Turbulence in the executive ranks

Acute-care hospitals saw their CEOs leave their organizations at a rapid clip in 2009, and even skeptics now agree that it was more than just some statistical anomaly.

All told, 18% of hospitals saw turnover in their top executive jobs in 2009, tying the record since the American College of Healthcare Executives started tracking the statistic in 1981, according to a new report from the American College of Healthcare Executives.

The reasons offered for the rising tide of departures vary widely, but the most common explanation is some close variation of what Utah Hospitals and Health Systems Association CEO Joe Krella said when asked his thoughts about the trend.

“Part of the driver is definitely the economy. All the states, and especially the federal government, are facing budget issues, and that all trickles down to hospitals,” he said. “It puts a strain on the bottom line, plus, you’ve got a lot of individuals who are retirement age and are looking to retire or just getting out of the industry.”

Contrary to popular conception, however, demographic data and some insider accounts suggest that the two-year-long recession may have actually held back executive turnover. In effect, this may have helped create a kind of CEO bubble that began deflating in the second half of 2009 to produce the spike in turnover.

Perhaps most concerning, that trend suggests that the CEO turnover will continue to remain higher than average for the next several years, since the theory rests on demographic trends, instead of the yearly or sometimes monthly financial fluctuations of healthcare providers that commonly lead to changes in executive management.

Thomas Dolan, president and CEO of the Chicago-based ACHE, declined to speculate directly on how turnover rates will look in the near future, but he said he believes the high level of executive churn seen in 2009 was because of demographic forces. “The reality is, it’s definitely up,” Dolan said. “There’s clearly something happening, and I believe it’s the retirement of the baby boomers.”

The ACHE’s annual CEO turnover report, which is based on American Hospital Association data and was provided to Modern Healthcare ahead of its March 8 general release, shows that 18% of the 4,582 nonfederal short-term hospitals changed CEOs in 2009.

That was the highest rate in a decade, tying the previous records set in 1987, 1988 and 1999. That compares with a 14% turnover rate in 2008. Several states, such as Arkansas, Oregon and California, saw steep year-to-year increases in turnover, which observers said may be because of intense market competition and increased financial uncertainty stemming from state reimbursements.

Conventional wisdom would hold that financial pressures such as dwindling volumes, lower government reimbursements and negative profit margins seen during the recession would send more top executives packing. Indeed, insiders have been anecdotally reporting elevated levels of turnover for the past year (June 29, 2009, p. 6).

In Arkansas, which had 86 acute-care hospitals in 2009, CEO turnover increased from 13% in 2008 to 32% in 2009, nearly tripling in one year’s time.

Terry Amstutz has been a CEO at several Arkansas hospitals over the years, and in November 2009 was hired to be the top executive at Medical Park Hospital in Hope, Ark., after the hospital’s new for-profit owners, Shiloh Health Services, concluded that the former executive management was not getting the job done, Amstutz said.

Amstutz barely even had time to take in local tourist attractions such as the Bill Clinton Birthplace before he had to devise and present a sweeping turnaround plan for the struggling 79-bed hospital. “This is a hospital that needed some attention quickly,” Amstutz said.

His turnaround plan, developed in his first four weeks on the job, is “based on all the fundamentals, because good business concepts are basic to any organization. It’s basically saying we need to have more revenues than expenses.”

Experts say financial performance has always been a key driver in decisions on involuntary CEO departures, which could lead to more turbulence in executive ranks as healthcare reform efforts shake up the government reimbursement systems at a time when almost half of all healthcare is paid for by the federal government.

But many of the long-term trends concern voluntary departures. For example, a study by executive search firm Witt/Kieffer released before the onset of the recession predicted that between one-quarter and one-third of all hospital CEOs would leave their jobs in the next seven years through retirement, President and CEO James Gauss said. Instead, ACHE data show that CEO turnover has remained at relatively low levels since then.

Observers say many CEOs decided that they couldn’t afford to retire, given what the recession had done to their nest eggs, while others decided not to make job changes because of difficulty selling their houses or the recent unwillingness of boards to negotiate on salaries. Those effects were coupled with the desire of many boards to maintain stability in executive ranks during a time of great financial instability, which limited involuntary departures to cases of urgent necessity, observers said.

