Taking the hospital "stress test": Will OCH survive in 2014?

At the Becker's Hospital Review Annual Meeting in Chicago on May 17, Scott Becker, JD, CPA, partner with McGuireWoods in Chicago, talked about signs of hospital sustainability. He mentioned the following factors as critical signs of whether a hospital will end up going bankrupt or being sold.

I attended that conference and will be speaking at the next one in May. I decided to take Becker’s hospital “stress test” for OCH. You might do the same and see if your answers are different than mine. [In keeping with my rant about OCH in 2014, please note that, unlike the MHA version, in the Becker hospital “stress test” there are no questions specifically about cash reserves even though this is a “test” designed to figure out which health systems are likely to survive in 2014.]

Test Question 1: Does the hospital have a clear strategy for physician alignment?

Scott Becker’s comments: "It used to be if you were a hospital, you viewed yourself as in fabulous shape if a large portion of business came with physicians you didn't have a financial relationship with," said Mr. Becker. That has since changed, where throughout the country today about 80 percent of physicians have some type of financial relationship with their hospital –– up from about 60 percent a decade ago, according to Mr. Becker. Does a hospital default on a strategy where it relies on independent but affiliated physicians? If so, it should strive to be more than that in order to remain sustainable.

Answer: I would say that we do have a clear strategy. We employ almost all of our doctors for the work they do at OCH in both Missouri and Arkansas. We do not depend on any independent practitioners to bring their patient volume to us. We have very little physician turnover. We need and want to recruit more physicians to the organization, and we do face challenges in that regard.

Test Question 2. Does the hospital have high quality care?

Scott Becker’s comments: "One of the things I find most interesting is when I'm in a meeting and you have to work hard to find a board member in that meeting who would actually use that hospital," says Mr. Becker. Mr. Becker calls this a fascinating litmus test: When not one board member would want their family members treated at the hospital, that's a good sign the hospital should be sold quickly.”

Answer: We provide quality care. One of our strategies in providing quality care is that we will simply not provide a service if we can not do it well—which is one of the few benefits of being surrounded by large health systems in both Arkansas and Missouri. Our system-wide focus is primary care provided in a clinic setting. We provide quality primary care as well or better than any of our competitors. We provide quality care through our inpatient services in Arkansas and Missouri. We are something of a quality “niche” provider in Gravette through our swing bed service and in Springfield through our novel approach to care and management of geriatric patients with medical and behavioral co-morbidities. We are a leading provider of chronic pain management in all of our markets. We do that difficult job the right way for everyone regardless of payor status. There are no other health systems our size providing the scope and quality of outpatient behavioral health care that we do.

Test Question 3. Does the hospital have a great leadership team?
Scott Becker’s comments: "When people hire people, you have a choice between talented leadership and experienced leadership, and we've found really hardwired, talented engaged leadership is more critical than experience. It's not one experience that's going to help; it's being able to respond to various situations over time.”

Answer: We certainly focus more on talent than experience when developing administrative leadership. From the CEO down, except for our nursing leadership which of necessity comes from a healthcare background, our leadership primarily comes from outside the healthcare arena. My analogy is the football draft—it is smarter to draft players based on athletic ability, not the name or size of the player’s college program. You can decide for yourself how that is working out for OCH. I can tell you this for certain: an experienced healthcare leadership group would have given up on this project 12 years ago. There is a line experienced hospital administrators are not supposed to cross when making a decision about whether to close or stay open. That line is defined by days of operating cash on hand. If the health system drops below that line—close. The fact is we have never been above that line.

Test Question 4: Does a hospital have a clear plan, or is it operating vaguely?
Scott Becker’s comments: A hospital can adopt various "mantras" to serve as guiding rules going forward. These strategies should be clearly understood across all levels of the organization, and sustainable hospitals' employees will be able to recite this strategy within 30 seconds. That goes to show the need for concision and definition in the plan. "It could be, 'We're going to be a leader in shared savings programs. We're going to be an innovator. We're going to be the leader in cardiovascular services," says Mr. Becker. The goal should be well-known and easy to remember.

Answer: 

