Why do two-thirds of American Hospitals Lose Money or Barely Break Even at the Operating Line?
Through my long career I have observed the divergence of American hospitals into the prosperous and the “have not’s.” Why? On occasion it is clear. There are two subsets of hospital failure easy to understand. Some hospitals simply should not be open. When the St. Francis Hospital of Pittsburgh closed in 2002 . . . it was barely mentioned in the local newspaper. At one time it was the largest hospital in Pittsburgh with over 1,000 beds. It simply worked itself out of being needed. It was sad, but inevitable. And, of course, there are those hospitals in communities that are very poor and, yet the hospital is desperately needed. Many of these hospitals are rural and their loss would be devastating to a needy community. What about the remaining hospitals that fail to thrive?
The answer to the puzzling question of hospital failure is becoming clear. Many hospital board members and hospital executives reach into the jaws of victory and find failure with fundamentally poor judgment and decision making.
I have made my own share of terrible decisions in my career, but have normally been supported by boards of directors to avoid disaster through good oversight and internal controls. It turns out that all hospitals are not as fortunate.
Recently, I received a phone call from a young lady in our research department and advised that she had stumbled upon a small multi-hospital system blowing approximately $4,000,000 per annum right out the window through a simple error that could be easily corrected by making a small change. As it turned out, I happened to nominally know the CEO of the hospital system. I called him on the phone and suggested we meet. At my own expense and time, I flew 1,100 miles, rented a car and drove to a restaurant to meet him. He was absolutely delighted at this revelation. His little system is suffering seven figure operating losses on a monthly basis. Four million dollars would go a long way. He was going to rush back to the hospital and share this great news with his flagship hospital CEO.
I will admit that my motivations were not derived entirely from the cup that holds the milk of human kindness. In healthcare consulting, sometimes if you do something “good” for a hospital or health system, it will be remembered when consulting services are needed.
Well, what happened in this situation? Finally a phone call came and it went something like this: “Jan, I checked in with my Hospital CEO and he does not want to make this change at this time and I support my people.” I was more than a little surprised. I said, “But Fred (name changed for obvious reasons), there is no cost, the numbers are not in dispute and your hospital system will lose $4,000,000 on a recurring annual basis. How could you possibly not do this, there is no downside and you receive four million dollars annually without any pain?” His reply went like this, “Well, my style is to show my people support by supporting their decisions . . . even when they are wrong.” My colleagues, this kind of “decision making” takes your breath away.
I am reminded of the American novel, The Grapes of Wrath, by John Steinbeck. In a novel that documented the tragedy of drought and famine in America’s heartland in the 1930’s, there is an exchange between the agent of The Shawnee Land and Cattle Company and a farmer who is having his farm repossessed. The farmer, Muley, said to the agent, “Do you know who owns The Shawnee Land and Cattle Company?” The agent said, “It ain’t nobody. It’s a company.”
The farmer’s son said, “They got a President, ain’t they?” The agent said, “Oh son, it ain’t his fault, because the bank tells him what to do.”
This kind of circular reasoning leads to decisions that are not in the best interests of America’s hospitals, and other organizations for that matter.
In another circumstance we offered a 10:1 ROI to a struggling hospital in the Pacific Northwest. Yes, it sounds too good to be true. So, to demonstrate confidence, we offered a money back guarantee. The hospital CFO thought it was too expensive. Wait a minute. How could it be too expensive if there is a money back guarantee and a 10:1 return on investment? How could that be too expensive? You know what is coming. The CEO told me he supports his people and they really appreciate his support. My opinion is they REALLY appreciate his support.
Facing a similar dilemma some twenty years ago at the Millard Fillmore Health System in Buffalo, New York, I shared with a group of board members that I wanted to support my management team, but I just could not stomach a recommendation being forwarded to me for an affirmative decision. The former Chairman and CEO of the Dunlop Tire and Rubber Company put his arm around me and whispered these words in my ear. “Jan, you are running a university affiliated hospital with lots of research laboratories. Would you turn the laboratories over to the monkeys? Sometimes you have to grab the steering wheel and follow your best experience and instincts. There is no upside in blindly supporting stupid decisions.” It is a lesson many hospital leaders and hospital board members need to learn.
These are only two data points in hospital and health system decision making. Notwithstanding, there is an indisputable pattern of poor decision making in many of America’s hospitals. The rules of the road, reimbursement methodologies (public and private) are so similar and yet the results among hospitals and health systems are so different. Success is rooted in good decision making. Failure is rooted in poor decision making. I have a keen perception of the obvious.
Jan Jennings
Republished with permission of Atlanta Hospital News
