Success under duress: policies and practices managers view as keys to profitability in five California hospitals with challenging payer mix.
Subject: Hospitals (Management)
Hospitals (Finance)
Hospitals (California)
Medicaid (Evaluation)
Authors: Rundall, Thomas
Oberlin, Shelley
Thygesen, Brian
Janus, Katharina
Pub Date: 03/01/2012
Publication: Name: Journal of Healthcare Management Publisher: American College of Healthcare Executives Audience: Trade Format: Magazine/Journal Subject: Business; Health care industry Copyright: COPYRIGHT 2012 American College of Healthcare Executives ISSN: 1096-9012
Issue: Date: March-April, 2012 Source Volume: 57 Source Issue: 2
Topic: Event Code: 200 Management dynamics; 250 Financial management Computer Subject: Company business management; Company financing
Product: Product Code: 8060000 Hospitals; 9105213 Medicaid NAICS Code: 622 Hospitals; 92312 Administration of Public Health Programs SIC Code: 8062 General medical & surgical hospitals; 8063 Psychiatric hospitals; 8069 Specialty hospitals exc. psychiatric
Geographic: Geographic Scope: California Geographic Code: 1U9CA California
Accession Number: 285087585
Full Text: EXECUTIVE SUMMARY

Hospitals with a challenging payer mix (CPM)--high proportions of uninsured and Medicaid patients and a low proportion of commercially insured patients--are an important source of care for low-income, uninsured people. Achieving profitability is difficult for CPM hospitals. From 2005 through 2008, only one-third of 67 CPM hospitals in California reported positive total margins. In-depth group interviews were completed with the management leadership teams of a diverse group of five profitable CPM hospitals to identify the management strategies and practices that the hospitals' leadership teams credited for their financial success. Twelve management policy and practice topics were identified. Four of the policies and practices that managers identified involve organizational actions to increase hospital revenue or operational efficiency. These factors are consistent with those identified in previous research. However, managers also identified eight factors not previously revealed in research on hospital profitability, including management policies and practices that establish the organizational culture, workforce, relationships, monitoring systems, and governance necessary to ensure that hospital employees and affiliated physicians support and successfully implement organizational actions necessary to achieve profitability.

INTRODUCTION

For many years, there has been widespread concern about the financial viability of our nation's safety-net hospitals (Cunningham, Bazzoli, and Katz 2008; Bazzoli et al. 2006; Bazzoli et al. 2005; Cunningham 2007). These public and not-for-profit hospitals are a major source of care for low-income, uninsured, and underinsured people. Although there is no universally accepted definition of a safety-net hospital, generally such hospitals are characterized by a challenging payer mix (CPM), which we have defined as the combination of (a) a high percentage of Medicaid (Medi-Cal in California) patients; (b) high uncompensated care as a percentage of expenses (1); and (c) a low percentage of commercially insured patients in relation to other hospitals (NAPH 2010). Typically, it is difficult for hospitals with these three characteristics to achieve financial profitability, because the revenue received from commercially insured patients may be insufficient to make up for the losses incurred from providing services to uninsured patients and patients covered by lower-paying Medicaid and Medicare programs (Felland et al. 2010). Since the beginning of the recession in 2007, rising unemployment and decreasing tax revenues have increased the challenges CPM hospitals face (Holahan and Garrett 2009). The 2009 American Recovery and Reinvestment Act (ARRA) helped maintain the financial viability of safety-net hospitals (Felland et al. 2010). However, even with the support provided by ARRA, safety-net providers reported more financial strain in 2008 and 2009 than in previous years (Felland et al. 2010).

The literature suggests that many factors that affect hospital profitability are beyond managers' immediate control, including a given hospital's geographic location, extent of health insurance coverage in the primary service area, ownership status, teaching status, amount of competition in the market (Younis, Rice, and Barkoulas 2001; Younis and Forgione 2005; Gapenski, Vogel, and Langland-Orban 1993), and penetration of managed care (Resnick et al. 2005). However, previous studies have also identified a number of factors that hospital management can influence to a greater or lesser extent (in collaboration with others, including nurses and physicians), including factors such as adjusted number of employees, length of stay, bed capacity, occupancy rate, volume of Medicare and Medicaid patients (Younis, Rice, and Barkoulas 2001; Younis and Forgione 2005), surgeon productivity (Resnick et al. 2005), capital structure (Das 2009), supply of physicians in the local market (Kim 2010), amount of nonoperating revenue (net income from sources not directly connected to patient care) (Schuhmann 2010), and market share (McCue 2007). The findings mentioned were derived from large sample, quantitative studies that examined the effects of multiple predictor variables on various measures of hospital productivity. Two other studies, the only ones focused on safety-net providers, come from the Center for Studying Health System Change's Community Tracking Study (CTS), which has been conducting in-depth tracking of health system changes in 12 randomly selected metropolitan areas. Since 1996 the Center has conducted the CTS through onsite and telephone interviews with healthcare providers and recognized local experts with a broad knowledge of the healthcare system in their community (Cunningham, Bazzoli, and Katz 2008; Felland et al. 2010).

