Two Q's based on a 17page-case-study, each answer is must be 250 words

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IN T R O D U C T IO N This comprehensive case study serves as a basis for the exercises included throughout the book.

Coastal Medical Center (CMC) is a licensed, 450-bed regional referral hospital providing a full range of services. The primary service area is a coastal city and three coun- ties, with a total population greater than 995,000, located in the Sunbelt. This tricounty area has had one of the fastest population growth rates in the country for the past five years. According to the local health planning council, the tricounty population is projected to increase by 15 percent from 2015 to 2020. Appendix A, at the end of this case study, provides detailed population statistics for the city and tricounty area.

The population growth rate for households (families) has been 1 to 2 percentage points higher than the overall population growth. The growth rate of the population under age 44 shows a young and growing community. Per capita (i.e., per person) income in the tricounty area is high and increasing. As the population of the tricounty area increases, the need for healthcare services is anticipated to increase. The area’s economy is largely supported by manufacturing, with service companies and agriculture accounting for another 35 percent. Unemployment is typically 6 percent. The overall poverty rate is 12.4 percent. A recent study revealed that 40,000 city residents are below 125 percent of the established federal poverty level.

HE A LT H C A R E CO S T S Healthcare costs in the region are high in comparison to healthcare costs in most other areas in the state. In response to what they feel are excessively high healthcare costs, county

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EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 4/24/2019 10:55 PM via WESTERN KENTUCKY UNIV AN: 1843079 ; Harrison, Jeffrey P..; Essentials of Strategic Planning in Healthcare Account: s8993066

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businesses recently formed a business coalition, hired a full-time executive, and publicly stated their intent to achieve reduction in healthcare costs. The local press has expressed its concern about the high cost of healthcare in the local community and consistently bashes the area’s hospitals and physicians. The coalition refused to allow the three major medical centers in the area to join, despite the fact that each is a major employer.

TH E CO M P E T IT IO N CMC has two major competitors. Johnson Medical Center (JMC) is the larger of a two- hospital for-profit healthcare system, and Lutheran Medical Center (LMC) is the larger of a two-hospital, faith-based not-for-profit healthcare system.

JMC is located less than two miles from CMC and is a 430-bed tertiary care facility. JMC owns four nursing homes, two assisted living facilities, a durable medical equipment company, a wellness center, an ambulance service, and an industrial medicine business. These facilities are located in the tricounty area and are within a 30-minute drive of the main CMC facility. JMC’s parent company, Johnson Health System, also owns one small hospital in the region.

JMC has 1,920 full-time equivalents (FTEs), which translates to 5.2 FTEs per adjusted occupied bed. JMC recently used a consultant to reduce its FTEs, flatten its structure, broaden its control, and improve its operations in general.

JMC has been averaging an occupancy rate of 74 percent. Outpatient revenues are 40 percent of total revenues and have grown about 6 percent per year for the past two years. JMC had a bottom line (i.e., net income) of $15 million last year. Bottom lines for the two previous years were $11 million and $14 million. Profit margins have exceeded 5 percent for the past three years. In essence, JMC is a major strong competitor for CMC. The organization is reported to have a “war chest” of reserves exceeding $70 million.

LMC is a 310-bed acute care hospital located outside the city limits but within the tricounty area. It does not offer tertiary, intensive services to the extent that CMC and JMC do, but it is a highly regarded general hospital that enjoys an occupancy rate of 75 percent. It is especially strong in obstetrics, pediatrics, general medicine, and ambulatory care. It attracts well-insured patients from the affluent suburban area.

LMC has 1,180 FTEs and typically operates at 6.1 FTEs per adjusted occupied bed. LMC provides a great deal of indigent care and, in accordance with the philosophy of the church, its budgets are set to generate only a 2 percent annual profit margin.

HIG H L IG H T S O F CO A S TA L ME D IC A L CE N T E R As a referral center, CMC offers almost every level of care, including a number of tertiary care services, with the exception of neonatology and severe burn–unit services. Many of its patients require high-intensity services. For this reason, its costs are the second highest

Full-time equivalent

(FTE)

Total number of full-

time and part-time

employees, which

is expressed as an

equivalent number of

full-time employees.

