No Margin, No Mission: Why CEOs Should Care About Margin Improvement
Practical Advice on Margin Improvement: A Success Story
In addition to considering the cultural aspects of margin improvement, it is critical to establish reasonable goals that are based on long-term solvency, capital for plant and equipment refurbishment, recruitment, maintenance of employee benefits, and similar organizational benefits. Whatever the hospital's tax status, margin improvement needs to be about more than profits or retained earnings. It has to have a strategic and ethical context that helps people fulfill their calling. Too many times a hospital leadership team waits until a bond covenant is tripped or their losses threaten their ability to effect change in a methodical manner. At that point senior executives are fired and a "turnaround" firm or management company is brought in. In contrast to the "turnaround" approach, margin improvement should be thought of as a proactive management tool rather than a last resort.
One example of a successful values-based margin improvement program comes from the University of Mississippi Medical Center. By 2006, UMMC had realized significant operating losses four out of the prior five years, was faced with significant morale issues, and lacked the funding needed to invest in capital improvements and hire enough clinical staff to meet increasing patient care demand. The organization was also faced with recruiting and retention challenges due to prior employee layoffs that had been implemented by the hospital's outsourced management firm. Based on the limited success of management outsourcing, UMMC leadership decided to hire a proven CEO and change direction. The new CEO quickly initiated a three-prong strategy of culture change, leadership change, and engaged us to assist him with a large-scale margin improvement program. The overall program covered three major phases starting with assessment and road map development and concluding with implementation and monitoring.
Over the first 28 months of implementation, the UMMC margin improvement program achieved the following results:
- $144 million in sustainable operating margin improvement
- Thomson Top 100 Hospital Award
- Volume growth of 4%
- The hospital no longer has to receive subsidy from the Medical Center and is now able to contribute to overall mission areas such as expanded education and research
- Medical education was expanded with a one-third increase in medical student admissions and UMMC is now able to help the state address physician shortages
- UMMC is investing more than $50 million of its margin improvement in new clinical information systems
The margin improvement program combined the values of patient care quality and stewardship and provided a comprehensive strategy for helping hospital leaders simultaneously improve patient care quality, patient satisfaction and operating margin. It has resulted in significant improvements to the institution and has created the capital needed to take the organization to a higher level of healthcare service quality, clinical quality and fiscal stewardship. Based upon these results, the margin improvement program should be considered by other institutions as a positive response to the strategic economic challenges of healthcare reform, the need for capital investments in new technology, and as a management tool for ongoing process improvement and effective long-term leadership.
Kent Giles is a Partner at CSC in Atlanta. He may be reached at firstname.lastname@example.org.
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