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Lessons Learned: How Scripps Health keeps making $100 million

 |  By HealthLeaders Media Staff  
   August 03, 2009

I haven't heard of too many hospital systems reaching a $100 million last year. In fact, 2008 was the third year in a row that San Diego-based Scripps Health surpassed the $100 million marker in operating income. That's after investing more than $287 million in community benefit programs.

During a time of unprecedented chaos in the economy and the capital markets, Scripps Health continues to see returns following an overhaul that began in 2001.

When Richard Rothberger, corporate executive vice president and CFO, arrived in August that year, the nonprofit system, with five hospitals (and now 19 outpatient centers), was $15 million in the red and without a credit rating. Rothberger, who was recently named CFO of the year in the large not-for-profit category by San Diego Business Journal, shared with me some of the changes he has made, plans for a $2 billion expansion, and how he's addressing big challenges such as Medicaid and Medicare cuts.

HealthLeaders: What was one key thing you did on day one to put a turnaround plan in motion?

Rothberger: We assessed the entire organization and began to create a list of priorities. At the time, Scripps had hundreds of initiatives and everybody was pretty fractionalized. So I sat down with my boss, our CEO Chris Van Gorder, and said I could see doing a maximum of 10 things and the rest we would come back to later.

HealthLeaders: How did you restructure the finance department?

Rothberger: I reassigned key folks who were very good at what they did, but would be better suited for other key roles. For example, the corporate VP of financial operations was appointed VP of supply chain and we began insourcing our contracting and supply chain folks, and reassessing all of our contracts. I also shifted around the site-based VPs of financial operations and put the stronger ones into more complex roles. I had about 20 direct reports when I got here and over eight years I have moved it down to nine. I also hired new auditors, a new financial advisor, a new investment banker and a new investment consultant because I felt like the individuals and groups that we had prior might have been biased and not as focused on the change that needed to occur.

HealthLeaders: How have you been able to sustain profitability year after year, especially in the past two years where it has been so tough for many hospitals?

Rothberger: We have set up the leadership structure so that the chief executives work for Chris (Van Gorder) and the VPs of finance operations work for me. The chief executives spend 70 percent of their time with the finance operation folks. We have achieved quite a bit from that. Also, I started monthly operating reviews for each business unit, which has made a big difference because rain or shine, we stay focused. We have also established a single signature for all of our managed care contracts for both the clinic and the hospitals, where previously they had been done separately. We cancelled our commercially capitated contracts, and we converted to fee-for-service to both improve the contract yield and reduce our risk of exposure. We also merged one of our smaller hospitals with a larger and stronger hospital, putting them both under one license. We were able to get more federal and state monies and reduce costs by putting in one administrator over both hospitals.

HealthLeaders: How has your relationship with the investment community changed?

Rothberger: When I arrived, Scripps was not rated and had very little external communications. I had a lot of skeptics on Wall Street and out in the field questioning where we were with regard to financials. For eight years in a row we ended the fiscal year ahead of budget projections, and additionally we have shared with the investment community more information and in a more transparent way. I err on the side of sharing information and so does my boss. We are both out there with the good and the bad. We have built credibility with the investment community so that they know we are focused on operating earnings and that in order to achieve borrowing capacity we need to keep that up.

HealthLeaders: You have embarked on a large expansion plan. How is that going?

Rothberger: We're on course for a projected 10-year, $2 billion capital plan to expand our facilities to meet growing patient demand. We were going to go to market this year, but put it off because of the economy. I took out a line of credit to get us over the hump in case we got stuck, but we didn't and I did not have to draw on the line. However, we had to refinance all of the auction rate securities when that market went haywire in 2008. We had budgeted $260 million to spend in 2009 on building expansion, but we will only spend about $150 million. As the market comes back we will start to accelerate if it is affordable.

HealthLeaders: I know healthcare reform is a concern for most right now, but what are your biggest worries?

Rothberger: The challenge that we have now is federal and state reimbursement cuts. We are anticipating 2010 federal cuts of about $15 million and the state cuts are still unclear. The budget was just passed and it looks like Medicaid/Medi-Cal eligibility will be reduced. Although we have a contract for rates with the state of California that can't be changed, there could be fewer Medicaid patients coming through the system. Also, with the government threatening to cut back physician compensation through Medicare and now Medicaid, it will become harder and harder to get physicians to come to California, particularly because it is the single lowest paying state for Medicaid.

HealthLeaders: How will you absorb these cuts?

Rothberger: We have a number of areas that we had not addressed in the past that still have significant opportunity. The single biggest one right now is pharmacy. We have changed our group purchasing organization and are now insourcing pharmacy leadership. We are also in the process of automating medical records and we have a document scanning initiative for all of our paper records that will allow us to reduce costs. We have a list of things that if we execute well, should offset the $15 million of reductions from the federal government. But we can't do that year over year, and I am worried that things can change dramatically in Washington. We want to be successful and to be around for the community for a long time. The only way to do it is by sticking to our knitting and making sure we are an employer and provider of choice.

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