The CTS studies identified a number of specific strategies managers in those hospitals pursued to either increase revenue or decrease costs in response to the financial strain they were experiencing. The safety-net hospitals in the CTS communities reported doing the following to increase revenue: (1) upgrading or expanding facilities to attract more privately insured patients, including building new patient beds, operating and patient exam rooms, dental clinics, and emergency departments; (2) expanding into more profitable service lines (e.g., primary care, obstetrics, pediatrics, and geriatric care) and more affluent geographic areas; (3) changing the safety-net "image" to appeal to a broader spectrum of patients; (4) redoubling efforts to earn more for each patient visit by increasing enrollment of uninsured patients eligible for Medicaid or other public insurance and by improving collections from public and private insurers; and (5) instituting new patient fees and donations. To decrease costs, these hospitals (1) negotiated savings in supply costs and (2) reduced labor costs through wage freezes, staff reduction through attrition layoffs, and decreased or eliminated overtime for nurses and the use of expensive part-time and temporary agency nurses. However, the CTS studies represent a snapshot of a community's health system at a given point in time, and it is not possible to determine whether the identified policies and practices affected hospital productivity. A longitudinal study with detailed measurements of many environmental and organizational variables and specific management policies and practices would be required to make causal claims of effectiveness. To date no such study has been done. Here we contribute to the field's understanding of safety-net hospital profitability by using an approach commonly taken with efforts to identify better practices in healthcare. We assessed the profitability of hospitals in California with a challenging payer mix and then used case study methods in a selected group of five profitable CPM hospitals to identify the strategies and practices that the hospital leadership teams credit for their hospital's financial success. Three primary questions are addressed:

* How many CPM hospitals are there among California's acute care general hospitals?

* How many of these CPM hospitals demonstrated financial profitability over the period 2005-2008?

* What were the managerial strategies and practices that senior leaders of five diverse CPM hospitals credit for their financial success?

METHODS

We used a mixed methods approach. First, we analyzed hospital data from the state of California's Office of Statewide Health Planning and Development (OSHPD) to select CPM hospitals that demonstrated profitability. Second, we collected and analyzed qualitative data from onsite interviews of the leadership teams at the five profitable CPM hospitals selected for in-depth case study.

Selection of Study Hospitals

To identify hospitals with a challenging payer mix, we created a CPM index. To create the index, all 268 non-Kaiser, general, acute care hospitals in California were assigned scores from 1 to 4 based on which quartile of the statewide distribution they were in for fiscal year 2005 with respect to (a) percentage of Medicaid (Medi-Cal in California) patients (1 = highest quartile); (b) uncompensated care as a percentage of expenses (1 = highest quartile); and (c) percentage of commercially insured patients (1 = lowest quartile). The scores for these three measures were summed. The 67 hospitals in the lowest quartile of the statewide distribution on the CPM index were identified as having the most challenging payer mix and were selected for further study.

To identify profitable CPM hospitals, we analyzed financial data for the period 2005-2008. Twenty-two CPM hospitals reported positive total margins each year for the period 2005-2007. We performed two other analyses to ensure that we selected hospitals for our case studies that reported solid financial performance and were also delivering quality of care that was not compromised. We identified a subset of CPM hospitals with robust financial performance by assessing the performance of each of these 22 profitable CPM hospitals during 2008 (the most recent year for which data were available) on ten financial indicators listed in Exhibit 1.

Based on advice from the Project Advisory Committee, which consisted of 11 hospital CEOs and CFOs, the performance criteria on the financial performance indicators were set at the lesser of the threshold for either a Moody's A3 or an S&P A-credit rating. None of the 22 CPM hospitals with positive total margins for 2005-2007 met the performance criteria for all ten financial indicators. However, 11 CPM hospitals met at least five of the ten criteria. We then examined summary indicators of quality of care reported on CalHospitalCompare and determined that all of the 11 CPM hospitals delivered acceptable quality as indicated by the hospital's performance relative to other California hospitals on ICU mortality rate, respiratory complication rate, surgical care measures, hospital-acquired pressure ulcers, and hospital rating of overall patient satisfaction.

In 2005 there were 268 non-Kaiser general acute care hospitals in California. Of these 268, hospitals 67 were identified in the "worst" quartile in terms of having a challenging payer mix. Of these 67 CPM hospitals, 22 had a positive total margin over the period 2005-2007. Of these 22 hospitals, 11 met performance criteria on five out of ten financial performance indicators in 2008.

Of the 11 hospitals that met at least five of the financial performance criteria, 5 were selected for further study through site visits and interviews with senior leaders to gain an understanding of the management strategies and practices they believed accounted for their positive financial performance. The group of study hospitals was selected to ensure variation in key hospital characteristics, including ownership, size, system affiliation, regional location, and market competitiveness. Given the complexity associated with their structure, service activities, revenue, and expenses, we did not include teaching hospitals in this study (2 of the 22 profitable CPM hospitals were teaching hospitals, but none were among the 11 hospitals meeting the financial criteria). The study hospitals and their selected market and organizational characteristics are identified in Exhibit 2.