Adjusted occupied bed

Number of inpatient

occupied beds,

adjusted (increased)

to account for the bed

occupancy attributed

to outpatient services,

partial hospitalization,

and home services.

Profit margin

Difference between

how much money the

hospital brings in and

how much it spends.

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in the entire state. The average length of stay of a patient at CMC is 9.2 days, compared to a statewide average of 6.4 days at hospitals of similar size and services. This difference is probably attributable to the intensity of services CMC offers. CMC’s expenses per patient day are also the highest in the state, with the exception of two large university-affiliated teaching medical centers. Its FTEs per adjusted occupied bed (7.5), paid hours per adjusted patient day (35.2), and paid hours per patient discharge (238.5) all greatly exceed those of competitors and the norms of comparable facilities. CMC is currently authorized for 2,240 positions but actually employs 2,259 FTEs. Salary expenses per adjusted discharge and adjusted patient day are $2,760 and $491, respectively.

A recent one-year market share analysis for the broader eight-county region revealed the data presented in Exhibit Case.1.

CMC has market advantage in substance abuse, psychiatrics, pediatrics, and obstet- rics. JMC has market advantage in adult medical and surgical care. At a recent administrative meeting, the following CMC utilization figures for the year were reviewed:

◆ Admissions are down 14 percent.

◆ Medicaid admissions are up 11 percent.

◆ Ambulatory care visits are down 10 percent.

◆ Surgical admissions are down 6.7 percent.

A recent auditor’s report included the following notes:

◆ A significant adjustment was required at year-end to correctly reflect contractual allowance expense (i.e., the amount of money spent in hiring

EXHIBIT CASE.1 One-Year Market Share Analysis Facility Discharges Percentage of Total

CMC 7,819 18

JMC 8,989 21

LMC 6,820 16

All others 19,546 45

Total 43,174 100

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outside contractors). The data used at the beginning of the year to estimate contractual allowance expense were grossly inaccurate.

◆ Insurers were not billed for services by certain hospital-based employed specialists ($7 million for the past year) as a result of neglect on the part of the hospital billing staff.

◆ A total of $1.7 million in Medicaid reimbursement was not authorized. No follow-ups were done, and no claims were resubmitted.

HIS T O R IC A L PE R S P E C T IV E CMC was founded just after World War II using a Hill-Burton grant (see Highlight Case.1) and funds raised locally. From a modest beginning with 100 beds and a limited range of acute care service offerings, the medical center has grown to its present size of 450 beds and now offers a full range of services. Credit for the major growth and past success of CMC has been given to Don Wilson, who served as chief executive officer (CEO) from 1990 until his retirement in early 2012. Mr. Wilson was a visionary and successfully transformed the medical center to its present status as a tertiary care facility offering high-intensity care, including open-heart surgery and liver and kidney transplantation.

HIGHLIGHT CASE.1 Hill-Burton Act

In the mid-1940s, many hospitals in the United States were becoming obsolete because

they did not have money to invest in their facilities after the Great Depression and World

War II. To combat this lack of capital and help states meet the healthcare needs of their

populations, Senators Lister Hill and Harold Burton proposed the Hospital Survey and

Construction Act, also known as the Hill-Burton Act. This act provided federal grant

money to build or modernize healthcare facilities. In exchange, hospitals receiving the

grant were obligated to provide uncompensated (free) care to those who needed care

but could not pay for it.

The Hill-Burton Act expired in 1974, but in 1975 Congress passed Title XVI of the

Public Health Service Act. Title XVI continues the Hill-Burton program by providing fed-

eral grant money for healthcare facility construction and renovation but more clearly

defines the requirements for the facilities. For example, facilities receiving grant money

must prove they are providing a certain amount of uncompensated care to populations

that meet particular eligibility requirements.

