Having weathered the Great Recession and the bitter debate over health care reform legislation, the nation's top-performing nonprofit health care systems now are bracing for significant changes to the way they are paid, altered relations with physicians and increased accountability from virtually every sector of the marketplace. Despite these daunting challenges, executives presenting at last month's 12th Annual Non-Profit Health Care Investor Conference seemed optimistic that their institutions are pointed in the right direction and well-positioned to succeed.
Perhaps no institution better exemplified that can-do spirit than Saint Barnabas Health Care System. Back in 2008, when the recession was in full swing, the New Jersey-based system was dealt a few major body blows. It was just coming off a $32 million outlier settlement with the Justice Department when the markets tumbled. State subsidies were cut as lawmakers sought to plug budget holes. All of Saint Barnabas' financial indicators suffered: Days cash on hand fell to 28, the debt service coverage ratio went negative, operating losses totaled $208 million for 2008.
Management responded with bold steps, including reducing the workforce by 1,300 employees; liquidating noncore businesses such as nursing homes; renegotiating managed care contracts; instituting a capital freeze; and streamlining management and governance.
The results have been pretty impressive. Between Dec. 31, 2008, and March 31, 2011, Saint Barnabas' operating margin went from -9.3 percent to 3.7 percent. Days cash on hand rose to 106 and the ratings agencies returned Saint Barnabas to investment grade.
Despite the positive numbers, executives at Saint Barnabas and the 28 other nonprofit health systems gathered at the meeting in New York City, recognized that heightened attention to costs and performance will be paramount in the years ahead. Hospitals will see less revenue, not just as reimbursement from both federal and private payers is cut, but as utilization changes, noted Katherine Arbuckle, executive vice president and chief financial officer of Bon Secours Health System, during a luncheon panel discussion. There will be more of a push to provide care in a less expensive manner. At the same time, hospitals will have to make substantial investments in building out the care continuum and health information technology.
The meeting, which is jointly sponsored by the American Hospital Association, Healthcare Financial Management Association and Citigroup, is a one-of-a-kind event. Executives from 29 hospitals get 30 minutes to tell their financial and strategic plans to a room full of analysts from the investment community and rating agencies. Then there's another 30 minutes in a breakout room for pointed questions from those very analysts. Kicking off the conference, AHA President and CEO Rich Umbdenstock said three basic themes are emerging for health systems: more clinical integration, dollars are more at risk, and there is more accountability.
All those themes were certainly on display during the meeting. Every executive talked about forging ahead with a clinical integration strategy. Most shied away from the phrase accountable care organization, or at least the federal government's version of an ACO. Few were excited about the Centers for Medicare & Medicaid Services' proposed ACO regulations.
All, however, expressed a need to align closer with physicians and other providers. Ernie Sadau, president and CEO of Christus Health, noted that the focus can't just be on acute care anymore, it has to be on population health and creating value for patients. Christus is looking for both formal and loose partnerships where it can improve the continuum of care. Trinity Health, which recently entered the Chicago market with the acquisition of Loyola University Health System, is eyeing other markets where it can build out integrated delivery models, said President and CEO Joseph Swedish, and the organization wants to move rapidly.
Underneath all of this, though, is the need to cut costs. The executives realize that hospitals have to start doing more with less. Chicago's Northwestern Memorial Healthcare, for instance, is aiming to reduce its cost per patient by 25 percent by 2017, said Dennis Murphy, executive vice president and chief operating officer, adding that the system is looking at everything from labor productivity to the supply chain. Community Medical Centers may tweak its bond portfolio. Steve Walter, senior vice president and chief financial officer, said that the current portfolio is 100 percent fixed bonds. Even a small change toward swaps could result in significant savings.
As these plans take shape, the investment community wants more transparency. Whether it's more frequent investor calls or some other form of communication, investors want a better sense of where health systems are headed and why.
"There's a lot of money coming into the market right now," said Susan McCormack, tax-exempt specialist, Putnam Investments. "So the decision I have to make is: What do I need to sell if I'm going to buy our bond and what's the upside?"