Although four of the organizations are medical centers offering diverse services, for convenience we will refer to all of them as hospitals. Detailed information on each hospital's financial performance, payer sources, patient service volumes, and quality indicators may be found in the project final report, which is available on the Internet (Rundall et al. 2010). A brief description of each of the five study hospitals follows.

Alameda County Medical Center

For many years Alameda County Medical Center (ACMC) in Oakland was a troubled organization. From 1991 through 2004, eight different CEOs were appointed to lead the organization. During these years, even with the assistance of a contracted management company, ACMC was unable to balance revenue and expenses. In 2003 the County Board of Supervisors appointed a blue ribbon committee to develop a long-term fiscal solution to ACMC's continuing financial problems. Important changes were made in ACMC's governance structure, local revenue contributions, and organizational leadership. For example, in 2003 a hospital district and an independent board of trustees were established to govern the medical center. In 2004, the residents of Alameda County approved a measure that increased the county sales tax, with the proceeds being allocated to ACMC. In 2005, a new CEO was hired who quickly assembled a leadership team of existing and new personnel, including a new chief financial officer and new chief operating officer. ACMC had a stable leadership team in place throughout the four-year study period, and this team remains in place in 2011.

Fairchild Medical Center

Located in Yreka, Fairchild Medical Center (FMC), a freestanding, nonprofit hospital, is the sole hospital serving the medical care needs of 25,000 residents of North Siskiyou County. Given its remote location, in 2005 FMC was designated a critical access hospital (CAH) under the Medicare Rural Hospital Flexibility Grant Program. The FMC management team and 16-member board of directors have long-standing ties to the community and the hospital, and their continuity over time is recognized by management as a contributing factor to the hospital's financial success.

Marian Medical Center

Located in Santa Maria, California, Marian Medical Center (MMC) serves the Central Coast communities in the Santa Maria Valley, one of the largest metropolitan areas in Central California. A 167-bed, not-for-profit facility with two hospital campuses (Marian and Marian West), Marian Medical Center offers a full continuum of health services. MMC is a member of the San Francisco-based Catholic Healthcare West System, which operates more than 40 hospitals in California, Arizona, and Nevada.

Providence Holy Cross Medical Center

Strategically located near the intersections of the 405, 5, 118, and 210 freeways, Providence Holy Cross Medical Center, Mission Hills (PHC) serves the North San Fernando and Santa Clarita valleys. A 254-bed, not-for-profit facility, PHC offers a full continuum of health services and is designated as a level II trauma center, with the second highest volume of cases in Los Angeles County among community hospitals. PHC is part of Seattle-based Providence Health & Services, which operates 28 hospitals in California, Oregon, Washington, Montana, and Alaska.

Sierra View District Hospital

Sierra View District Hospital is a 163-bed hospital located in Porterville, California, a community of about 50,000 residents, with a service area population of 115,000, located about 70 miles southeast of Fresno. The region is heavily agricultural. Founded in 1958, the hospital serves the Southeastern Sequoia region of California's Central Valley. The hospital is part of the Sierra View Local Health Care District and is governed by a board of elected hospital district directors. The foundation for Sierra View's current success was laid between 1998 and 2000, when a new senior management team was hired and began to implement structural, financial, and cultural changes in the organization. The core of that team remains in place today.

Collection and Analysis of Qualitative Interview Data

The leadership teams at all of the five hospitals accepted our invitation to join the Success Under Duress study and to participate in an in-depth interview about the factors they believe contributed to their hospital's positive financial performance. At each hospital the authors completed group interviews with the senior leadership team, including the chief executive officer and chief financial officer. For the four larger hospitals, the interviews were extended to other members of the leadership team, including, but not limited to, the chief operating officer, chief medical officer, vice president for human resources, and the director of physician recruitment. Overall, a total of 28 senior managers participated in the interviews. The interview participants were sent a set of proposed discussion questions in advance of the meeting to give them an opportunity to think about the issues involved. Each interview lasted approximately two hours and focused on confirming the hospital's financial data and exploring the factors contributing to the hospital's success. We sought the leadership team members' views on a number of factors commonly associated with financial success, including reimbursement issues, patient service volume issues, expense issues, strategic and operational issues, accountability and performance issues, and board/system oversight issues; however, many important insights came from the participants' responses to the general question "What do you believe are the reasons for your hospital's positive financial performance?" The interview guide may be obtained by request from the corresponding author (TR). Two members of the study team took detailed notes of the comments made during the interview, recording verbatim the responses of members of the hospital's leadership team to the questions asked. An interview summary was created by consolidating each set of notes, comparing their contents, and combining them to make a master interview summary. Each interview summary was sent to the CEO of the respective hospital with a request to correct any errors or misstatements of fact. Two CEOs requested a small number of changes. The corrections were incorporated in the final interview summaries.