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Mr. Wilson’s successor was Ron Henderson. For three years, Mr. Henderson practiced a loose, informal style of management. He seemed to sit back and enjoy himself while others ran the medical center. He was often characterized as a caretaker. The medical center made $52.5 million in 2012 following Mr. Wilson’s retirement (the result of an excellent revenue stream and a strong balance sheet), so Mr. Henderson was not pressed to make major changes. He encouraged the board of trustees, the medical staff, and his administrative staff to submit new ideas for improving community healthcare services using CMC as the focal point for delivery. An avalanche of ideas was submitted during the first two years of Mr. Henderson’s tenure. He moved quickly on these ideas and established himself as a person who made swift decisions on new ventures and kept things rolling. He simply let other executives “do their thing” and neither discouraged nor evaluated their work. His strategy was apparently rapid growth and diversity in new businesses. He made major fund commitments to new ideas but did little to evaluate the compatibility of those ideas with CMC’s mission and its strategic direction, and he usually did not consider the financial implications of these ventures. His approach was simply “let’s do it.”

Before 2012, CMC was in excellent financial shape and faced few financial problems. By 2015, expenses began to skyrocket while utilization and revenues failed to keep pace. In addition, a hospital census indicated that, on average, 58 percent of CMC’s patients were Medicare patients and 18 percent were Medicaid patients. As a result, the medical center suffered from reductions in reimbursement. Notable among CMC’s excessive costs were labor, material, and purchased services. The chief financial officer (CFO) was convinced that a major part of this problem was the presence of three unions, including unionized employees in support services and unionized nursing services. Added to this cost burden was the more than $5 million being transferred to subsidize other CMC subsidiary companies.

During the second year of his tenure, Mr. Henderson began to receive criticism from the board of trustees. He had added 127 new positions despite solid evidence that utiliza- tion was experiencing a steep decline. His reasoning was that the declines were temporary and that business would soon be back to normal.

In 2015, the medical center suffered a net loss of $16 million (see Appendix B). Surprised by this major loss, the board of trustees fired Mr. Henderson. They contended that he should have informed them of these serious problems. They felt that a better strategic planning process should have been in place for the selection of projects, on which millions of dollars had been spent. The board of trustees could not understand how overall corporate net income could drop to a loss of $16 million when $7.3 million in profit had been made the previous year.

BO A R D O F TR U S T E E S CMC’s governing board has 27 members. All of its trustees are prominent, influential, and generally wealthy members of the community. The board is self-perpetuating, meaning its members have continued their positions beyond the normal limits without any external intervention. The same chair has served for ten years. Average tenure on the board is 17 years. Committees of the board are detailed in Exhibit Case.2.

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One physician-at-large is included on the board. The chief of staff and the CEO attend all board meetings but are not allowed to vote on board decisions. There are no minority members despite the fact that racial minorities account for 12 percent of the service area population. Only one of the 27 members of the board is a woman. The average age of the trustees is 66.

PA R E N T CO R P O R AT IO N The parent corporation of CMC is Coastal Healthcare Incorporated. A parent board was created through corporate restructuring several years ago, but its role has never been clear. This board is made up of friends of the most powerful trustees of the CMC board. In essence, when corporate restructuring was the “in” thing to do, this holding company was formed. By appointing a few CMC trustees to also sit on the parent board and by appoint- ing friends of present CMC trustees, it was believed the two boards would function as one

EXHIBIT CASE.2 Committees of the

Coastal Medical Center Board

Committee Size Meeting Frequency

Ambulatory care 11 Monthly

Audit 9 Quarterly

Budget 18 Quarterly

Construction 13 Monthly

Executive 16 Monthly

Executive compensation 9 Annually

Finance 13 Monthly

Joint conference 24 Monthly

Material and equipment 11 Monthly

Patient care 11 Monthly

Personnel 11 Monthly

Public relations 9 Monthly

Quality assurance 9 Monthly

Strategic planning 16 Monthly

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happy family. However, there has been constant conflict from the beginning regarding the relative powers and roles of the two boards.

The parent board has 19 members, all of whom are white and male. The backgrounds of the parent board trustees mirror those of the CMC trustees in that they are prominent and mostly wealthy. Membership includes bankers, attorneys, business executives, business owners, developers, and prominent retired people.

Committees of the Coastal Healthcare Inc. (parent) board are detailed in Exhibit Case.3.

