Freeman Memorial Hospital in Inglewood, Calif., gave life to Catherine Fickes' healthcare career. Nearly 40 years later, she's come back to return the favor.
Fickes, who trained as a nurse at the hospital in the mid-1960s, became Daniel Freeman's interim chief executive officer in October. She was part of a turnaround team that arrived at the hospital in early September. As CEO, she was given the task of reviving the 360-bed facility and its sister hospital, Daniel Freeman Marina Hospital in Marina del Rey, Calif. The hospitals were losing a combined $2 million per month before Fickes came on board with a mission to trim expenses and speed payment of collectibles, among other tasks. During an interview last month, Fickes estimated that the hospitals would break even this month. That's a far cry from just three months earlier, when there was talk in the local provider community that Daniel Freeman Memorial might soon close its doors.
There's little reason to doubt Fickes' prognosis. Since moving from nursing to hospital management in the late 1970s, she has accumulated nearly 25 years of administrative experience. But Fickes is more hired gun than white knight. She isn't an employee of Daniel Freeman or its parent company, St. Louis-based Carondelet Health System. She landed the job when Carondelet approached her employer, hospital turnaround specialist Cambio Health Solutions based in Brentwood, Tenn. When Fickes' work is done and the Daniel Freeman hospitals are back in the black, Carondelet plans to sell them to another operator, a common ending for turnarounds.
Turnaround firms such as Cambio (formerly Intensive Resource Group, a unit of Quorum Health Resources, Brentwood, Tenn.); the Hunter Group, based in St. Petersburg, Fla.; and many others have gained prominence in recent years. Cuts in reimbursement caused by managed care, fraud crackdowns and the impact of the Balanced Budget Act of 1997 have helped shrink providers' bottom lines and have unleashed a tide of red ink, industry observers say. Brought in at the behest of a hospital CEO, system board or creditor, turnaround specialists can make the difference between a distressed hospital closing its doors in a matter of weeks or becoming relatively robust in less than a year.
Demand for the firms' services is high. "Our turnaround business is growing by leaps and bounds," says Thomas Reardon, Cambio's president and CEO. "I'd say it's doubled in the past year."
John Tiscornia, Seattle-based director of the national healthcare practice for Andersen, formerly known as Arthur Andersen, has performed six turnarounds in the past year. "Business has increased tremendously," he says.
In fact, the firms have been busy for several years, a reflection of the chronic ailments the hospital industry has been suffering. They have been so busy that their ability to balance multiple turnaround assignments at one time has been called into question (Aug. 19, 1999, p. 2).
Turnaround experts say their prospective clients are often on the brink of a financial calamity. The hospitals are sometimes in technical violation of bond covenants--either they don't meet requirements for cash reserves or net margins--or they're close to reaching those thresholds.
"When we're talking about a turnaround, it's a desperate situation," Reardon says. "There's really no question that help is needed and it's needed today."
David Hunter, CEO of the Hunter Group, hears the same types of concerns. "We often get called by CEOs who say, `I've got myself a problem and I don't want it to get worse,' " says Hunter, whose company is perhaps the best-known hospital turnaround firm. Clients have included the former merged organization of the University of California at San Fran-cisco and Stanford University, where Hunter served as interim CEO. The system ultimately was dissolved as part of the turnaround process. The Hunter Group also has worked with University of Pennsylvania Health System and New England Medical Center in Boston.
Typically, the firms can offer antidotes ranging from pulling the hospital out of technical default to a full return to profitability and a road map for the future. "We can look two or three or five years down the line," says Dennis Patterson, a Los Angeles-based partner with Wellspring Partners, a Crystal Lake, Ill.-based turnaround firm formed in 1999 by several former healthcare consultants from the national consulting firm Ernst & Young. Among Wellspring's most recent clients was San Francisco-based Catholic Healthcare West, the largest hospital operator in California. Wellspring aided 48-hospital CHW in the reorganization of its operations in Bakersfield, Calif., which included plans to shut down one of the three hospitals CHW operated in that city.
Varied factors drain hospitals
The factors creating a need for a turnaround firm can be extraordinarily varied, experts say. Not-for-profit institutions are more likely to need a turnaround because they tend to be more mission-focused and have fewer internal fiscal checks or have drained their on-hand capital. Although managed care and the budget law both have received a lot of the blame for healthcare's financial ailments, there are plenty of other factors.