The analysis of the qualitative information from the interview summaries was done in two phases. In phase 1, two members of the study team independently performed a content analysis using the constant comparative method (Glaser and Strauss 1967; Strauss and Corbin 1990) on each of the five hospital interview summaries. Each phrase was coded to reflect the type of management policy or practices it described, and similar phrases were clustered together. Examples of coded phrases that emerged from the phase one analysis are "development of neonatal intensive care unit," "increasing efficiency of operating room use," and "promoting shared core values of respect, compassion, quality and performance." Overall, 71 category codes were assigned to 138 phrases before saturation occurred, and the number of mentions in the coded categories across all interviews ranged from one to five. Both coders' classifications were reviewed and compared for consistency by a third member of the team. Of the codes assigned by the two reviewers, 10 percent were inconsistent, and these were resolved through group discussion among team members. In phase 2, a second review of coded categories and clustering of similar codes reduced the 71 category codes to 17 topic categories. An independent comparison and clustering of the 71 codes into the 17 topic categories achieved 100 percent agreement. The 12 most robust topic categories--those mentioned at least once by all five management teams--were organized into five thematic groups: (1) strategic initiatives, (2) operational practices, (3) organizational vision and values, (4) workforce recruitment and commitment, and (5) governance. The Project Advisory Committee reviewed the interview summaries and the results of the content analyses and provided some interpretation and guidance in understanding the complexities of some of the hospitals' reported policies and practices. The final study report, including descriptions of the topic categories contributing to profitability in the CPM hospitals, was sent to the CEO of each study hospital with a request for them to comment on the findings. No CEO requested changes to the report, and all of the CEOs indicated that they believed the topic categories captured the policies and practices they attributed to their success.

FINDINGS

The 12 topic categories are reported in the following, with the number of mentions across all interviews indicated in parentheses. For each topic category, a brief explanation with an example follows.

Strategic Initiatives

1. Improving quality to increase leverage in contract negotiations with commercial health plans (14 mentions)

Each study hospital has some characteristics that give it leverage in negotiating contracts with payers. Fairchild Medical Center and Sierra View District Hospital are located in remote locations, with the nearest competitor hospital over an hour's drive away. Marian Medical Center and Providence Holy Cross Medical Center are located in competitive markets, but they are members of larger hospital systems that have a substantial presence in the geographical region. Alameda County Medical Center has few contracts with commercial insurance plans for general acute medical care services, but the John George Psychiatric Pavilion is one of the few behavioral health services in the region, giving ACMC strength in negotiations with payers. While these organizational and market features provided leverage with payers, the leadership of each hospital believed the features were less important in negotiating payment rates with commercial insurers than was the hospital's reputation for delivering high-quality care. As one executive put it, "When your quality is good, you can negotiate with payers. That's been our philosophy." Many study hospitals viewed quality improvement as a strategic issue and had programs in place to improve quality and ensure proper documentation and reporting of quality of care. Several years ago Providence's leadership made a commitment to the Six Sigma approach to improving quality (and other aspects of organizational performance). The organization has hired a chief medical officer (CMO) to work closely with the chief of staff and the medical director. In addition, a regional CMO works with the hospital CMO and others to improve quality and patient safety. At Marian Medical Center, the leadership is proactive in holding medical staff members accountable for complying with quality indicators. MMC has set quality benchmarks at the top 10 percent of national scores and has reached this goal on most indicators.

2. Growing the volume of patient visits (9 mentions)

Every hospital viewed growth in patient service volume as a strategic issue and the key to profitability over time. Many different strategies were implemented to achieve growth in inpatient and outpatient service volume. However, as described in the following section, service line development and physician recruitment actions were the two most frequently mentioned specific strategies used to increase patient service volume.

3. Developing new and expanding existing service lines (8 mentions)

Related to the strategy of growing the volume of patient visits were the hospitals' efforts to develop new or expand existing outpatient, emergency room, trauma center, and specialty service lines. At Fairchild Medical Center, considerable investments were made to establish three outpatient clinics in the region. Alameda County Medical Center actively promoted their acute rehabilitation and outpatient surgery service lines. Providence Medical Center developed new and expanded existing outpatient centers, a neonatal intensive care unit, and a trauma center. Managers at Providence noted the special importance to hospital profitability of having a trauma center: "The trauma center establishes Providence as a must-have hospital for health plan contracting. A trauma center also brings higher complexity and acuity patients to the hospital, and it provides an attractive environment to help recruit highly skilled surgeons. If there [is] a single service you can build your center around, it's trauma." Sierra View District Hospital also expanded its service offerings; however, given the difficulty of recruiting specialists to the region, efforts to increase patient volume through these strategies were more measured. Unique to Sierra View was an increase in service volumes due to the closure of another hospital in the region.

4. Implementing Physician Recruitment Programs (5 mentions)

An adequate supply of community physicians who will refer patients to the hospital is also an important factor affecting patient volume. Every study hospital had a formal, organized physician recruitment program to bring new physicians--both primary care practitioners and specialists--to their community to meet patient-care needs and provide a growing physician base for patient referrals to the hospital. In fact, Sierra View District Hospital hired an executive director of physician recruitment to lead this work.