The following are some of the conflicts that have occurred between these two boards over the years:

◆ The parent board refused to approve the appointment of a new hospital CEO selected by the CMC board.

◆ In 2013, the two boards hired separate consultants to develop a long-range strategic plan. Two plans were produced but were never integrated and never really implemented.

◆ Committees from the parent board often request information about functions of the medical center, creating conflict because the parent board has a tendency to micromanage CMC’s routine operations.

◆ Separate committees of both boards spent more than two years trying to revise CMC’s mission statement.

ME D IC A L STA F F The medical staff at CMC has historically had difficulty cooperating with the board and administration. Patient length of stay is excessively high in most specialties, yet the physicians refuse to be educated on reimbursement and the need to reduce length of stay, excessive

EXHIBIT CASE.3 Committees of the Coastal Healthcare Inc. (Parent) Board

Committee Size Meeting Frequency

Executive 11 Monthly

Finance 11 Monthly

Strategic planning 11 Quarterly

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tests, and so on. Approximately 90 percent of the medical staff also has privileges at one or more competing hospitals in town. Further, medical staff members have set up their own diagnostic services, especially the radiologists and neurologists, despite the fact that they were granted exclusive service contracts at CMC.

In recent years, the specialists, who represent the majority of the medical staff, have been increasingly dissatisfied. They complain that their referrals are decreasing or remaining flat and that CMC is not doing enough to help them establish and maintain a sufficient number. Hospital admissions for specialty services are declining drastically. To compound the problem, the competing medical centers are courting these specialists aggressively with attractive offers, such as priority scheduling in surgery and other special arrangements, all of which are legal.

The medical staff also rated various aspects of medical center operations as unsat- isfactory in a recent survey. The subjects of their complaints ran the gamut and included the following:

◆ Nursing services, and especially the nurses’ attitudes, are not satisfactory. Nurses have formed themselves into shared governance councils and are taking issue with both physicians and administration regarding their autonomy.

◆ Excessive delays exist in every aspect of operations. Surgical procedures start late, supplies or equipment are lacking when needed, and processes for admitting patients take too long.

◆ CMC’s recent Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) scores confirm doctors’ perception, with satisfaction with nurses’ communication rated only 74 percent (Appendix C). Patient satisfaction with physicians’ communication was even lower at 72 percent.

◆ Medical staff members think they should have more voice in both financial and operational matters, especially in capital budgeting. They believe they are asked to provide free services too frequently (e.g., by committees), and many have refused to serve without compensation to offset the practice income they have lost.

There are also quality problems. Two physicians should probably have their privileges revoked, three apparently have substance abuse problems, and several have not kept up with current practices and should be asked to retire. Persuading physicians to hold elected offices and accept committee responsibility has also been difficult. Payment of honoraria has helped, but few are still willing to serve. More than $200,000 has already been paid out to entice doctors to serve on committees.

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SU B S ID IA RY CO M PA N IE S Including CMC, Coastal Healthcare Inc. comprises 24 subsidiary corporations:

◆ Medical Enterprises is a for-profit joint venture with physicians. The company is developing computers that enhance imaging services. Thus far, CMC has invested $18 million in this company. No cash flow is expected for three to four years.

◆ Three nursing homes. These long-term care facilities are collectively losing almost $1 million annually. Debt service on two of them is very high. Only one is within patient transfer distance of CMC. The second is 70 miles away, and the third is 82 miles away. All three have unions. Almost all of the residents of the two facilities losing the greatest amount are Medicaid patients; there are only a few self-pay patients.

◆ CMC Management Services was formed to sell management and consulting services. The company lost $360,000 last year, which was its third year of operation.

◆ Regional Neuroimaging is a joint venture with physicians. The company lost $920,000 in its first year of operation. Capital invested by the hospital to date totals $9 million.

◆ American Ambulance is a local ambulance company. Financially, it just breaks even, but it does increase admissions to CMC, especially through trauma pickups.

◆ Home Health Inc. provides home health care services in an eight-county area. Its operating loss last year was $290,000. The company has considerable difficulty attracting and retaining professional personnel, especially nurses and physical therapists.

