Hospital Revival and the Board
By James Langabeer II
Hospital closures, acquisitions, and bankruptcies are more common in health care today than ever before, due to declining reimbursements, greater intensity of competition and poor management, among other causes. Two out of every five hospitals are near insolvency, and while it is possible to completely turn around an organization, it is becoming increasingly rare and often takes a decade or longer to fully recover.
Some boards watch their organizations gradually diminish, hoping that the same management systems and structures that brought them to financial collapse will somehow eventually recover. These trustees are doing their organizations an injustice. When a turnaround or performance revival is needed, trustees must take control through more active governance, meeting more frequently and tracking performance in real time by encouraging the use of scorecards on operations, quality and finance. Active governance also requires significant involvement in strategy and leadership.
Active Governance vs. Meddling
Directors and trustees must continuously walk the tightrope between knowing when to get involved in significant organizational issues, yet not “meddle” or interfere with management. This is probably one of the biggest risks in governance. The role of the board is oversight, not management. Overstepping or blurring these boundaries as a board member creates role conflict and ambiguity in the organization.
Board members can effectively get more involved in their organizations before they collapse by closely following trends in key indicators and asking themselves the following questions:
- Has patient volume recently declined?
- Have profitability, liquidity and retained balances continuously dropped for more than four quarters?
- Has management turnover increased recently?
- Have there been more medication errors, a rise in patient complaints or other clinical problems?
- Have there been any signs of physician-initiated privilege withdrawal, or any other noticeable changes in the physician network?
A combination of these factors may represent signs of impending hospital failure. If boards see significant changes in these areas, they need to take action.
To successfully revive or turn around their organization, boards must assist management to develop a strategic approach to their hospital’s revival. This requires open channels of communication with senior management and symmetric scorecards on performance and quality.
Fundamentally, boards need to oversee the development of their hospital’s recovery plan, and then frequently ensure meticulous execution of that plan at each board meeting. Board directors need to review management’s plan to ensure that it is comprehensive, and that checklists are prepared, as well as action plans for monitoring status.
Careful due diligence in each area often is overlooked over time, so the plan must be written, easily communicated and detailed in tactics, such as provider relations, service line management, quality, finances and operations.
Trustees need to ensure that the entire hospital management team is in alignment with the CEO and the board. Nursing, medicine, quality, operations and finance executives need to unite around a core set of strategies and operations if they are to succeed. Lack of alignment between the chief medical officer, chief nursing officer, chief operating and chief financial officers and other managers, even on small issues, can cause turnarounds to fail. Conducting random site visits and having independent discussions with managers may at times help trustees ensure this alignment and transparency.
Management Style
The board must continuously review the CEO’s capabilities and fit. A hospital in distress can suffer losses for several years before it realizes that a change in executive leadership might be warranted.
Executive management styles are typically strong in only one of three areas—maintaining current operations, building or growing a business, or turning around failing businesses. A CEO’s management style needs to be aligned with the organization’s current state, so continuous review and assessment of the CEO’s leadership and communication style during these times is fundamental. The CEO should be visible and direct, candid and open, and share information if possible.
Boards must maintain a focus on quality, not just efficiency. While it is easy to focus only on costs, efficiency and margins, the board must watch for signs of obsession on financials and ensure that patients’ outcomes and satisfaction are not compromised. This is a disastrous strategy. Quality and clinical care often worsen in stressful times.
Turnarounds may need to be facilitated by outside experts, so boards may need to encourage management to hire this help. Outside advisors bring a methodology for reviving the organization through external perspectives.
To this point, chief financial officers are not necessarily the best choice as turnaround leaders. They can help provide data and recommendations, but traditional finance executives tend to focus on details, such as across the board cuts, which may make things worse. Strategic changes in debt leverage and working capital policies are necessary, but it is more important to focus on clinical areas and service lines, where chief financial officers are often not comfortable.
For example, service line management becomes much more vital to revivals, selecting the right service lines to invest or divest, and thus encouraging an appropriate focus on patients, quality, service and improvements.
Trustees need to ask the tough questions, such as which service lines will be eliminated or streamlined, what variables drove the decision process, and what targets executives will be expected to meet. Continuously challenging the status quo, requesting strategic data and evidence, and ensuring behavioral and structural changes during revivals are the job of the board.
Survival is key. At least in the short term, the organization may look significantly different post-revival than when it started. Some organizations emerge smaller, leaner and more focused, while others rebound and grow. A critical review of the turnaround plan, strategies and leadership by the board will help ensure the focus and execution that is required during these times.
James Langabeer II is an associate professor of health care management and finance at the University of Texas School of Public Health in Houston, and recently completed a five-year study of hospital turnarounds and board governance. He can be contacted through his Web site, www.HospitalStrategy.com.
This article 1st appeared in the June 2008 issue of Trustee Magazine.
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