Operational Practices

5. Improving the efficiency of hospital operations (25 mentions)

All study hospitals reported that improving the efficiency of hospital operations was important to their hospital's financial success. For example, at Marian Medical Center, controlling expenses in all areas was critical to achieving a positive operating margin. A monthly operational review of financial and key operating indicators enables management to assess all cost drivers. In addition, the review compares Marian to "A" rated hospitals across the Catholic Healthcare West system. A balanced scorecard is updated monthly and includes all "mission metrics," such as care management indicators, capital expenditures, volume figures, financials, mission service information, patient satisfaction measures, and human resources indicators. The monthly operational review and scorecard provide Marian's leadership with current information on the extent to which the hospital is meeting its performance targets. As one senior manager said, "If we're not hitting our targets, we ask, 'What do we need to do to readjust ourselves to succeed?'" A few of the specific efficiency practices reported by our study hospitals are full use of capacity of hospital service units such as operating rooms, CEO approval of any expenditure above $350, flexible nurse staffing, supply chain and inventory management, standardization of supplies and equipment, reducing staff overtime, and implementing an EMR, PACs, and other information technology.

6. Performance monitoring and accountability (20 mentions)

Related to the practices to improve efficiency described previously, but worthy of a separate mention, is our study hospitals' reported efforts to monitor performance and hold staff accountable for their performance. Our Project Advisory Council noted that the frequency and intensity of performance monitoring and follow-up may distinguish these profitable CPM hospitals from other general acute care hospitals. For example, at Providence Holy Cross each department prepares a business plan that ties together staffing, budget allocations, and expected productivity. Managers receive daily reports on the performance of their unit related to budget (e.g., number of inpatients, trauma visits, scheduled surgeries in comparison to budget projections). Reviewing and responding to these daily reports is a key to Providence's success. Providence prepares a weekly watch list that identifies individuals and departments that have not met their budget goals. If the unit's performance does not improve over time, the manager is reassigned. One Providence manager expressed the importance of monitoring and accountability to the organization: "Awareness is key. It is built into the DNA of the facility. If it weren't that way, it would be a blocked artery to the facility." Managers from other hospitals expressed similar views; one manager succinctly said, "We never mistake activity for achievement."

7. Enterprise-wide budgeting (5 mentions)

Every study hospital/medical center had an enterprise-wide budget, which was regularly reviewed. Actual performance over a given time period was compared with budgeted revenues and expenses; variance analyses were performed; and remedies were developed and implemented to bring performance

back into line with budget projections. This general budget review is common across virtually all hospitals. Again, what may be different among these profitable CPM hospitals is the frequency and intensity of these budget reviews. Some study hospitals reported daily checks on financial performance. Others reported weekly budget reviews, and all hospitals conducted quarterly reviews and reported financial performance to their governing bodies. One senior manager described the value of the budget process: "Expectations are set at [annual budget] time. In addition, we review actual results on a monthly basis. If volumes are below budget, we make adjustments accordingly. It is a constant process of monitoring, forecasting, and taking action."

Organizational Vision and Values

8. Establishing a shared vision and core values (13 mentions)

The leadership team at each study hospital had a clear vision of the type of hospital they worked for and the roles that their hospital and related enterprises should play in their community. For example, the senior managers at Marian and Providence shared a vision for their medical centers that placed them at the center of a comprehensive delivery system providing a complete continuum of care that includes trauma, emergency, inpatient, rehabilitation, outpatient, long-term, and home care services. Fairchild's vision was more limited, emphasizing a wide range of emergency, inpatient, and outpatient services, but not including long-term or home-care services.

Alameda County Medical Center has a vision and set of goals for the organization that are captured in what they call the Six Success Pillars: quality enhancement, workforce development, service enhancement, fiscal stewardship, community image enhancement, and growth enabling access to care. One manager noted: "It was essential that all members of the organization understand and share a vision for their hospital, which enhances the ability of people to work in a harmonious way toward shared goals, including implementing policies and practices necessary to achieve financial profitability." Establishing shared core values was a practice complementary to establishing an organizational vision. All senior leaders we interviewed emphasized the necessity of establishing shared core values for management to implement many of the strategic and operational initiatives previously listed. Respect, compassion, quality performance, honesty, open communication, trust, fairness, and teamwork were frequently mentioned as core values. Some hospitals, such as Sierra View District Hospital, used their core values in recruiting new staff by including existing staff members on interview teams, in part to help staff determine whether a candidate is a good fit with the core values of the hospital. One interviewee summarized the importance of these "soft" organizational characteristics to organizational performance: "Instead of working in silos and pointing fingers, we say 'Let's roll up our sleeves and figure out how to fix it.'... We believe in the work we are doing, and we carry out that mission daily."

