Life after bankruptcy: a CFO's role in a hospital's renewal: dark clouds were on the horizon for Henry Mayo Newhall Memorial Hospital in Valencia, Calif., after it filed for Chapter 11 bankruptcy protection in late 2001. The hospital was $10 million in debt and had no cash on hand - Executive Insights

Healthcare Financial Management, Sept, 2003 by C.R. Hudson

Some creditors had proposed selling the hospital at "fire-sale" prices. In an interview with hfm, C.R. "Bob" Hudson, senior vice president and CFO of Henry Mayo, discussed how new management improved the financial standing of the hospital while bolstering its image in the community.

About five minutes after I first walked into this hospital. I thought to myself, "There is no way this hospital can't make money. "It was apparent that the hospital's financial problems could be fixed by just implementing the basics. Of course, putting the basics into action was not a simple task, but the hospital definitely had the raw material to be profitable. It had location, payer mix, community support, and committed long-term employees who were frustrated with the inefficiencies and bad decisions of the past.

Our recent difficulties were the result of the cumulative effect of many things, including the 1994 earthquake, which severely damaged the facility; the resultant enactment of the California Seismic Safety Act (SB-1953), which requires California hospitals to meet earthquake safety standards; the nationwide shift from inpatient to outpatient services; the reductions in both Medicare and Medi-Cal (California's Medicaid program) payments; the deep discounts associated with managed care; and labor unrest that resulted in physicians deferring or moving surgical procedures. This is only a small sample of the issues we faced.

A handful of our creditors wanted us in bankruptcy and wanted the hospital sold. But the hospital had spent three years trying to sell itself before this leadership team came on board. In every instance, the potential buyer would offer to buy the hospital at X cents on the dollar if the hospital went into a prepackaged bankruptcy. It cost us six to nine months and millions of dollars to get people to realize that was not the right thing to do, that the value of the hospital was a lot more than was being offered. We produced the numbers to make our point.

When our CEO, Roger Seaver, and I joined the hospital, we developed a plan to reduce costs and enhance revenue to address the hospital's cash-flow problems. We now benchmark both our financial performance and our operating performance against industry standards and targets. Our goal is the top quartile of performance.

The previous management had entered into capitation agreements that were disastrous, especially as the hospital's financial outlook plummeted. The hospital was taking on tremendous risk, but we're just a community hospital, not a tertiary-level hospital, so we couldn't manage that risk.

As part of our revenue-enhancement efforts, we eliminated all our capitation agreements--every one of them. We contract on an HMO or PPO per diem, case rate, or fee-for-service basis. I started negotiating with the payers: "This is what we need. If we can't get it, we won't sign a contract." Well, it worked. We have contracts.

Our Medi-Cal utilization in the population of the valley is only in the 5 to 6 percent range. Our Medicare utilization is also small, in the 35 to 40 percent range. So 55 to 60 percent of our business is through our contracts with HMOs and PPOs.

Most of the cost reductions we implemented resulted from eliminating noncore services. The hospital had off-site warehouses, off-site offices, off-site therapy locations, and an off site reference lab. They were just sucking up cash. All of those are gone.

We undertook massive internal restructuring of our revenue-stream and revenue-enhancement processes--everything from the registration process to cash collections upfront to charge capture to CDM review to systems updates. From the ground up. People were given direction and the authority and responsibility to figure out how to make it better. And they did a hell of a job.

We also hold people accountable. We've implemented monthly "management operational reviews," where I sit down with all the department directors and go through their financials. I emphasize to them that those numbers are their financials, not mine. We've also implemented a management incentive program so that managers are rewarded if they meet their goals and targets.

We are unusual in southern California in that we have a very small population of seniors. But we have a large aging population, people who are now 50 to 55. We will have to meet the increase in demand that goes with that aging population. Meeting the capital requirements of expanding capacity is a major issue.

Our plan of reorganization, which was approved by the court and has been vetted by the bond insurer and creditor committee analysts, calls for us to expend about $37 million on capital improvement between now and September 2007. Most of that amount will be spent on new projects, such as a new emergency room, new ICU, about 50 new acute care beds, and a new heliport for our trauma center. There are some pretty ambitious capital projects in the works right now. In fact, we've started to convert 27 of our nursing pavilion beds into 24 acute care beds, to add to our existing 121 acute beds.