Despite sliding revenue, the Joint Commission on Accreditation of Healthcare Organizations is flush with income to seed a new wave of program development after experiencing the most profitable year in its 50-year history.
The Oakbrook Terrace, Ill.-based agency earned $11.6 million in 2000, a 10.4% profit margin on revenue of $111.4 million. That's more than double the net income of any previous year.
The financial results, reported in the JCAHO's latest tax filing with the Internal Revenue Service, were achieved mainly through aggressive cost reductions even as survey revenue from accreditation activities declined 5.5%-the second consecutive year of slippage.
"They had a rude awakening two years ago, when they had to dip into their reserves," said Donald Nielsen, M.D., a senior vice president at the American Hospital Association, which appoints seven members to the 28-member JCAHO board. In 1999, the commission lost money on operations for the first time in 20 years.
The size of the profit margin in 2000, combined with continuing complaints about the value of accreditation compared with its expense, place the JCAHO under industry scrutiny as it decides what to do with its newly earned financial cushion.
"Our membership will be intensely interested from the value perspective," Nielsen said. The not-for-profit commission, he said, has a responsibility to plow its profits back into operations and provide customers with "more return from the accreditation program than the costs that are going in," he said.
That would include reducing the costs of complying with proliferating accreditation standards, "even a reduction in survey fees if this surplus continues."
And the JCAHO expects it to continue. The private accrediting body has projected a profit of $10 million for 2001, a 9% margin on projected revenue of $115 million.
The JCAHO geared up this year to develop new products and services to increase revenue, said Chief Financial Officer Paige Rodgers. "We've spent a lot of time investing in the future," she said.
Activities included developing standards in patient safety, disease management and emergency preparedness, along with considering whether to remove or de-emphasize some dated standards.
A record level of direct contributions from outside interests in 2000 (See related story, p. 16) coincided with such efforts. But for the first time, the JCAHO refused to disclose the identities of those contributors, which in the past have included pharmaceutical companies and medical equipment manufacturers.
Paring the way to profitability
The cost-cutting effort yielded $15 million in savings, reducing expenses to $99.8 million compared with $114.9 million in 1999. An $8 million reduction in payroll accounted for more than half the savings, the consequence of culling 176 positions from the JCAHO workforce in late 1999 and early 2000.
In the face of declining revenue, especially in home healthcare and long-term-care accreditation, an internal analysis subjected all jobs to productivity benchmarks, said Rodgers, who became CFO in December 1999. Nearly two-thirds of the job reductions resulted from not filling vacant positions. In all, 68 employees were laid off, leaving 491 employees, a number that has since risen to about 510, spokeswoman Charlene Hill said.
The lower payroll included a 16.5% decline in officers' and directors' compensation to $3.3 million. JCAHO President Dennis O'Leary received $779,667 in total compensation, up 6.3% from $733,201 in 1999. That total included a 2.8% raise in salary to $478,758 and a 17.4% increase in contributions to his employee-benefits plans to $286,503, but a 38% decline in expense-account allowances to $14,406.
Besides trimming labor costs, the commission also made substantial changes to its corporate travel policy, Rodgers said. The clampdown resulted in a $4.8 million reduction in travel-the commission's second-largest expense after employee compensation. In addition, all supplier contracts were revisited and significant services were put out to bid, she said.
"I'm impressed with the amount of management," said Kenneth Raske, president of the Greater New York Hospital Association. "They obviously grabbed hold of the place and are managing their way out of their problems."
Those problems include a continuing decline in survey revenue since 1998, when dollar volume peaked at $92 million and the number of surveys conducted in all accreditation areas hit an all-time high of 10,222. Revenue from survey fees totaled $86.2 million in 2000, down 5% from $90.8 million in 1999. Survey volume skidded 23% in two years to 7,906 in 2000. Rodgers projected another 3% to 4% drop-off this year.
JCAHO officials traced the decline in business chiefly to declining ranks of nonhospital customers that were done in by financial problems in the aftermath of the Balanced Budget Act of 1997. While the hospital accreditation business remained stable, many healthcare organizations reassessed whether they wanted to stay in the home-care or nursing home business, Rodgers said.
Home-care survey volume in 2000 declined 46%, compared with 1997, the last time the same comparable contingent of facilities came due for the triennial inspection process. Long-term-care volume declined 38%, compared with 1997 volume, Rodgers said.
