Hospital Turnaround Strategies Summary and CritiqueJames Langabeer Strategic Management MBA

SAHAR AL-JOBURY - ESLSCA 39E

Hospitals are failing at a faster rate despite higher profitability. Leaving decisions on revenues and costs to CFOs is wrong. Through a 4-year research and analysis of hospitals and health systems with a high probability of immediate financial crisis or collapse, the author found that a common series of actions will help organizations evade collapse. Hospitals are affected by free market forces, competition and other external factors. Management and strategy are to respond creatively to such factors. How can organizations turn around their operations to become profitable? Theoretical Background on Turnarounds Organizations with negative performance have three strategic paths: closure, acquisition or merger, and turnaround. A turnaround, or the reversal of historically low financial performance, is the preferred path. To date, most researchers have taken a one-dimensional perspective of turnarounds, which is not likely to lead to long-term renewal. Their primary finding of most researchers was that cost containment and other financial strategies were the most likely strategic response to closure. A turnaround requires more effort and integration to succeed.

Method:Research focused on hospitals operating today and likely will operate in the foreseeable future in severe financial distress. The sample was of sufficient size to be statistically significant. Using a specific technique, the author generated a score for each hospital. He collected financial and operating data for the sample and conducted distress calculations using the MDA model. He selected 20 wi t h highest level of distress for analysis in the near-bankruptcy group and researched their anti-distress and bankruptcy strategies. Then divided it into 8 successful (able to generate positive operating margins in the next 24 months), and 12 unsuccessful (still unprofitable 2 years later).

Results and DiscussionContraction is the standard initial strategic response to distress, followed by expansion. In this study, following the start of the turnaround, contraction is evident by a reduction of expenses for 24 months. Once profitability occurs, hospitals return to an expansion model where expenses and investment resume. The distinction between successful and unsuccessful turnarounds is the process used to determine which services or facilities are eliminated. Unsuccessful turnarounds involve across-the-board cost reductions and cuts, whereas successful renewals demonstrated focused efforts to (a) streamline specific programs, (b) eliminate unprofitable service lines, and (c) partner with nearby competitors or alliance partners to jointly offer specific services or other targeted means to reduce expenses in specific areas. Organizations with larger retained earnings balances were less likely to contract as significantly as were their counterparts with less of a safety net. The more successful organizations tended to retrench less and rebound quicker. A more successful turnaround hospital may attempt to invest or grow service lines despite current economic conditions if it is overly confident in its capabilities and resources. When the competitive landscape and other market and regulatory pressures are below industry norms and the internal capabilities are also low, a transformational change is necessary. The study suggests that a change in senior leadership and a shift or reduction in board composition may be justified, as revitalization in the governance processes is required. For organizations facing competitive situations but with capable internal resources, a hold strategy may be justified. This entails initial contraction and possible elimination of specific capacities (e.g., programs, providers, beds) but would then enable a focus on more profitable or generally strategic positions.

Focus on Service and QualityA common mistake made by distressed organizations is focusing on immediately becoming efficient and minimizing

all expenses and investments. This has long-lasting effects on organizational culture but, more important, can have an adverse impact on patients and quality of service offerings. Successful turnarounds tended to focus more on improving service quality than efficiency. If one considers a theoretical continuum between service and efficiency, the more successful turnarounds stated that their strategy was to improve service offerings in specific areas, reduce administrative waiting times, and generally improve the patient experience. Less successful organizations focused strictly on improving efficiencies. The lesser performing group tended to have the turnaround driven by the finance department or the chief financial officer who relies on financial strategies alone, whereas the other group typically stated their strategy and was led by senior leadership or the management team who can offer a more comprehensive view of clinical programs and services. Governance is a key factor in turnarounds. More successful strategies involve changes or turnover in multiple key positions, not strictly the CFO or chief executive officer positions. Many hospitals appear to take the renewal as a time to downsize and improve board of trustee members. Leaders of successful renewals attributed the collapse of their organization to several factors, mainly internal in nature. Whereas unsuccessful hospitals almost always cited the extrinsic environmental changes going on around them as the primary drivers toward failure. Better leaders recognize that financial distress is partially due to poor management of internal resources and capabilities, in addition to a competitive or turbulent landscape.

LimitationsFirst, it is based on qualitative research conducted on stated strategies as expressed by hospital leadership despite availability of research showing divergence of stated strategy from actual practice. Therefore, many of the factors suggested by hospital managers a s key to their turnaround may really not have been. Second, future researchers in this area need to analyze turnarounds over an evenly extended period beyond 4 years. The sample size should be expanded. As sample size increases, results can be significantly more generalizable across the entire population of healthcare organizations.

ImplicationsFirst, adapting strategies that have a higher probability of success will shorten periods of decline and improve service to communities and patients. Strategic adaptation must focus on primary revenue-generating services. Second, the first reaction to hospital bankruptcy by policy makers and analysts is to suggest broad increases in governmental reimbursements. Although this may be the most offered solution, it is not necessarily a universal solution and is not supported by this research. Many organizations can and do achieve profitability and liquidity through a change in strategic responses to environmental conditions. Hospital failures are not proof that healthcare requires higher reimbursement; however, they do encourage more efficient business practices and better leadership and strategy. Although administrators continue to rely on fundraising and philanthropy to augment revenue goals below the profit line, only direct revenue from clinical patient care and operations enable long-term recovery and turnaround. Last, this research must be continued for researchers to fully explore the entire population of failing hospitals and isolate successful strategies and practices. Future researchers should consider surveys of hospital executives and more quantitative models of business strategy. Organizations can adapt strategies to respond to continuously evolving external environment to better influence healthcare outcomes by using rigorous research and successful methods.

Article Critique In the article Hospital Turnaround Strategies published in Hospital topics Journal in 2008, author James Langabeer informs the readers that for administrators of hospitals facing financial crisis or collapse never emerge from their bleak financial conditions, yet a few hospital administrations, taking certain actions, have succeeded in turning around their operations and become successful. In my opinion the article gains its importance from its timeliness. The fact that it was issued in 2008 when the financial crisis hit hard many countries and businesses is indicative of its significance and relevance to many hospitals and health organizations seeking to pursue turnaround strategies. Focusing on service and improving service quality are the leading factors to success in those organizations. They are more vital than being efficient alone. I agree with the authors recommendation for further research if we are to mainstream such results across the health system.