• We are and we are going to continue to be a leader in primary care for governmental patients and the uninsured. Our recent adoption of the Kitchen Clinic is a recent illustration and it is paying dividends to the organization. 
• The reimbursement playing field is leveling out and it is coming down to where we are and have been. Our advantage over other health systems is that we are accustomed to it and will thrive while they are collapsing. 
• We are being innovative in the way we are incorporating behavioral health as primary care—both on an inpatient and outpatient basis. The nation is slowly beginning to recognize that care for behavioral health is as important as national security to our long-term survival as a nation. It doesn’t hurt that we will now have the NRA on our side lobbying for funds. 
• We are clearly an innovator when it comes to governmental revenue management. For example, our understanding of governmental reimbursement led us to develop a game changing strategy in the Gravette hospital. We recruited expansive-to-manage skilled nursing patients to our inpatient swing bed service knowing that we would be reimbursed for those higher costs while other providers would not. As a result, we are getting patients from providers who have their own skilled nursing units. 
• We have been a leader in maintaining provider-based clinics. The only clinic in our organization that is not provider based is OCH Jasper County—and we receive provider-based reimbursement even there for our Missouri Medicaid patients. 
• We have been an innovator in providing care for the Medicaid population. We opened and continue to operate the only hospital-based primary care clinic exclusively for Medicaid patients in the State. We employed specialists and paid Medicare rates for services provided to Medicaid patients. 
• Our employment of long-term care providers through provider-based rural health clinics tied to a small urban hospital is a one-of-a-kind innovation. 
• We have been an innovator in physician contracting. We are one of the only health systems in our markets that is “payor blind” when determining physician compensation. We do not require physician production to deduct for operating expenses. We do not impose covenants against competition. This innovative approach to physician compensation will give us an advantage in expanding our base of primary care providers—which is our fundamental strategy. 
• We are going to stick with the plan we have followed for over ten years and trust that the healthcare industry will catch up to it and find us leading the way. 

Test Question 5: Does the system have a clear reason for being?
Scott Becker’s comments: "If you're a community hospital, the answer is probably yes. If you closed, people would have to travel much further for care. In Chicago, there might be less need for being," said Mr. Becker. Hospitals in urban or competitive markets with hundreds of hospitals, especially need a defined reason for their existence.

Answer: We are a community hospital in Gravette and we provide a niche, skilled nursing care service for expensive-to-manage patients through our swing bed program. In general, the Springfield community does not need our hospital beds since there are two billion dollar hospital systems in town, but it does need our clinics; and I believe we still provide a needed inpatient service primarily to the nursing home community.

Test Question 6. Is the hospital known for something?
Scott Becker’s comments: Closely related to that former question, hospitals need a reason patients would travel to or strongly prefer their facilities. This often comes in the form of an outstanding specialty program. There are plenty examples of these reputations in Chicago. "Years ago, the University of Chicago was the lead academic institution here. If you had a serious GI problem, you went there. On the North Side, there were also certain hospitals that patients preferred for OB/GYN care," says Mr. Becker.

Answer: OCH is known as the “Medicaid hospital” in Springfield. We are known for being a community resource in Gravette. We are known in a small but important way for the approach we take in the treatment of disenfranchised and at-risk people in Missouri and Arkansas. For example, there was a situation recently in which a DFS caseworker needed help for a child, and the situation involved police, EMT, Children's Division hotline worker and the caseworker. Before OCH could raise its hand and say “We will help,” all involved came to an independent conclusion that OCH was the place to go for help. They know we will cut through bureaucratic nonsense and payment concerns and simply help. We are known in a surprising number of places across the nation as a unique safety-net provider that somehow manages not only to stay open but to grow despite the odds stacked against us.

Test Question 7. What is the payor mix?
Scott Becker’s comments: This factor is the wild card, as a payor mix is largely dependent on demographic traits that fall out of hospital management's control. Still, hospital leaders should not be naive about the determinant nature of a payor mix.

Answer: We take patients from the payors our competitors do not value, and we have transformed that necessity into a virtue.

Test Question 8. Is the hospital large enough to afford some chance investments?
Scott Becker’s comments: If not, hospitals have to make every single bet right, and that's risky. "You have to have enough size and capital to take some chances," said Mr. Becker. Hospitals with $100 million in revenue may be sustainable, but they may face the challenge of finding enough money to invest in their physician alignment strategy, for instance.
Answer: Our strategy is to strengthen and widen our base of primary care providers. We cannot manufacture capital (cash reserves) which would make us a larger system as systems are ranked based on their balance sheets; so, we have to get “large enough to afford some chance investments” simply by growing real capital—OCH patients and employees.

OCH in 2014: What this year will bring for our health system

I may be an incurable optimist. Then again, I may not be. I am not a glass-is-half-full guy. As I recall saying at one of our Christmas dinners, I am a glass-is-always-completely-full guy. That makes me a realist… a MacGyver-wannabe, perhaps, but a realist. The glass really is always full, even if it is full of a complete vacuum. After all, a vacuum is a really useful force. I don’t focus on the emotional connotation of the half empty/full glass—the realm of the pessimist/optimist—I focus instead on what can be done with a glass that is half full of water and half full of air. Air, like a vacuum, is not nothing.

So, there we are. OCH in 2014 is a glass half full of water and half full of air. What will become of it… and us? I use the glass full of water and air to illustrate the principle of defamiliarization—a novel perspective on a familiar object that forces the viewer to look at the familiar as though seeing it for the first time. In the OCH world, capital is that familiar object. What is capital? Most would answer “money” or assets that can be converted into money. Capital is a resource. Businesses are rated as weak or strong largely on the strength of available resources—and capital is king among business resources.