Experts specifically cite mismanagement, lack of governance or a combination of the two. Hospitals or healthcare systems can pursue business expansions that go sour and devour cash, such as when they purchase medical groups, or as in the case of UCSF-Stanford, fail to recognize economies of scale from a merger. Facilities can hire without care, and over a period of years become grossly overstaffed. Purchas-ing can lack standardization. Fear of fraud crackdowns often prompts overcautious coding, resulting in lost patient revenue. Bill collection isn't aggressively pursued. And just a few maverick physicians can do a lot of damage to a hospital's bottom line.
"Some medical staff members can be very costly," says Steve Valentine, president of the Camden Group, an El Segundo, Calif.-based consulting firm that has performed 15 turnarounds in the past dozen years, mostly at small- to medium-sized hospitals in Southern California. "The (medical staff members' patients) have long lengths of stay, very high resource utilization, and when management tries to work with (the medical staff) they push back by keeping patients in the hospital even longer." Having five or 10 physicians whose patients cost a couple of thousand dollars more to treat than their colleagues' patients can cost an institution millions of dollars per year, Valentine says.
Meanwhile, boards often are loath to make any hard decisions for fear of generating bad publicity or removing longtime employees from the payroll. "Boards often take their eye off the ball and are not focused on financial performance," says Michael Peterson, a partner in the Peterson Network, a Santa Cruz, Calif.-based turnaround firm formed in 1997. "Then things start to deteriorate. In the early stages, it's simply that they're not making as much money as they used to, so there's no immediate movement," Peterson says. "By the time it finally is recognized, it's awfully late in the game. What often causes the problem is not one bad year, but three or four so-so years that have a cumulative effect."
Boards can be resistant even when it's obvious that drastic action must be taken. Cambio's Reardon recalls a turnaround assignment where the board had done nothing to implement the recommendations of a previous consulting firm, even though millions had been spent by the hospital to hire the firm.
Valentine recalls a turnaround his firm undertook at 309-bed San Pedro Peninsula Hospital in Los Angeles a decade ago. Despite losses totaling $9 million during the previous two years, the San Pedro Peninsula board insisted that hospital staff members whose jobs would be vulnerable to a turnaround meet with Valentine and his colleagues to discuss their fates. The meetings dragged on for two hours, but Valentine was unmoved.
"I told the board that if they wanted the hospital to remain open and continue its mission, they needed to put that aside," he says. By cutting staff 28%, eliminating a family medicine residency program and reviewing bill coding and purchasing programs, the turnaround plan helped the hospital cut costs by $500,000 per month and put an end to the facility's losses.
Governance problems can be so widespread that Andersen has had to revamp boards and committees as part of the turnaround process. "We want to achieve what we call sustainable change," Tiscornia says.
When boards do relent and acknowledge they need help, turnaround specialists often descend on the facility in a way that has been likened to a SWAT team. Often as many as 30 turnaround experts will arrive en masse, renting cars and hotel rooms on the hospital's dime. Their skills are widely diverse. "There will be nurses, physicians, and finance and materials management experts in the turnaround team," Reardon says.
The work typically begins with a top-to-bottom examination of a hospital's operation. That leads to the construction of an operational assessment and plan of action, a task that typically takes 60 to 90 days. The plan is then put into operation, which usually takes another six months. The primary components typically involve cutting jobs, renegotiating contracts, improving bill collections, changing coding methods and overhauling purchasing. Although assignments can last from two to 18 months, the average turnaround can be accomplished in about eight months to a year.
The price of health
Many of the firms interviewed for this article were fairly tight-lipped about what they're paid. Most, such as the Camden Group, the Hunter Group and the Peterson Network, receive a flat fee based on the size of the hospital they're trying to turn around. Others, such as Cambio, may receive a fee plus an incentive payment based on reaching specified goals. Wellspring might be paid a sum equal to 5% to 10% of the losses posted for the year prior to the turnaround. Andersen charges anywhere from $250,000 to $600,000 to formulate a turnaround plan, but fees to implement the strategy vary widely, Tiscornia says.
Hunter says his organization's fees range from $300,000 to more than $1 million, although the New York Times reported in 1999 that the Hunter Group billed UCSF-Stanford $414,000 per month plus expenses during its work at that system.
Turnarounds can take years in some cases. One Cambio assignment, Maricopa Integrated Health System, the public health system in Phoenix that operates 481-bed Maricopa Medical Center, began in January 1997. Cambio cut system staff by 14%, sold a Medicaid HMO that was losing $3 million per year, closed six clinics and tightened the processes for patient diagnoses and billing. Supply costs were slashed to $216 per patient day in 1999 from $274 per patient day in 1997. Once the hospital posted operating losses of nearly $13 for every patient day; now it posts a profit of more than $16. The bottom line underwent a similar transformation, from a loss of $23.4 million in 1997 to net income of $5.4 million in 1998, climbing to $14.5 million in 1999. The surpluses were used to raise employee salaries, expand services and purchase new equipment.