Workforce Recruitment and Commitment

9. Paying competitive salaries and supplementing salaries with non-financial incentives and rewards (10 mentions)

All study hospitals reported that their employee compensation was competitive. It should be pointed out that employees at three of the hospitals were not unionized. Although the hospitals varied in the extent to which they used incentive-based compensation systems, all agreed that providing competitive salaries was necessary in order to recruit and retain high quality staff members capable of designing and implementing policies and management practices to achieve financial profitability. As one manager put it, "We're a service industry, which means that we're only as good as the people we have to provide the service." At Providence Holy Cross Medical Center and Marian Medical Center, part of employees' compensation was tied to work performance. At Fairchild Medical Center, Sierra View Medical Center, and Alameda County Medical Center, compensation was straight salary. All study hospitals also reported using non-financial incentives to motivate employees and reward high-performing individuals and units. Rewards for meeting performance targets included celebrations, newsletter announcements, thank-you-grams, and certificates for free meals. Some hospitals also had "special day" programs, such as doctors' day and hospital week, to thank physicians and staff members for their efforts. Sierra View District Hospital established Journey to Excellence, a programmatic reward effort. One senior leader emphasized the importance of non-financial incentives: "You can never do enough: pizzas, ice cream day, all the little things you do to recognize that this is a family and that they work hard; and [working hard] is part of the culture."

10. Building strong hospital-physician relationships (7 mentions)

All study hospitals emphasized the importance of building strong relationships with physicians in their community. Physicians who are committed and loyal to the hospital will refer their patients to the hospital and work collaboratively on the quality improvement, efficiency, and culture-building initiatives mentioned. Engaging physicians and recognizing their importance to the hospital and the community is crucial. The hospital leaders described three other ways in which strong relationships could be built:

* Develop a physician recruitment plan with input from physicians

* Develop hospital services and technology that are attractive to physicians

* Use employment contracts with physicians where possible

One interviewee pointed out the impact that building strong, positive hospital-physician relationships can have on recruiting and retaining highly qualified physicians to the hospital's service area: "These physicians could work anywhere, and they choose to work here."

11. Building a strong management leadership team with commitment to the hospital (8 mentions)

The hospital leaders emphasized the importance of recruiting and retaining managers and senior leaders who are committed to the hospital's mission and vision and understand the importance of financial profitability to long-term viability. Interviewees acknowledged that different leadership and management styles may lead to success, but they proposed that a high level of organizational performance was most likely to be achieved when continuity of leadership was established, with highly capable leaders who encourage teamwork, excel at relationship building, are able to set/clarify roles and expectations, and are focused on personal and organizational accountability. One senior manager said, "Continuity of leadership allows you to put your finger on the pulse and be reactive to changes ... as opposed to [dealing with] the uncertainty and delays caused by turnover and instability."

Governance

12. Building an effective, independent board of directors (8 mentions)

The study hospitals had various forms of governance: a local board under the authority of a system-wide board of trustees, a traditional board of directors consisting of local community members, and an elected district board of directors. Senior leaders at each study hospital believed that the type of governance board they reported to worked well for their organization. There was also general agreement that effective boards must have diverse representation that includes members experienced in key areas such as financial performance, strategic planning, and quality improvement. One interviewee noted the importance of having experienced board members to provide close oversight of hospital policies and practices: "A hospital board must have long-term board members; they know what to look for and can hold management accountable." Our interviewees also thought it was especially important that a board member have strong ties to his or her community, which made it easier to promote the hospital and relay the community's service needs to the hospital's management.

CONCLUSION

The analyses presented herein enable us to offer answers to the three questions posed in the introduction.

To identify CPM hospitals, we created a CPM index equally weighting the scores (the hospital's quartile ranking on the statewide distribution) across the index's three components: percentage of Medi-Cal patients; uncompensated care as a percentage of expenses; and percentage of commercially insured patients. Further, we arbitrarily selected the 25th percentile of the statewide distribution of the CPM index as the upper bound for considering hospitals as having a challenging payer mix. Using this approach, 67 of California's 268 non-Kaiser general acute care hospitals were identified as having a challenging payer mix during 2005. Future research could perform sensitivity analyses on the CPM index by assigning different weights to the index components. For example, the weight assigned to the second component, uncompensated care as a percentage of expenses, could be greater than the other two components. Sensitivity analysis of the statewide CPM index percentile threshold, perhaps using thresholds of 15, 20, 25, and 30 percentile, might reveal what types of hospitals are included in each grouping of CPM hospitals. Such an analysis could lead to the designation of multiple groupings of CPM hospitals with varying degrees of payer mix challenge, such as "moderate" and "high" CPM hospitals, which would be of interest to managers and policymakers alike.

To identify profitable CPM hospitals, we analyzed financial data from 2005 to 2008. The results revealed somewhat surprisingly that one-third (22 of 67) of CPM hospitals had positive total margins each year over the period 2005-2008. However, more detailed assessment of the hospitals' performance in 2008 on operating margin, days cash on hand, current ratio, and seven other financial indicators showed that none of the 22 profitable hospitals achieved the performance thresholds on all ten financial indicators, and only 11 of the 22 hospitals achieved threshold performance on at least five of the indicators. This suggests there is much room for improvement in the financial performance of even those CPM hospitals that demonstrate overall profitability over time.

