Internal and External Assessments for Strategic Planning

Atan M. Zuckerman

Metro Mercy Hospital (MMH) has been in a down-

wardspiral, resulting in losses in tbe past few years

anda tenuous casb position. Altbougb a new CEO

bas recently been biredanda turnaround begun, tbe

board is unclear as to wbetber tbe bospital can and

sbould remain independent now and in tbe future.

Wbat sbould tbe board do?

The Siiiuiatiioini

MMH is a Catholic-sponsored, freestanding, ?oo-bed hospital with annual operating revenues of $125 million, located in the western end of a city in a large metropolitan area. The hospital is a relatively undifferentiated, general acute care hospital with the typical range of medical, surgi- cal, ob/gyn, and pédiatrie services. The hospital does not provide any tertiary or even near tertiary services. It has a very busy emergency depart- ment and a network of owned physician practices in the area it serves; these practices provide mainly primary care services and constitute a significant portion of the primary care medical staff of the hospital.

MMH is located in a rapidly changing community. The population it has historically served, primarily second- and third-generation Italian- and Polish-Americans, has moved to the suburbs and/or aged. These groups have been replaced by African-Americans, and more recently Hispanics, particularly immigrants from Mexico. Although the service area population was expected to decrease from 1990 to ?ooo, Census Bureau data indicate that the population—

especially Hispanic—actually grew. Recent estimates suggest continued slow growth and transformation of service area demographics.

MMH faces veiy stiff competition due in part to the number of competitors in and around its service area and the general overbeddedness in the region. Its main competitors include St. Luke's Hospital, the 600-bed flagship of a veiy successful multihospital system, located a few miles west of MMH in an affluent suburban area; a nationally recognized teaching hospital located within five miles of MMH; a number of other ter- tiary teaching hospitals located in and around the downtown area of the city; and one large for- profit community hospital and two large system- affiliated community hospitals all located within three to five miles of MMH.

MMH has experienced downward trends in uti- lization and financial performance since 2004. In 2006, the hospital had an operating loss of $10.9 million (total loss of $10.6 million) after an operating loss of $10 million (total loss of $10.2 million) in 2005. The financial situation led to the resignation of the previous CEO and an interim management arrangement for about 12 months until a new CEO was named and began work early in 2007. The board was also reorgan- ized and a new lay board chair and other board members with strong business skills were added in 2006-07.

The CEO's first priority was to restore the organization to financial health. By fall 2007,

118 AUGUST 2008 healthcare financial management

METRO MERCY HOSPITAL BALANCE SHEET

Assets Current assets:

Cash and cash equivalents Patient accounts receivable* Inventory of drugs and supplies-at cost Due from primary third-party payers Prepaid expenses and other current assets

Total current assets

Assets limited as to use: Internally designated (capital improvements) Externally designated (debt agreements) Externally designated (self-insurance program)

Other investments Deferred bond issuance costs, less amortization Land, buildings, and equipment, net

Liabilities and net assets Current liabilities:

Accounts payable Accrued salaries and other expenses Accrued interest Due to primary third-party payers Note payable Current maturities of long-term debt

Noncurrent liabilities: Long-term debt, less current maturities Reserve for professional liability claims Accrued pension and postretirement benefits

Net assets: Unrestricted Temporarily restricted

* Less allowances (or uncollectible accounts.

2006

$ 25,749,000

1,939,000 2,362,000 3.319.000

33,369,000

5,769,000 2,821,000 3,494,000

12,084,000

225,000 571,000

50.788.000 $97,037,000

$8,039,000 6,316,000 555,000 508,000

863.000 16,281,000

24,411,000 4,278,000 3.025.000

31,714,000

48,818,000 225.000

49,042,000

$97,037,000

June 30 2005

$2,111,000 25,580,000

1,919,000 1,412,000 4.351.000

35,372,000

19,116.000 2,747,000 3,548,000

25,411,000

225,000 597,000

53.662.000 $115,268,000

$6,534.000 8,410,000

539,000 736,000

2,500,000 1.076.000

19,795,000

25.832,000 4,231,000 3.171.000

33,234,000

62,037,000 202.000

62,239,000

$115,268,000

operating losses had been trimmed substantially (to $6 million total, but $3 million run rate by year end) and the organization was on target to be at breakeven on a monthly basis by the endofFYo8.

As the turnaround proceeds, the new CEO and board leadership believe it is imperative that the hospital develop a new strategic plan. Although much of the financial improvement that is occur- ring is a result of internal operating changes and

managed care contract revisions, and leadership believes that tighter operations and financial management can bring the hospital to breakeven, the hospital needs to make significant improve- ments on the market and revenue side if it is to become truly viable. Therefore, while manage- ment continues its operational changes, a strate- gic planning effort needs to commence to help position MMH for long-term success. A key question to be answered in the strategic planning process is whether MMH should remain

h i m AUGUST 2008 119

STRATEGY CHALLENGE

' SWOT ANALYSIS

Strengths

> Catholic base, caring organization > Strong history > Neighborhood growth, economic revitalization > Several younger, well-trained, entrepreneurial

physicians on staff > Primary care base

Opportunities

> Differentiation through Catholic identity > Community outreach > Medical staff development > Program development/enhancement

in key service lines > Partnerships (other Catholic hospitals, physicians,

niche players) > Niche programs (occupational medicine, wound

care, pain management, sleep lab) > Prevention and health promotion

Weaknesses

> Limited response to neighborhood diversity > Declining volumes, weak market position > Aging medical staff > Medical staff-hospital relations > Poor financial performance > Large proportion of admissions through

the emergency department (few patients are choosing M M H )

Threats

> Continued erosion of volumes and market share > Significant number of providers in the market > Inability to compete asa stand-alone provider > Payer mix > "Outsiders" skimming business from local

hospitals > Medical staff

OPTIONS BEING CONSIDERED FOR METRO MERCY HOSPITAL

Pros

Cons

Freestanding

> Proud tradition > Growing, Catholic area > Good book of business

> Weak cash position > Capital needs > Formidable competition

AHiliate

> Attractive to two to three organizations

> Strong clinical/management complementarity

> Transitional step to merger

> Does not address capital needs

> Hard to get/keep partners' attention

> Probably not long-term solution

Merge

> Would provide support needed to thrive

> Potential Catholic and non-Catholic options

> Likely anyway in three to five years

> Better deal possible if stabilized

> Wrenching decision for sponsor

> Potential loss of community focus

freestanding, affiliate, or join a system. Given the above, how should MMH's board proceed?

The Decision

Tbe board asked management to prepare detailed

financial pro formas and casb flow projections for tbe

next tbree to five years, including a best case, worse

case, and likely case. In tbe likely scenario, manage-

ment's projections sbowed a modest operating sur-

plus, reacbing 1 percent to 2 percent by year two and

continuing tbrougbout tbe projection period. Best

case resulted in a 3 percent to 4 percent margin

toward tbe latter part of tbe forecast period, and worst

case indicated a modest 1 percent to 3 percent

operating losses, but cash neutral operations

tbrougbout tbe period.

Asa result, tbe board directed management to con-

tinue tbe organization s turnaround and develop a

tbree- to five-year strategic plan, including, as a major

component, an affiliation witb one of tbe tbree poten-

tial candidates identified as interested bospitals and

bealtb systems witb wbom MMH could form botb clin-

ical and operational support relationsbips. •

Alan M. Zuckerman, FACHE, FAAHC, is president. Health Strategies & Solutions, Inc., Philadelphia (azuckerman@ hss-inc.com).

120 AUGUST 2008 healthcare financial management