Competitors Lead Hospital’s Financial Turnaround

  • September 3, 2010
September 3, 2010 — Two hospitals in Monterey County, CA, about 60-70 miles south of San Francisco, knew they had a problem in late 2006. The county-owned public hospital, Natividad Medical Center, was hemorrhaging cash to the tune of $25 million that year. It had lost $15 million the year before, and the trend wasn’t looking good.

As one of 15 public safety net hospitals in California, and the smallest, the 166-year-old, 172-bed hospital wasn’t alone in losing money. In fact, in 2009, says Harry Weis, the CEO hired to take over back in 2006 to turn the place around, public hospitals in his state lost between $1.4 billion and $1.6 billion. But who’s counting when the news is as bad as the apple I left in my car a little too long a few weeks back. That averages out to a loss of about $107 million per facility.

Natividad lost $3.7 million as recently as 2007. But it hasn’t lost any since. In 2008, it made $10.5 million. In 2009, $7.6 million. And in fiscal year 2010, it made $10.5 million. How is this possible?

That brings us back to the two hospitals I mentioned earlier. Neither was Natividad. Instead, the two hospitals that helped solve the problem were the two other nonprofits in town, Community Hospital of the Monterey Peninsula and Salinas Valley Memorial Healthcare System. Essentially, the two competitors—CHOMP donated $4 million over two years and Salinas donated $6 million over three years—paid for significant turnaround efforts at Natividad. Again, why?

Well, they weren’t doing it exclusively out of the goodness of their hearts, but Natividad faced a real possibility of closure if it couldn’t get things turned around. The county, also one of the smallest in the state, couldn’t stomach that type of annual loss. Natividad’s competitors knew that if they lost the public hospital, they would take the annual hit for uncompensated care from the uninsured. In fact, they had explored the possibility of a merger with Salinas Valley, but the cash flow issue at Natividad was so uncertain, they couldn’t be assured that they’d be able to absorb and turn around the facility, too. They just weren’t sure it could be done.

In return for the donation, during the time the money was being disbursed, each donor got two seats on Natividad’s board. Huron Consulting, now known as Wellspring Partners, was chosen to lead the turnaround. At a cost of $12 million, the consulting firm worked on the usual suspects. Revenue cycle was at the top of the list. And at the top of that initiative: Harry Weis, who was acting CFO at the time.

He and two colleagues from Huron completed a business plan in 2007 that outlined a journey of improvement for Natividad. Importantly, through that initiative, which covers everything from billing, to financial assistance teams for patients, to coding appropriately, Natividad realized a positive net cash flow even though the income statement showed a $3.7 million loss because it included depreciation.

“They had not had that positive net cash flow in any recollectable fiscal year,” says Weis, who was appointed CEO in April 2009, when the consulting engagement ended.

Much of the rest of the turnaround came from canceling and renegotiating managed care contracts. “We lose money on Medi-Cal and Medicare and the uninsured,” says Weis, echoing many other hospital leaders across the country. “But we were even losing money on the managed care PPO,” he exclaims. “We had reverse philanthropy where we were subsidizing for-profit insurance companies!”

What’s really amazing about the turnaround, however, is that it happened at all. Principals at the three hospitals spent about two years, Weis reckons, on obtaining permission from CMS that would permit the two hospitals to make the donation.

“CMS was not keen on that,” Weis says. “But within about 10 days after Obama was sworn in, we received a letter from CMS that said that it was ok, and meets in essence our rules and regs. They permitted it.”

Looks like it was a good decision.

Meanwhile, Natividad supports its county now, rather than the other way around, Weis says. It runs the county’s medical indigent program, for which it is reimbursed to some degree, but “as a courtesy, we’ve capped the cash receipts we receive from them at $6.2 million and we lose about $4 million a year on that program, so that’s a drag on our earnings and a way to give back,” Weis says. In addition, it gave $750,000 in 2010 to the county health department, and will give $820,000 in 2011. It’s also giving $280,000 for a senior in-home care program, and it won’t receive a penny of the county’s general fund, sales, or property tax.

Weis credits the forward-thinking leadership of his competitors for the key piece in the puzzle, however, insisting that his story shouldn’t be unique—that other struggling public hospitals and their competitors should emulate it.

“They clearly recognized the critical role this facility provides,” he says. “They did it first and foremost as the right and ethical thing to do. I’d like to see that kind of unselfish leadership continues to exist.”