Risk Factor for Health Systems: High Turnover of Hospital CEOs and Visionary’s Role of Hospitals In 10 Years
Reporter: Aviva Lev-Ari, PhD, RN
High Turnover of Hospital CEOs: A New Risk Factor for Health Systems and Bond Investors
With a 17% CEO turnover rate and a record-setting $20 billion downgrade of not-for-profit healthcare debt, attention to the cultural fit of hospital CEOs is more important than ever, reports Phillips, DiPisa & Associates
Chicago, IL (PRWEB) July 11, 2013
Already facing growing pressure to contain costs, jockey for market position, and manage physician groups, top executives at not-for-profit health systems are increasingly being evaluated by bond-rating agencies for patient care outcomes. Driven by new Medicare guidelines and Affordable Care Act regulations that require hospitals to track patient “fitness”—including readmission rates, quality of care and satisfaction surveys—the focus on the fitness of CEOs is intensifying even as turnover is spiking.
At 17 percent in 2012 (compared with about 14 percent in the private sector), the CEO turnover rate is already at near-historic highs and “may continue to increase,” says Thomas C. Dolan, former president of the American College of Healthcare Executives. The risks of executive failures are growing as well, with implications for a system’s ability to attract investors for its bond offerings.
The fit of a CEO with an institution can have a direct impact on patient care, and a poor fit can be financially catastrophic. A badly matched CEO can cost an institution tens of millions of dollars in direct costs and exponentially more in indirect costs associated with ratings downgrades that increase the cost of financing, physician, patient and staff attrition, delayed or halted programs, service expansion, and innovation. Once a hospital loses its competitive advantage and access to affordable financing, it’s difficult to recover.
Health systems—and bondholders—are already reeling from the financial consequences of leadership problems. Moody’s Investors Service downgraded a record-setting $20 billion of not-for-profit healthcare debt in 2012—a 213% jump from 2011—citing “management and governance issues,” “more competition… and weakened or negative revenue growth” as three main drivers, according to Carrie Sheffield, a Moody’s associate analyst.
A significant risk to investors right now is leadership instability. “A successful CEO helps define the culture and strategic direction of an organization,” says Mark Melio, Founder of Melio & Company, LLC, a financial advisor to not-for-profit healthcare institutions. “Mergers and acquisitions in healthcare are currently at an all-time high. Investing in innovative ways to improve outcomes and quality of care while managing expenses will continue for the foreseeable future. A capable CEO’s leadership in navigating these challenging times and making critical decisions has never been more important.”
For example, a successful not-for-profit health system in the southeast suffered a downward spiral at the hands of a tyrannical CEO whose personal ambitions conflicted with those of the health system. In less than four years, three senior executives resigned, staff morale plummeted, and poor acquisitions left the system without the financial resources to keep up with its competitors’ technological advancements and labor cost adjustments. As a result, physicians were leaving for the competitors, and the patients followed. Ultimately, the system’s failing financial health jeopardized its bond covenant obligations, triggering a ratings downgrade.
The system brought in a new CEO who fit with its culture. He stabilized the organization, restored its reputation, galvanized the staff, and stopped the revolving door of senior executives, leading the system from the brink of failure to a position of financial strength worthy of a ratings upgrade.
With CEO fitness now thrust into the spotlight, more investors will be scrutinizing a health system’s patterns of progress in construction and service-expansion projects, in regular technological upgrades, in the stability of its staff, in growth in patient numbers, and improvement in patient outcomes as potential indicators of the cultural fitness of the CEO. Evidence of a negative shift in patterns will compel investors to reevaluate the overall health of the institution.
Health systems are beginning to respond with greater urgency to the crisis by paying closer attention to cultural fit to reduce CEO turnover and sustain growth—a trend that will continue as organizations seek to regain or maintain financial stability and positive bond ratings, and seek to restore or reinforce investor confidence. Deliberate attention to CEO fit is now, and will remain, critical for the success of not-for-profit health systems and for their investors.
About Michael Corey
Michael Corey is a partner at Phillips, DiPisa & Associates and a former hospital senior executive. He specializes in senior-level executive recruitment for community healthcare systems, academic medical centers, medical group management, associations, and leadership for not-for-profit organizations.
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About Phillips, DiPisa & Associates
Phillips DiPisa is a retained executive search firm serving the healthcare industry. Ranked as one of the top healthcare recruiting firms in the country, Phillips DiPisa is known as Leaders in Recruiting Leaders by its growing base of clients across the country, drawing on a national pool of candidates. For more information, please visit
Forbes, 7/24/2013 @ 10:03AM
Dave Chase, Contributor
I power/cover disruptive innovators reinventing healthcare.