Mark Hillard, CEO of Maricopa Integrated, gave up a secure job as chief financial officer of Phoenix-based St. Luke's Medical Center to take an assignment with Cambio to be the system's new CFO. He was named CEO about a year later. "It's turned out to be one of the most fulfilling jobs I've ever had," Hillard says. He adds that the challenge of turning around Maricopa Integrated while still preserving the public safety net has been particularly rewarding.
The people who engage in turnarounds tend to be adrenaline junkies, individuals who don't mind working long days and being absent from their homes for months at a time. "It's a 24/7 job," Reardon says.
Fickes undertook an assignment in 1999 that had her commuting between her home in Los Angeles and New Jersey every other weekend--the only respite from workdays that could last 20 hours. For his last assignment, Peterson boarded a plane in San Jose, Calif., every Sunday evening to arrive in Chicago by early Monday morning. "It's a physically demanding and mentally demanding situation," he says. To counterbalance such stress, Peterson prefers that executives he sends into a turnaround be overqualified. "When you walk in the door, you should immediately understand and recognize the issues and there shouldn't be anything there that you haven't encountered in your career," he says.
Fickes, who oversaw the bankruptcy of a suburban Los Angeles facility, Mission Community Hospital, in the mid-1990s, thrives on the chaos a turnaround team initially encounters. "I'm very good in a crisis situation," she says. "I like to create a sense of order and continuity."
Living up to a reputation
Turnarounds, however, can create problems of their own. Observers say there is always a concern that too much power is ceded to the turnaround team by the hospital's governing board. The turnaround teams also must communicate effectively to staff members fearful of changes that could cost them their jobs.
"Boards can pull back and provide less oversight. They can sweep concerns aside with the justification that everyone must be subservient (to the turnaround firm)," says James Orlikoff, a Chicago-based healthcare governance consultant. "It's particularly prevalent with firms that do slash-and-burn jobs," he adds.
When it comes to the term slash and burn, perhaps no other firm is mentioned more than the Hunter Group. Hunter doesn't deny his firm's reputation, but he dismisses it.
"That term comes from labor unions and executives who were canned and deserved it," he says. "It's easy to call somebody who has to correct a $100 million loss a slash-and-burn outfit, but expenses have to be reduced, and that's a fact of life." He adds that a movement several years ago to soften the Hunter Group's image was quickly abandoned. It turns out that the metaphorical machetes and flame-throwers that a turnaround firm can wield are exactly what prospective clients want.
"We tell boards it's like going through death and dying, but it's really like rebirth," observes Wellspring's Patterson.
Still, a certain reputation lingers. Van Johnson, CEO of Sacramento, Calif.-based Sutter Health, was well-aware of the Hunter Group's reputation when he hired the firm in early 1999 to overhaul his system's management. By turnaround standards, it wasn't a huge job; Johnson simply felt that Sutter's corporate operations needed to be right-sized before he could ask the same of the system's hospitals. "My colleagues thought I was nuts," he recalls. "Many of my senior management thought the Hunter Group would go around me and get me fired."
Although 48 people lost their jobs, most in Sutter's information services department, and the system's print shop was shut down, Johnson says the Hunter Group communicated clearly and decisively, and everyone wound up in a better situation. "The board is in a far more comfortable position than it was before and is far more disciplined now," he says.
As for communicating with hospital employees, all the turnaround experts follow the same rule: Be upfront.
"We're not there to smooth over ruffled feathers," Patterson says. "You just say why you're there, present a plan and let the next management team do the healing. A lot of times everyone is aware that something went terribly wrong, and spends an inordinate amount of time finding out who was responsible. We don't try to find someone to blame."
Wellspring also makes great efforts to talk with the local media to dispel rumors. During the CHW turnaround in Bakersfield, Patterson's team met with the editorial board of the Bakersfield Californian to better communicate the issues to the public. Patterson also likes to set up an internal communications network he dubs a "rumor crusher." It consists of a hot line employees can call to express their concerns about the latest scuttlebutt, typically such as the fear their hospital will close by the coming weekend. Once 10 calls are received about a particular issue, Wellspring distributes a memo to the entire staff detailing the facts of the situation.
Turnaround specialists all agree they can't get their jobs done without communicating to staff members and managers at all levels.
"The biggest thing you can do is communicate. You can't execute a plan without buy-in from everyone," says Fickes, who adds that it can take months before chaos subsides and the staff and board achieve a comfort level with the changes being made.