Finally, content analysis of interview data from the management teams at five profitable CPM hospitals identified 12 management policies and practices to which they attributed their financial success. Four of these policies and practices are consistent with findings from other studies. In particular our finding that patient visit volume growth is perceived to be one key to profitability is consistent with the findings of the studies reviewed in the introduction that reported that occupancy rate and surgeon productivity were associated with hospital profitability. Similarly, our findings that managers believed in the importance of developing new and expanding existing service lines, implementing physician recruitment programs, and improving the efficiency of hospital operations are consistent with the findings of previous research reviewed earlier. However, eight of the management policies and practices our study managers considered important to their hospital's profitability have not been identified in previous studies, including improving quality of care to increase leverage in contracting with commercial health plans, performance monitoring and accountability, implementing enterprise-wide budgeting, establishing a shared vision and core values for the organization, paying competitive salaries and using non-financial incentives and rewards for performance, building strong hospital-physician relationships, building a strong management team with commitment to the hospital, and having an effective, independent board of directors. Many of these policies and practices are related to human resource management efforts to build a stable workforce that is highly trained, committed to the organization's mission, and willing to implement organizational changes needed to maintain the financial viability of the hospital. Typically, these tasks are not recorded in organizational databases and thus not identified in quantitative studies of hospital profitability using secondary data. Our findings derived from in-depth interviews with managers that allowed them to comment on the importance of policies and practices across the entire range of management activities. Future research using multivariate analytic techniques and data from secondary sources and from primary sources from a larger sample of hospitals should be conducted to validate the importance of these policies and practices to hospital profitability.

Study Limitations

This study has several important limitations. The hospital sample only included profitable CPM hospitals. We do not know if the managers of unprofitable hospitals would also identify many or all of the policies and practices revealed in our interviews as present in their organizations. Mso, our study was not designed to assess the empirical relationship between the 12 identified policies and practices and actual financial outcomes for the study hospitals. That several of the policies and practices identified here are consistent with factors identified via causal analyses in other studies strengthens our belief in the validity of the managers' perceived linkages. However, we are unable to make any causal statements about the policies and practices identified through our qualitative analysis. A related study limitation is that our interviews focused on managerial issues and actions related to hospital profitability. Other environmental and policy factors were not discussed in detail, and no doubt factors such as the local rates of unemployment, employer and employee premium costs for insurance, and the regional cost of labor are important factors affecting hospital profitability.

Still, this study has been able to shed light on an important fundamental question: what management policies and practices do managers of CPM hospitals believe contribute to their hospital's profitability? Establishing the conditions under which CPM hospitals can be financially successful is one of the most important responsibilities of governing board members, senior management, and clinical staff. Organizational leaders could use our findings to compare their hospital's policies and practices to those identified by the managers of profitable CPM hospitals, and where judged necessary they could incorporate policies and practices identified here into plans to increase profitability. The case studies of our five financially successful CPM hospitals are reported in more detail elsewhere (Rundall et al. 2010) and provide many examples to stimulate such hospital-specific reviews. An online managerial briefing report on this study (Rundall, Oberlin, and Janus 2010) is also available that could be used to stimulate discussion of these issues. We hope this research will inform and inspire other hospital leaders to implement their own policies and practices to improve their hospital's financial performance and ensure that their critical community resource is available to future generations of Americans.

Financial support for this study was provided by the California HealthCare Foundation.

For more information about the concepts in this article, please contact Dr. Rundall at trundall@berkeley.edu.

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--. 2008b. Accounting and Reporting Manual for California Hospitals. www.oshpd .ca.gov/hid/Products/Hospitals/AnnFinanData/Manuals/ch 1000.pdf.

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NOTE

(1.) The California Office of Statewide Health Planning and Development defines uncompensated care as the sum of bad debt and charity care multiplied by the hospital's cost to charge ratio. The patient's accounts must be written off as bad debt if the patient has the ability but is unwilling to pay off the account. Charity care is defined as the difference between full-established charges for services rendered to patients who are determined not able to pay for all or part of the services provided; this determination should be made at the point of admission or as soon as possible thereafter. Deductions from revenue due to care provided to Medi-Cal payments are not included in charity care (OSHPD 2008b).

PRACTITIONER APPLICATION

Jeremy T. Schrimsher, MBA, MSHA, FACHE, vice president ancillary services, Mercy General Hospital (CHW), Sacramento, California

Today, perhaps more than ever before, the need for healthcare organizations to remain financially viable is paramount. This need is of particular concern to the kind of hospitals that Rundall and colleagues define as having a challenging payer mix (CPM), as these hospitals provide critical access to healthcare services, especially to many underserved, high-risk populations. In the current episodic fee-for-service reimbursement model, CPM hospitals' ability to cost shift is limited, and these hospitals must focus on execution of key strategic and operational actions to remain economically viable.