Indeed, many executive search firms have struggled over the past year, with layoffs recorded at many of the industry’s largest names as the companies work to diversify their offerings (Dec. 21/28, 2009, p. 12).

But the pressure on this “pent up” wave of executive retirement driven by retirement-age, baby boomer hospital CEOs is ratcheting up as boomers look warily toward the financial uncertainty for healthcare that awaits if reform succeeds, Gauss said. “In 2008 and early 2009, it was kind of a panic, and everyone was paralyzed,” he said. “It was very hard to make decisions … and that has kind of broken loose.”

Another long-term factor contributing to executive churn is the proliferation of for-profit chains, which tend to change their CEO ranks more rapidly than not-for-profit hospitals and systems. For 2008, the most recent for which data are available from the AHA, the number of for-profit hospitals in the U.S. grew by 12%, while the number of not-for-profits held stable.

Also, the widely discussed increase in outside scrutiny of hospitals’ balance sheets is having repercussions on CEO turnaround. The scrutiny of finances by the public, encouraged by changes in data reporting by tax-exempt hospitals, is placing boards under more pressure to take decisive action when financial goals go unmet, which often can result in involuntary departures of top executives, observers said.

While that force has received a great deal of attention, less noticed is the scrutiny being brought by bond raters, who can hold great sway over hospitals in a tight credit market. Bond ratings reports routinely delve into the leadership situation at a hospital, noting when new executives have been appointed or when a stable C-suite is in place. “As they rate, they do a deep analysis of what’s going on in an organization, and leadership talent is part of that,” said Marie Sinioris, president and CEO of the Chicago-based National Center for Healthcare Leadership. “Anything that points a spotlight on leadership talent is a good thing, because leadership is what drives performance.”

However, officials with one bond ratings firm said that assessing the executive team of an organization has long been a part of their work and is not a new development. Lisa Goldstein, senior vice president and healthcare team leader for Moody’s Investors Service, said management is one of the five key factors in evaluating the credit-worthiness of hospitals. “Hospitals are very complex, capital-intensive, cash flow dependent organizations that borrow on the municipal market. We feel that there are a growing number of needed skills in management as the complexity of hospitals and healthcare increases,” she said. The agencies’ best indication that management strategies are working is when financial performance and patient volumes are “stable, steady and improving,” she said.

Goldstein said she has never heard of a case where a CEO was terminated because of a poor rating. However, a poor rating often reflects the kinds of factors that will lead to a top executive being fired regardless of what a ratings’ agency says.

“For boards to make leadership changes or for senior leadership to make middle management changes is likely due to a host of factors. A rating change may reflect the impact of those several factors,” she said. “I’ve never been told, ‘We let someone go because you changed your ratings.’ It’s, ‘We decided to make various changes because of our financial performance or some other goal was not met.’ ”

In Boca Raton, Fla., something close to the opposite happened this year. The board of directors of 394-bed Boca Raton Community Hospital in 2008 ousted its executive team and brought in a temporary senior leadership group on an 18-month contract with an executive staffing agency after the hospital ended the fiscal year with $120 million in losses.

That total comprises $60 million in operating losses and $60 million on a failed effort to develop a new academic medical center at a hospital with annual revenue of $360 million.

“They needed help pretty quickly to make sure the financial performance didn’t continue,” said Jerry Fedele, who was hired in the fall of 2008 as the temporary CEO.

In about one year’s time the new executive team largely accomplished its turnaround goals, as evidenced by a Standard and Poor’s bond rating report that reported promising signs, except for one glaring asterisk: The entire executive team that had implemented the turnaround was preparing to exit the hospital again in April.

Shortly afterward, Fedele was offered a role as permanent CEO, which he accepted. As of February, his paychecks started coming from the hospital instead of the temporary placement firm.

Fedele insists the bond report did not directly lead to the job offer or to his decision. Indeed, board members have said since the beginning of the process that they were not seeking a team of “hired guns.”

But how many other short-time CEO hired guns are still out there running hospitals? No one can say for certain, but Fedele noted that more hospital boards seem willing in recent years to hire “change agents” without even having a full-blown crisis on their hands.

“I think the traditional view was, if you were having severe financial difficulties, a change agent is necessary because you have to make quick and difficult decisions, and sometimes those decisions can alienate people,” Fedele said.

“Sometimes they may not be under an immediate threat, but they are still seeking a change in an organization,” he said.

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