What’s The Role Of A Hospital In 10 Years?
Dr. Eric Topol was named #1 Most Influential Physician Executive in Healthcare of 2012 by Modern Healthcare so his views are closely watched. In addition to his role as a cardiologist, geneticist and author of the Creative Destruction of Medicine, he’s also the Editor-in-Chief of Medscape (WebMD’s leading physician offering). Every health system CEO I’ve spoken with readily admits that we’ve essentially had a hospital building bubble with an over-capacity of 40-50% of hospital beds as we shift from the “do more, bill more” fee-for-service system to the “no outcome, no income” fee-for-value era.
Topol has gone on the record stating that in the future, the only real reason to have hospitals is for their Intensive Care Units if digital medicine is adopted. His recent tweet of his vision was provocative comparing it to Wired’s vision. Despite the widely held view of over-capacity and alternative scenarios such as Topol’s, I have yet to hear about the health system board thinking in these terms. With the board’s fiduciary responsibility to think further out than the CEOs since their tenure usually outlives CEO tenure, is this not a dereliction of their duties?
While some healthcare leaders may dismiss Topol, his ideas aren’t without precedent. In Denmark, they realized that most people weren’t having their end-of-life wishes met — generally speaking people want to be with family and friends at home while being warm, dry and pain free. A shift in approach shifted the norms from well over half of people dying at hospitals, to 92% dying at home according to their wishes. A mix of remote monitoring, video conferencing and house calls enabled this. This also happens to be far less expensive — not an insignificant point in these budget-constrained times.
“History doesn’t repeat itself, but it does rhyme.” – Mark Twain
Lessons From Newspapers For Health Systems’ Immense Challenge
Health system CEOs and board have an immense challenge I have heard described as the equivalent of going down a rough river with one foot in one canoe called fee-for-service (FFS) and their other foot in another kayak called fee-for-value (FFV). The objectives of FFS and FFV are diametrically opposed and puts hospitals in an untenable situation. For example, in one they operate like a hotel wanting to have heads on beds maximizing occupancy. While in the other, a hospitalization represents a failure in the system to be avoided.
In theory, a non-profit health system board has an easier decision to make since topline revenue shouldn’t matter as much as long-term economic sustainability. Thus, they could make decisions that would harm their topline revenue as long as it was economically sustainable. Unfortunately, health organizations are dooming their innovation to failure the way they are going about their reinvention.
While no analogy is perfect, health system boards would be well advised to study what newspaper industry leaders did (or perhaps more appropriately, didn’t do) when faced with a dramatic industry change. Turn back the clock 15 years and the following dynamics were present:
- Newspaper leaders knew full well that dramatic change was underway and even made some tactical investments. However they didn’t fundamentally rethink their model beyond window-dressing.
- Newspapers were comfortable as monopoly or oligopoly businesses allowing for plodding decisions. Their IT infrastructure mirrored the plodding pace with expensive and rigid technology architectures.
- Newspaper companies bought up other newspaper chains and took on huge debt.
- Owning printing presses was a de facto barrier to entry allowing newspapers unfettered dominance.
- Depending on one’s perspective, it was the best of times or the worst of times to be a leader of local media enterprise.
Before they knew it, owning massive capital assets and the accompanying crushing debt became unsustainable. The capital barrier to entry transformed into a boat anchor while nimble competitors dismissed as ankle-biters created a death-by-a-thousand-paper-cuts dynamic. Competitively, newspaper companies worried only about other media companies or even Microsoft MSFT +2.24%, but their undoing was driven by a combination of craigslist, monster.com, cars.com, eBay, and countless other substitutes preferred by the majority of their customers. In addition, there were easier ways to get news than newspapers. Generally, the newspaper’s digital groups were either marginalized or unbearably shackled so that the encumbered digital leaders left to join more aggressive competitors. The enabling technology to reinvent local media didn’t come from legacy IT vendors who’d long sold to newspaper companies, but from “no name” technologies such as WordPress, Drupal and the like.
The parallels with health systems today are clear. Consider the present dynamics:
- The handwriting is on the wall for health systems but there is little evidence that organizations are aggressively moving at a scale corresponding to the enormity of the change.
- Health systems have been aggressively gobbling up other healthcare providers and frequently taking on debt to finance the growth. Concurrently, health systems often have capital project plans that equal their annual revenues even though no expert believes the answer to healthcare’s hyperinflation is building more buildings. Consider the duplicative $430 million being spent in San Diegoto build two identical facilities just a few miles apart as Exhibit A of the problem. Studying other countries that shifted from a “sick care” to a “health care” system, more than half of their hospitals closed. They simply weren’t needed or appropriate.