After establishing criteria for inclusion in the study as a CPM hospital, the authors explore which common managerial strategies and practices senior leaders of these hospitals credit for their financial success. This study is timely and applicable because the authors chose five diverse markets within California and spoke directly with the senior leadership teams to obtain real-time, firsthand knowledge of the current issues practitioners face.

The 12 managerial strategies and practices identified are topics that those of us in practice have very likely spent time discussing recently--perhaps even today, and certainly during the past week. Quality improvement has long been a primary goal among hospital administrators; currently these administrators and their organizations face even more substantial financial pressure to improve. Growth in volume remains a critical strategy in the current reimbursement model, while preparation for population management and accountable care runs a parallel course. Many hospitals are using physician employment as a key recruitment strategy.

Reducing staffing costs, placing necessary administrative controls for supply purchases, ensuring efficiencies in throughput, leveraging IT resources, and focusing on revenue cycle improvements to increase collections all amount to basic blocking and tackling in hospital operations, to borrow a concept from legendary football coach Vince Lombardi. Each of these practices requires not only the necessary monitoring capabilities but also the discipline to hold leadership and staff accountable for execution.

The foundation of each of these practices lies in the organization's governance and its mission, vision, and values. The CPM hospitals in the study know where they belong in their respective markets, and it is clear from the words of the senior leaders of these organizations that their governing boards are engaged and knowledgeable in overseeing strategies for success.

While the study focuses specifically on CPM hospitals within California, it holds much that non-CPM hospitals can glean as well. Most practitioners will agree that the 12 managerial strategies and practices identified are critical for the financial health of any hospital organization; however, what will prove most beneficial is not the mere presence of the strategy or practice, but rather the best execution of that strategy or practice. To echo one senior leader quoted in the study, "Never mistake activity for achievement."

Thomas Rundall, PhD, professor emeritus of health policy and management, University of California Berkeley; Shelley Oberlin, MBA, MHA, MS, senior manager, Kurt Salmon; Brian Thygesen, MHA, senior consultant, Kurt Salmon; Katharina Janus, PhD, professor of healthcare management, University of Ulm
EXHIBIT 1
Hospital Financial Indicators Used to Select Study Hospitals

                                          Performance
Financial Indicator                       Criteria

Operating margin                          > 1.8%
Total margin                              > 3.3%
Operating cash flow (EBIDA) margin        > 8.7%
Days cash on hand                         > 139.6
Cash to debt                              > 97.3%
Days in Accounts Receivable               < 49.3 days
Current ratio                             > 2.1
Long-term debt to capitalization ratio    < 40.7%
Debt service coverage ratio               > 3.3
Average age of plant                      < 10 years

Source: Project Advisory Committee Meeting,
December 21, 2009.

EXHIBIT 2
Selected Organizational and Financial Characteristics of
California Case Study Hospitals

                 Ownership/                  Total
                 Governance     System      Staffed
Hospital            Type      Affiliation   Beds (1)

Alameda          County       None            475
County           Hospital                    (169)
Medical          Authority
Center
(ACMC)

Fairchild        Not-for-     None             25
Medical          profit
Center,
Yreka
(FMC)

Marian           Not-for-     Catholic        262
Medical          profit       Healthcare     (167)
Center,                       West
Santa Maria
(MMC)

Providence       Not-for-     Providence      254
Holy Cross       profit       Health &
Medical                       Services
Center,
Mission Hills
(PMC)

Sierra View      District     None            163
District
Hospital,
Porterville
(SVDH)

                                                 2009         2008
                                              Operating      Total
Hospital         Location/Market Situation    Margin (2)   Margin (3)

Alameda          Northern California, East       0.2%         5.5%
County           Bay
Medical          Urban/Suburban
Center           Multiple competitors
(ACMC)

Fairchild        North Central California        3.4%         4.1%
Medical          Rural/Mountainous
Center,          No competitor in
Yreka            immediate vicinity:
(FMC)            a critical access hospital

Marian           Central Coast California        7.5%         9.5%
Medical          Urban/Suburban
Center,          Multiple competitors
Santa Maria
(MMC)

Providence       Southern California            12.6%         8.1%
Holy Cross       Urban/Suburban
Medical          Multiple competitors
Center,
Mission Hills
(PMC)

Sierra View      Central Eastern California      6.1%        13.4%
District         Rural/Agricultural
Hospital,        No competitor in
Porterville      immediate vicinity
(SVDH)

Source: OSHPD (2008a).

(1) Includes all classifications of beds for the hospital per
OSHPD reporting, including general acute, psychiatric,
rehabilitation, long-term care, and chemical dependency/other.
For two hospitals with non-acute care beds, the number of acute
care beds is listed in parentheses.

(2) Operating margin is net income from operations divided by
total operating revenue (net patient revenue plus other operating
revenue). Operating and net income on the annual Financial Pivot
Tables includes net DSH funds provided to the institution.

(3) Total margin is net income from all sources divided by total
operating revenue.
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