But Nielsen said the decline in applications for accreditation also reflected doubts about the worth of accreditation. Many operators of home-care agencies and long-term-care facilities "have determined that the value of accreditation is not there for those who have stayed in business."
For long-term-care facilities, it's probably a little of both, said Tom Burke, spokesman for the American Health Care Associations, which represents nursing homes. The financial root is "probably very accurate," Burke said, but nursing homes likely viewed JCAHO accreditation as expendable in tough times. That's because unlike other accreditation programs, the long-term-care program doesn't have "deemed status," which substitutes for federal inspections in providing Medicare certification.
"Nursing facilities are surveyed yearly by the states on behalf of (the Centers for Medicare and Medicaid Services)," Burke said. "Without deemed status, (JCAHO accreditation) probably lost some value."
The predicament of provider customers has put the JCAHO's financial results in sharper relief. "It's a much higher operating margin than you'd find in the hospital community," Raske said. But the profit margin "in a one-year-context" isn't something to begrudge, he added.
"By reducing expenses, they were rewarded by a significant surplus," he said. "As a manager, when you make your reductions, it's not always clear how fruitful they will be." If the atypical surplus becomes a recurring event, however, it calls for either adding programs or cutting fees, Raske said.
A 3.25% fee increase went into effect January 2000 for full surveys in all programs except ambulatory-care and home-care accreditation, Hill said. The commission has held the line on fees for 2001 and 2002, and it will try not to pass typical inflationary costs onto customers, Rodgers said.
Seed money for new directions
Meanwhile, the JCAHO has committed $3 million over three years to a lineup of programs intended to improve the accreditation process, she said. And new accreditation programs are under way for disease management and for a new class of healthcare facilities created by the budget law called critical-access hospitals.
Among the accreditation-process changes being pilot-tested is a switch to a more continuous approach to accreditation readiness (June 12, 2000, p. 2). The field tests will continue for at least another year before any decision is put before the JCAHO board, said Russell Massaro, the JCAHO's executive vice president of accreditation operations.
A contrast to the current grand-scale survey every three years, the alternative process would employ Internet technology to swap information routinely and add a survey visit at the 18-month mark. Massaro said hospitals could fold the accreditation readiness into normal operations and would not have to spend as much money to prepare for one crucial visit every three years. He called the approach "more a movie than a snapshot."
Not all hospital customers feel the same way about it. In fact, when Massaro presented the plans to the Hospital Association of Southern California in July, a gathering of 150 hospital chief executive officers unanimously panned the proposal, said Leonore Tramontano, an HASC vice president.
Though the association maintained it believes strongly in continuous survey readiness, it contended the JCAHO proposal would not accomplish that objective. In particular, there was "overwhelmingly negative feedback against the 18-month accreditation process," Tramontano said.
"We're not sure every three years is valuable-why do it twice as often?" she said. "To go through that exercise twice as often would be costly, it would be disruptive, and it would severely damage some hospitals financially."
The average survey fee for hospitals nationwide is $22,000, according to the JCAHO. But the average fee among 18 Southern California hospitals recently surveyed by the JCAHO was $31,000. In addition, the cost of more training, consulting and personnel time devoted to the survey drove the average to $146,000 per hospital in the California survey.
"Increasing its frequency will only increase its adverse impact on hospitals," Tramontano said.
An HASC position paper also criticized another project in development for the 18-month midpoint, a companion online self-assessment of compliance with a subset of standards based on an organization's setting, services and population. Once on-site, surveyors randomly check 20% of those standards to validate the hospital's findings.
Massaro said the process has to prove its value in testing first, and it's likely that the continuous-accreditation approach will be offered initially as an option if approved by the commission board. Once in force, its track record will determine whether the comparative benefits argue for making the approach universal, he said.
Last spring the JCAHO decided to launch a standard-by-standard re-evaluation of the survey preparation burden (May 7, p. 5). A task force has finished reviewing two areas so far-leadership and patient rights-with the aim of removing some standards from the list of nearly 500 in the hospital accreditation manual and modifying the amount of documentation required for others, Massaro said.
A commission spokeswoman said in May that the task force hoped to complete its work by December, but Massaro said the laborious process will take longer. The 18-member committee isn't expected to finish until the second quarter of 2002, after which its recommendations will be submitted for board action, he said. Massaro's "best guess" is that the changes will go into effect in January 2003.
The work will "improve our ability to participate in the national agenda" by making room for recently developed standards addressing everything from clinical safety to bioterror readiness, he said.