◆ Industrial Services Inc. provides health services to industrial companies throughout the state. Only one of the six operating locations is close enough to CMC to generate referrals. None of the operating sites is making a profit, though the company is five years old.

◆ MRI Enterprises is a successful mobile magnetic resonance imaging joint venture with a physician group. It has a consistently positive bottom line.

◆ Textile Enterprises is a large, high-tech laundry completed three years ago. It was intended to serve the medical center and many other companies in the region. Because of its debt service, union wages, and remote location, the

Debt service

Cash required over a

given period for the

repayment of interest

and principal on a debt.

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laundry has yet to break even. After three years, it still does not have its first non-CMC service contract.

◆ Caroleen Hospital (60 beds), Grant Hospital (74 beds), and Ellenboro Hospital (90 beds) are all small, rural hospitals purchased to feed patients to CMC. All are unprofitable. Collectively, the three require $2.5 million in subsidies annually.

◆ HMO Care is a health maintenance organization joint venture with 20,000 subscribers. After three years of operation, its costs are still rising. Last year, it required $2 million in subsidies.

◆ Northeast Clinic is a large multispecialty group of 11 physicians who were fed up with government red tape and sold out to CMC last year. CMC now employs these physicians and is responsible for all medical group operations. It is too early to determine whether this venture will succeed.

◆ Imaging Venture is a recently formed radiology joint venture. Until it becomes successful—if it does—it will cost just under $1 million in debt service annually.

◆ North Rehabilitation, a 60-bed inpatient rehabilitation facility, was just opened. It is expected to succeed because CMC will refer all of its rehabilitation patients here, and there is no other rehabilitation facility in the region.

◆ Center for Pain has been a successful outpatient facility and is expected to remain successful. Its space is leased, overhead is kept low, and the physicians are salaried.

◆ Coastal Wellness, a fitness and wellness center, was developed five years ago at a cost of $10 million. It is located in a coastal community and is intended to attract those from wealthy areas. A significant number of CMC employees and their family members use Coastal Wellness at a lower monthly rate, with the rest subsidized by CMC. Coastal Wellness is currently underutilized, so CMC subsidizes it with $220,000 annually.

◆ Central Billing was formed to attract patient billing contracts from health facilities and physician groups. It has been moderately successful and reached the break-even point this past year.

◆ City Contractors, a separate, small general contracting company, was just formed. It will require about $200,000 annually in subsidy.

◆ Bay Enterprises is a land acquisition and holding company.

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EX E C U T I V E S A N D MI D D L E MA N A G E M E N T CMC employs 20 executives (defined as positions above the administrative director level). Total annual executive compensation is $6.2 million. Each executive has an executive secretary whose average compensation is $35,000, which amounts to an executive-level support cost of $700,000.

Each of the other 23 subsidiary companies employs executives and executive support personnel in addition to regular employees. This executive overhead is a drain on CMC because many of the subsidiary companies do not break even and thus must be subsidized.

CMC employs 15 administrative directors, who function in the hierarchy between department vice presidents and department directors. Their principal purpose is to handle problems at the department level so that these problems do not escalate to the department vice president.

There are 67 director-level positions in the organization. Directors are responsible for a particular department or function. Managers are the next level down the line of supervision. There are 31 managers. Collectively, these managers have 68 supervisors working for them.

The compensation and benefits policy of CMC deviates substantially from industry norms in terms of range. For example, the directors’ annual salaries range from $85,000 to more than $170,000. Annual salaries for directors in the United States typically fall between $115,000 and $140,000.1

CO R P O R AT E STA F F Coastal Healthcare Inc. consists of the following offices:

◆ Office of the CEO, who has five assistants to the president (i.e., administration, board, ethics, community, and staff assistants)

◆ Office of the senior vice president for finance (three people)

◆ Office of the senior vice president for corporate affairs (four people)

◆ Office of the senior vice president for corporate development (three people)

◆ Office of the vice president for legal affairs (five people)

◆ Office of the vice president for medical affairs (two people)

◆ Office of the vice president for marketing (two people)

◆ Office of the vice president for strategic planning (two people)

These corporate staff members serve as advisers and coordinators; oversee their functional areas at CMC; and, where needed, oversee the various subsidiary companies.

