Wednesday, January 15, 2014

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.

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