As health care organizations struggle to do better with less, boards around the country are challenged to pull significant cost from their organizations. With 30 percent — or $750 billion in 2009 — of national health care expenditures identified as waste, many boards are coming to grips with the fact that they must preside over a 20 to 40 percent reduction in the overall cost structure of their hospital or health system while they improve clinical performance. And, they must do so quickly.
Changing payment models such as accountable care organizations, population health management, value-based payments and high-deductible insurance are driving people out of the hospital and away from high-cost and profitable diagnostic services. Further, many boards pursuing an accountable care strategy are realizing that one of the most significant factors in ACO success is reducing utilization of profitable hospital services by 20 to 30 percent.
This leaves the hospital with both excess capacity and decreased revenue. Trustees understandably may feel trapped as they realize they cannot escape these challenges by traditional means of growth, price increases or cost-shifting. Many leaders are confronting these challenges by focusing on clinical transformation and performance improvement. Others are attempting to get the benefits of size and scale via mergers to help reduce costs. Yet, there is a fourth and often underutilized approach that boards must add to their armamentarium that not only will reduce cost and improve performance, but also will allow organizations to strategically balance reduced demand with excess capacity.
To understand and implement this approach, trustees first must recognize a strategic continuum that runs from the negative to the positive: asset rationalization to asset optimization.
Asset rationalization is the negative pole of the continuum. It reflects leaders' being backed into a corner where, to raise operating capital, they take rushed and reactive actions that often are not aligned with the organization's mission.
At the positive extreme of the continuum, asset optimization is a strategic, proactive and thoughtful approach that evaluates the economic and strategic sense of all programs and facility assets in relation to mission and market needs. Leaders then can make "planful" — as opposed to painful — decisions to invest in strategic assets, or to deal with the complexities of making significant changes in asset array and use. Asset optimization will be a key strategic competency for boards to help their organizations thrive by reshaping their programs, services and facilities to ensure that they have the right capabilities in the right places, and that they are allocating capital and people in a way that best serves patients and populations.
Yet, many trustees avoid this topic, thinking that even discussing this continuum is an admission of defeat, or an unacceptable retreat from the past era of continuous growth or expansion of services. Paradoxically, this behavior often results in its being thrust upon boards when their organizations are in financial crisis and their options are limited to the most painful ones. With their backs against the wall, board members' only option becomes asset rationalization: being forced to close services or sell assets, or merge with or sell to another organization or partner. Although common, this is an unfortunate and limited approach.
Effective boards avoid the trap of asset rationalization by embracing asset optimization as part of a multipronged, balanced strategic approach to strengthen their organizations financially and clinically. This tactic includes leveraging clinical transformation, performance improvement, scale and integration, and asset optimization to get to peak clinical and financial performance and an appropriate and effective balance of capacity and demand. Making rushed, painful asset rationalization decisions in a financial crisis is not a position in which any board wants to be. Yet, this is precisely where many boards find themselves if they do not address this issue proactively.
First, boards should insist that a structured asset optimization review be part of every strategic planning process. For trustees to effectively oversee an asset optimization review, they must ensure that a structured inquiry to accomplish four linear tasks is conducted:
- Understand the changing market;
- Understand how the organization's programmatic assets meet the needs of the market;
- Understand how its facility assets meet the needs of the market;
- Based on this information, understand the gaps and opportunities in achieving asset optimization.
Each task requires detailed answers to several significant questions.
1. Understand the market.
- Who are our current competitors? What provider groups are positioned for growth, in what areas and in what time frame?
- How will emerging provider groups likely be positioned in our market?
- What are our profits and losses in the geographic markets we serve? Are patient volumes declining or growing? What is the case mix for each market?
- Which competitors could potentially be our partners?
- Which competitors will have the most attractive networks (for example, locations and services)? What programs and services will each provide?
2. Understand how programmatic assets meet the needs of the market.
- Which population groups — demographics, economic status, geographic location — does our organization currently serve? Where are there unmet needs for additional services in our market? Is there a match between demand and patient volume for each of our service lines? Which service lines are experiencing low volume? Which service lines might have pent-up demand? Where do we have potential excess capacity that is being clogged by inefficiency?
- Are there service lines or programs not currently provided in one or more of the geographic areas we serve? What might be the return on investment to build, expand or partner to offer these services?
- What programs and services might our communities not support? Who would provide these programs and services if our organization does not?
3. Understand how your facility assets meet the needs of your market.
- What are the most attractive locations — from a patient access and volume perspective — for the inpatient and outpatient programs and services we currently offer or might consider offering?
- Have we evaluated whether the current location of a program or service is the best location in terms of patient access or might it be provided more efficiently in alternative settings?
- How might our facilities and real estate be reconfigured to best support the entire system of programmatic asset delivery?
- Where should our major medical equipment assets be deployed throughout the delivery system to optimize patient access?
4. Understand gaps and opportunities in achieving asset optimization.
- What asset distribution options better serve our targeted population in the most cost-efficient manner?
- What options eliminate duplication and create more favorable variable and fixed cost structures?
- What are the projected profit and loss and capital implications of each asset optimization option?
Serve the Mission
It is a truism in governance that the fundamental role of the board is to be loyal to — and aggressively pursue — the mission of the organization. In fact, for boards of nonprofit, tax-exempt organizations, this is the supreme fiduciary duty: obedience to charitable purpose.
In this context, boards must regard all of their assets as existing to serve the mission, as opposed to assets being viewed as the mission. All too often, however, a board is institutionally loyal, placing great emphasis on preservation of the buildings and services overall. Unfortunately, institutional loyalty often results in compromise to the mission and, in a worst-case scenario, complete sacrifice or loss of the mission. The ability to thoughtfully and appropriately implement structural change based on an asset optimization plan requires a board to be mission-loyal, regarding all of the organization's assets as fungible tools in service of the mission.
A mission-loyal board will see asset optimization as an approach that is not in conflict with the mission. Rather, when properly used, asset optimization is a powerful tool in service of the organization's mission.
Protecting the Future
Asset optimization must be part of a multipronged, balanced approach to strengthening an organization financially and clinically, which includes leveraging scale and integration, performance improvement and clinical transformation. Reaching peak financial and clinical performance will help to ensure that organizations have the cash flow to make strong decisions in the face of a challenging, uncertain future.
Making rushed and painful asset rationalization decisions in a financial crisis is not where any board wants to be; yet, this is precisely where many will find themselves if they do not address this issue proactively. There is an urgent need for boards to systematically review their organization's assets now in light of new market imperatives and to make balanced recommendations and decisions that will help keep their organizations strong for years to come.
James E. Orlikoff (email@example.com) is president, Orlikoff & Associates Inc., Chicago. Curt Whelan (firstname.lastname@example.org) and Jeff Jones (email@example.com) are managing directors, Huron Healthcare, in Chicago and Portland, Ore., respectively.
Sidebar - Case Studies: Rationalization vs. Optimization
Sidebar - Need to Know: Glossary of Terms