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The parent company corporate staff comprises 26 total FTEs. The total costs of cor- porate overhead are $2.3 million annually. In addition, during the past year, the corporate officers purchased the consulting services listed in Exhibit Case.4.

DU P L IC AT IO N O F FU N C T IO N S Throughout CMC, functions have been duplicated as the organization has grown. For example, there are three education departments and three transportation departments. There is both an inpatient and an outpatient pharmacy, each with its own director. CMC and 12 of the larger subsidiary companies have separate human resources management functions.

There are 24 boards, one for each subsidiary company, and each board has a large number of committees. Executives from CMC and the parent corporation sit on these boards and their committees.

SE R V IC E A N D PR O F E S S IO N A L CO N T R A C T S CMC contracts with many service providers. Service contracts include housekeeping, food service, record transcription, biomedical maintenance, security, and many others. These contracts are renewed regularly with the same firms. CMC also contracts with countless health professionals. For example, CMC contracts with two physicians to cover CMC’s pediatrics clinic at an annual cost of $380,000, and CMC furnishes the facilities as well as

EXHIBIT CASE.4 Consulting

Services Purchased by the Parent Corporation

Consultant Purpose Cost Conduct board retreat $35,000

Prepare restructuring recommendations $65,000

Write organization history $60,000

Provide policy advice $25,000

Lobby $50,000

Undertake compensation $72,000 (wage/salary) study

Conduct labor negotiations $120,000

Advise on management development $90,000

Conduct managed care study $47,000

Total $564,000

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professional and support personnel. Numerous physicians have negotiated arrangements through which they regularly receive checks for committee service, advice, and so on. Many of these negotiations are not documented in written contracts.

The hospital-based specialists’ contracts are based on a percentage of gross earn- ings, with no provision for any type of adjustments to the gross amount. Several of these arrangements are long-standing but not documented in writing.

MAT E R I A L S MA N A G E M E N T CMC is organized traditionally, meaning there is no centralized materials management function. Purchasing is done throughout the organization from a large number of vendors. The pharmacy, laboratory, and other services do their own ordering, arrange contracts, and handle other supply and equipment matters. For example, the laboratory recently purchased a large computer software package without the knowledge of the purchasing agent or the information services department.

Large stores of inventory can be found throughout the facility. CMC also owns excessive and obsolete equipment. Central storage occupies a huge amount of space and carries what appears to be an overabundance of many items.

SP E C I A L PR O J E C T S Fifty-three “special projects” at various stages of progress are under way at CMC, ranging from the addition of a new education center to renovation of the food service department. A large number of start-ups are also under development. For example, CMC is considering a joint venture with physicians to build an ambulatory surgery center offering the latest robotic surgery technology. Analysis of the projected costs of these projects, and of the working capital many of them will need before they become profitable (if they ever do), has revealed that the organization will suffer severe financial distress if these projects continue. Moreover, the financial feasibility of many of them is uncertain. Finally, these projects have not been centrally coordinated, nor has their potential impact on the organization’s mis- sion and strategic direction been discussed. These projects were simply developed on the basis of individual interests of various executives and managers. By his inaction and lack of leadership, Mr. Henderson gave everyone free rein to do their own thing—and they did.

NE W CEO CMC hired an executive search firm specializing in healthcare to look for a new CEO. After a nationwide search, the board of trustees decided to hire Richard Reynolds. Mr. Reynolds appeared to be a no-nonsense CEO who had the knowledge and skills needed to determine the problems at CMC and resolve them. During his first few weeks in the new position, he did an exhaustive analysis of CMC with the assistance of a transition consultant and the executives and managers of the organization. The following list highlights his findings:

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◆ Compared to national personnel standards, many of the departments at CMC are grossly overstaffed. More than 100 new positions were added during the most recent fiscal year, despite the fact that utilization did not justify these positions. The overall administrative structure is top-heavy.