The conventional assessment of OCH is that we are a weak business organization because we have so little capital. If capital is money, it is true that OCH has never had any. By the time we opened our doors for business in 2000 we had already spent all of the money we had. We have been living off cash flow from current operations ever since. When OCH is compared to other health systems, the most glaring difference between us and everyone else is the lack of capital—of cash reserves. True, there are some systems that manage to make a great deal of profit, but most health systems these days are barely above break even, generating an operating margin of no more than one percent.

The Missouri Hospital Association recently employed consultants to perform a “stress test” of all the hospitals in Missouri. OCH-S was judged to be one of the most financially stressed hospitals in the state, and the other stressed hospitals could depend on non-operating sources of revenue—such as government hospitals receiving direct taxpayer support and nonprofits with foundations, donations, grants and large cash reserves. We do it without ancillary support revenue.

The Arkansas Office of Rural Health retained a firm to provide economic performance benchmarks for all critical access hospitals in Arkansas. OCH-G has the lowest cash reserves of any CAH in the State and we do not compare favorably with other hospitals according to most economic indicators. However, we were also deemed in the top five of all critical access hospitals in the State in terms of our average inpatient costs and charges weighted by DRG—we are treating patients with the same illness by doing less but getting similar outcomes. In other words, we are efficient.

There is one category in which OCH compares favorably with the economically healthiest health systems: the ratio of non-physician employee compensation to total operating expenses. OCH has one of the best such ratios in the nation: the range is from 40% to 60% and we are near 40%. Generally speaking, if a health system’s cost of labor is low compared to overall operating expenses, the health system is an efficient business operation. We are also a system composed of safety-net facilities. We have a predominantly governmental payor mix. Safety-net providers typically have a labor ratio nearer 60% than 40% because governmental payors pay less for the same service. If our cost of labor was calculated against the volume of patient services provided, we would truly be in a class by ourselves.

I realize I am the glass-is-always-completely-full guy, but I admit I am perversely proud of the fact that OCH is still here, still providing quality care to thousands of patients (many of whom would not have access to quality primary care otherwise), in spite of the fact that we constantly appear to be on the edge of economic ruin. As we like to say around here: “If it was easy, it wouldn’t be any fun.”

So, where does that leave OCH… where does that leave us?

We have an efficient organization, as efficient as any of the “profitable” systems. If only we had capital. Like glasses half full of water and half full of air, there is another way to look at capital. People are capital. OCH employees and OCH patients are capital. Healthcare experts are increasingly discounting the value of cash as capital and are instead focusing on the number of primary care patients who access care through a given health system. One such expert approached me at a recent healthcare symposium and said, “Everybody has cash.” [I thought to myself this guy needs to get out more.] “Cash can be gone with the wind. The real capital in healthcare right now is primary care encounters.” 

On that basis, OCH has plenty of capital. OCH does over 200,000 primary care encounters a year system-wide. As a point of comparison, There are billion-dollar health systems (based on monetary capital) which do not do as many.

OCH employees are another source of capital. We are battle tested in ways that employees who work at well-funded health systems can not imagine. Everyone acknowledges that the healthcare industry faces an increasingly challenging future. Hospitals which have had an easy time of it over the last few decades are ill-equipped to deal with decreasing reimbursement and increased governmental regulation. We at OCH have lived in that world virtually since we were born.

We are efficient. We have sufficient capital. We need to keep growing. It may seem crazy to push the pedal on expansion while we struggle to pay our bills, but crazy has worked for us for more than a decade. Get ready to have some fun. 2014 is going to be an OCH year.

MINUTE RANT: On the effect of states refusing to expand Medicaid

I have ranted about the fact that the states like Missouri that refused to create a state exchange and expand Medicaid are making the cost of insurance higher for their residents than those states that both created exchanges and expanded Medicaid. I had no real data to support that rant but I knew it would be forthcoming.

From the Huffington Post:

While Republicans at the national level have thus far been completely unsuccessful in attempts to repeal or defund the Affordable Care Act, Republicans at the state level have succeeded in preventing people from obtaining health coverage under the new law. Data compiled by Theda Skocpol of Harvard University for the Scholars Strategy Network, a progressive group of academics, illustrates how states' decisions to not create their own health care exchanges or expand Medicaid under the ACA have suppressed enrollment. According to Skocpol's research, the 14 states that are expanding Medicaid and running their own exchanges have seen enrollment in Medicaid and exchanges at around 40 percent of projections. In contrast, in the 23 states that refused to expand Medicaid or cooperate when it comes to an exchange, enrollment percentages are in the single-digits.

Source: http://www.huffingtonpost.com/2014/01/07/health-care-obstruction_n_4556307.html