Jump . . . or Get Pushed
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"It was losing a substantial amount of dollars and it wasn't mission-critical and there were others providers in our community that could take on the service without much difficulty," he says. Sparks Regional converted that space to house an inpatient rehab facility that was a more mission critical service, he says.
Similarly, 93-staffed-bed Logansport Memorial close down a long-term care unit that was losing $1.5 million annually, after a new nursing home came to town that could provide that service to the community, says Shockney. "That decision was difficult from the standpoint of we liked having the service line and had to release some employees," he says. "But from a mission standpoint, the care was still going to be provided. That is where margin trumped mission."
What about a service that is important to the hospital's mission, but keeping it is threatening the viability of the whole organization? "It is kind of like cutting off an arm to save the body," says Woodrell. "Sometimes you have to sacrifice something that you hold dear, but you do that to protect the overall mission."
Prior to cutting a service, organizations need to answer some key questions. Why close the service—is it all economic? Will the market for this service return? Is there another facility nearby that can provide this service? Have all alternative options been explored?
For example, two services that Shockney wouldn't close are obstetrics and pediatrics—even though pediatrics barely breaks even. "From a pediatric standpoint, we believe it is part of our mission and there is no one else providing it," he says. "From the OB standpoint, as others have closed around us and scaled back, we have increased ours. Our community is too big to not have that service available. [Patients] would have to drive too far to have quality of care and timing with delivery."
Senior executives should engage trustees and members of the community well in advance of a final decision being made to terminate a service, says McKay. "That way there are no surprises and everything is on the table."
Can we grow services?
When it comes to growth strategies, most organizations are still laying in wait and hoarding cash. Assuming your organization has a decent credit rating and it can actually borrow money, the interest rate is still around 10% to 12% versus 3% to 4% a year or so ago. "Most institutions can't afford that; it is just too great of an expense," says Woodrell.
So how long can hospitals afford to delay purchasing new equipment or expanding and renovating the facility—six months, one year, two years? "That is the catch-22," Woodrell says. "You always have to do it in advance of demand, but you can't do it too far in advance of demand or you go broke."
Fifty-six percent of hospitals were reconsidering or postponing new capacity and renovation projects, 45% were putting off clinical technology and equipment, and 39% were reconsidering or putting information technology projects on hold, according to the AHA.
Even though most expansion projects have been delayed until the capital markets improve, Kenneth P. Kates, MBA, associate vice president and chief executive officer of the University of Iowa Hospitals and Clinics, says organizations can still focus on the planning elements of these multiyear projects while they wait for the financing. "We work closely with the board so they know where we are in the planning process," says Kates. "And we, of course, would go back to the board asking for approval to proceed with various stages of the project."
The current economy may seem like the worst time to grow services or expand facilities, but for organizations that are willing to take some risks, the rewards can be great. Organizations that can tap that credit—even if it is not the cheapest rate that they have ever had—will be able to execute against some sort of strategy that is important to them and their community, says Susie Krentz, director of private healthcare for the Noblis Center for Health Innovation. "In three years you can have that new facility that is good for your mission," she says. "Risk and reward go hand in hand, so organizations that have the culture and economic capacity to take risk stand to benefit at the end of the day when things shake out in two or three years."
The $787 billion American Recovery and Reinvestment Act may also help hospitals move some of these projects back in gear. Granted there are still a lot of unknowns with the stimulus package. For instance, to receive some of the $19 billion in funding for health information technology, organizations need to be "meaningful users." Some organizations will wait for all of the details before they move ahead. But others will start pushing projects forward, because they want to be ahead of the curve, Krentz says. For example, there will be some organizations that decide based on the stimulus and the country's priorities that it is worth the risk to move ahead on their IT strategy, because they believe the money will be there.
Shockney doesn't think that organizations should delay an expansion project or large capital investment if it has been identified as a strategic priority. "You look for creative ways to accomplish it," he says. For instance, the institution could partner with a larger organization that is more financially secure. Or there are "some creative financing mechanisms," he says, such as the federal home loan, bank partnership, the tax-exempt bond market, or paying for a letter of credit from a strong bank or creditor in order to use their credit rating.
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