◆ CMC has 58 general contracts, many of which are standing contracts with consultants who appear to be receiving large monthly retainers but are not providing services. In addition, CMC has 121 contracts with physicians. Again, these physicians appear to be providing few services. The previous CEO apparently made numerous agreements to subsidize various physicians and pay them large sums for performing administrative services that are normally done on a voluntary basis by members of the medical staff.

◆ CMC has 53 major new service projects in the planning or construction phase. The analysis indicated they will require more than $100 million in future commitments, and Mr. Reynolds is not sure that CMC will be able to service the necessary debt. No project priorities exist and no feasibility studies have been done for most of the projects, so there is no way to forecast the financial impact of these “innovative ideas” on the organization.

◆ CMC has a large number of duplicate departments. Mr. Reynolds pinpointed many departments and services that could be consolidated.

◆ CMC has 66 “special” programs, collectively accounting for a $6 million outflow of cash. These programs are not directly related to CMC’s tertiary care mission. CMC seems to have developed every type of program conceivable, from one end of the care continuum to the other, without considering whether the programs support its mission or generate a positive cash flow.

◆ In materials management, Mr. Reynolds found nearly $8 million in “unofficial” inventory stored throughout various facilities of the medical center and a declining inventory turnover rate of 42 percent. There is no centralized materials management system for the purchasing, storage, distribution, and accountability of materials.

◆ While the median operating margin for medical centers of similar size and service was about 2.5 percent during the past year, CMC experienced a multimillion-dollar loss and a –13.6 percent operating margin. In addition, the medical center’s return on equity was a major problem. The number of days accounts receivable in other medical centers averaged 48 days during the past year; CMC’s days accounts receivable were far greater at 58 days. Most alarming, CMC’s cash on hand at any given time represented only 17.2 operating days. Finally, the hospital’s major bond issue has been recently

Days accounts

receivable

Average number of

days an organization

takes to collect

payments on goods

sold and services

provided, calculated

as follows: Average

accounts payable (in

dollars)×365 (days per year)÷Sales revenue.

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downgraded to the lowest credit rating, and the age of CMC’s physical plant is 13 years, which is older than the average not-for-profit facility age of 11 years and the average for-profit facility of 7 years. (Days accounts receivable is the average number of days it takes to collect payments that clients owe to the organization The “normal” range is 40 to 50 days. A number significantly greater than 50 indicates the organization is having difficulty collecting payments from its clients; a number significantly lower than 40 indicates that the organization has overly strict credit policies that might be preventing it from taking in higher sales revenue.)

◆ Medicare has just notified the CFO that recovery of $4 million is forthcoming as a result of past errors in the Medicare cost report.

◆ The business coalition is becoming well established and intends to aggressively pursue discounted services through direct contracting.

◆ Coastal Healthcare Inc. is neither structured nor functions as a local healthcare system. Clinical services and administrative support are not integrated. For this reason, Coastal Healthcare Inc. does not meet the classic definition of a healthcare system provider.

◆ Nationally, capitation payment arrangements have not been successful for many hospitals. CMC is not in a favorable position to become an accountable care organization. To become an accountable health plan, CMC would have to partner with primary care and specialty physicians to meet the total healthcare needs of a defined patient population.

◆ No value-oriented efforts (e.g., continuous quality improvement, benchmarking) have been initiated at CMC.

◆ No leadership development is available for the board of trustees, medical staff, and administration.

◆ No formal strategic planning process is in place at either the CMC or the Coastal Healthcare Inc. level.

◆ No physician–hospital organizational arrangements exist.

GE N E R A L CO N D IT IO N S Mr. Reynolds quickly learned that he had taken a position in an organization with a govern- ing board that is generally content to approve anything the CEO recommends. The medical staff appears no better in that they were principally focused on their own self-interest and show little interest in the affairs of the medical center.

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Control systems are lacking, and CMC does not have a comprehensive information system. Moreover, the quality of care appears low, and a large number of legal cases against the medical center are pending. With respect to materials management, several suppliers have refused to deliver supplies because of delays in accounts payable.

Mr. Reynolds summed up the medical center’s situation to the board by reporting that there is an immediate cash flow problem, people-related expenses are far too high, material-related expenses are well above those expected, plant-related expenses are excessive, contract amounts are excessive, and accounts receivable are too high. He also remarked that CMC seems to have no sense of direction or overall corporate strategy.

With the help of his transition consultant, Mr. Reynolds surveyed and interviewed his department heads. Given the financial situation and the results of the survey, Mr. Reynolds knows he faces a difficult challenge.

Mr. Reynolds concluded that the prior CEO had followed the one-man rule con- cept and had failed to build necessary knowledge and management skills among the vice presidents. Thus, when difficulties occurred in the organization, inertia set in. The reactions of his executives and managers are characterized by indecisiveness and unwillingness to take risks for fear of compromising their job security. In addition, he found an excessive number of administrative positions.

An examination of CMC’s balance sheet (see Appendix D), financial ratios (Appen- dix E), and structure led Mr. Reynolds to conclude that the corporation is overexpanded, overleveraged, and overdependent on a narrow market. The organization is too expensive to operate, bloated with bureaucracy, inefficient in its services, and unimaginative in its approach to strategic planning and change.

From his discussion with the leadership team and other hospital staff, Mr. Reyn- olds believed CMC’s leaders are considerably dissatisfied. To confirm his beliefs, he had the transition consultant administer a brief leadership survey, which included detailed questions about corporate culture and job satisfaction (Appendix F). Mr. Reynolds has decided to do a similar survey of all hospital staff within the next six months to obtain more baseline data on the organization’s corporate culture and its ability to deal with the changes he knows are coming.

NE W BU S IN E S S IN IT IAT IV E S To expand its physician staff, CMC has constructed a hospital-owned medical office building in a growing community five miles from the hospital. This effort has been successful and has attracted a prominent group of orthopedic physicians who now refer their surgical procedures to the hospital. As part of this expansion, and because the orthopedic workload has grown, CMC is exploring the financial feasibility of opening a physical therapy clinic at this new location. On the basis of current physician referral patterns, CMC anticipates $250,000 in outpatient physical therapy net income at the new location during the upcoming 12 months.

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VA L U E-BA S E D PU R C H A S I N G Medicare value-based purchasing is a combined effect of efficiency and quality metrics. Value-based performance metrics have been identified at CMC in areas such as clinical processes; patient satisfaction; outcomes; readmission rates for heart attack, heart failure, pneumonia, chronic obstructive pulmonary disease, and hip or knee surgery; and hospital- acquired infections and conditions (Appendix G). The fact that CMC has a negative payment adjustment following each of these value-based purchasing metrics reflects the percentage reduction in Medicare reimbursement for the most current year.

IN PAT I E N T DATA A N D CA S E-MI X IN D E X CMC had a case-mix index of 1.666 in 2015 (Appendix H). This index, which reflects the level of complexity for inpatient services, declined significantly since 2012, when it was 1.729. Given that the average case-mix index for an acute care hospital in the United States was 1.32 in 2015, CMC is more clinically complex than the average acute care hospital in the United States, but the level of complexity declined over the past four years. A major reason for this decline was the changing medical/surgical mix of the inpatients at CMC from 2012 to 2015 (Appendix H). Specifically, CMC’s medical volume increased from 65 percent in 2012 to 66.26 percent in 2015. Conversely, CMC’s surgical volume decreased from 35 percent in 2012 to 33.74 percent in 2015. This decline in surgical volume led to a reduction in volume in the overall case mix as well as an overall decline in profitability.

CO N C L U S I O N As Mr. Reynolds now ponders the many problems he has uncovered at CMC, he wonders what other problems lie beneath the surface. Every day he encounters additional major problems. At this point, Mr. Reynolds is so overwhelmed that he is unsure how to proceed. He does know, however, that priorities need to be set, the deteriorating situation needs to be turned around, and a strategic plan needs to be developed to chart the future of the organization.

EX E R C I S E S Assume you are Mr. Reynolds. Being new to the position, you are faced with major chal- lenges. The questions and exercises at the end of each chapter in this book provide an opportunity to gain leadership experience in managing change in a healthcare organization. Most important, you will gain experience in developing a strategic plan.

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