- Until recently, complex medical procedures always took place in an acute care hospital setting. Increasingly they are being done more and more in specialty facilities that can do a high volume of particular procedures at a signifiantly lower cost. With “hospital at home” programs proving to be move effective than regular hospitals for an increasing number of procedures, Topol’s view of only needing hospitals for ICUs starts to come into view. Company-sponsored Centers of Excellence programs are rapidly growing with companies ranging from Boeing to Lowes to Pepsico to Walmart further obviating the need for duplicative infrastructure for non-emergent surgeries. The byproduct is making every community hospital in competition with Mayo and Cleveland Clinic with inferior outcomes in most cases. [See graphic below]
- Just as newspapers were implementing multimillion dollar IT systems while nimble competitors were using low and no cost software to disrupt the local media landscape, health systems are similarly implementing complex systems to automate the complexity necessary in a multi-faceted system. Meanwhile, disruptive innovators are implementing new models at a fraction of the cost and time. For example, it’s well understood that a healthy primary care system is the key to increasing the health of a population. Imagine if a fraction of the billions being spent by mission-driven, non-profit health systems on automating the complexity of the old model was redirected towards the reinvigoration of primary care. They’d further their mission and lower their costs. Of course, they’d likely see revenues drop but presumably maximizing revenues isn’t the mission of a non-profit. See Health Systems Spending Billions to Prepare for the “Last Battle” for more.
- The plodding pace and scale of innovation at most health systems isn’t up to the enormity of the task. The vast majority of health system innovation teams are constrained by how they have to fit innovation into an existing infrastructure. That approach rarely, if ever, leads to breakthroughs, as its true intent is to make tweaks to a current system rather than a rethink from the ground up.
New Wave of Disruptive Models in Healthcare
Image is courtesy of Jason Hwang, M.D., M.B.A. Executive Director, Healthcare of the Innosight Institute and co-author of The Innovator’s Prescription.
Compared to newspapers, the scale and importance of the challenge is far greater for health systems so they must aggressively take action or risk their future viability.
Rx for Healthcare From a Newspaper Industry Executive
In the midst of the newspaper industry disaster, there is one notable bright spot from an individual who has gone against the conventional wisdom that newspapers are doomed to fail. His name is John Paton and he’s reinventing local media. Highlighted below are some of what he’s done to turn a bankrupt (creatively and financially) enterprise into a profitable, dynamic and rapidly growing enterprise attracting the all-stars of the industry such as Jim Brady. It hasn’t been without continued challenges as he transparently reports on hisblog.
There has been an expression in traditional media that analog dollars are turning into digital dimes. Rather than lament that, here’s John Paton’s response:
“And it is true that print dollars are becoming digital dimes to which our response at Digital First Media has been – then start stacking the dimes. All of that requires a big culture change. A change that requires an adoption of the Fail Fast mentality and the willingness to let the outside in and partner. Partnering is vital to any media company’s growth whether it is an established media company or start-up. We are going to marry our considerable scale with start-up innovation to build success.”
It’s worth noting that those “digital dimes” are often more profitable than the “analog dollars” of the past because much less overhead is required. It’s well understood that hospitals are shifting from revenue centers to cost centers so it behooves healthcare provider leaders to adopt new models that are well-positioned to be profitable in the fee-for-value era.
The following is John Paton’s 3-point prescription for reinvention that led to a 5x revenue increase and halving of capital expenses. This resulted in his organization going from bankruptcy to $41 million of profit in two years.
- Speed to market: One new product launched per week.
- Scaling opportunity: Sourced centrally, implemented locally. Ideas can come from all over. Identify the best ideas/people from all over.
- Leverage partners: Feed the fire hose of ideas from outside.
Unfortunately, before John Paton was able to affect this level of change, scores of newspaper employees lost their jobs while traditional newspaper executives dawdled. It is the rare leader that can create the sense of urgency necessary to affect this scale of change before the enterprise is a hair’s breath from extinction. It might be one of those tough-as-nails nuns running a health system that isn’t concerned about bonuses that refocuses their mission from growth to health. As the old oil filter ad says, “you can pay now or pay later” – of course, the cost is much greater if change is delayed. The only question is whether health system leaders will have the courage to make the change before the inevitable hurricane hits with full force.
Applying Reinvention Lessons into Healthcare
Listed below are some ideas and examples of how this approach can be applied to tackle the enormous challenge facing health system leaders. The wave of disruptive innovation is building with pioneers such as WhiteGlove Health and Qliance forging new territory and then others putting their own twist on it.
[Disclosure: The company where I’m CEO, Avado, provides Patient Relationship Management technology for some of the organizations mentioned which is why I have a view into their projects.]
Fresh, Outside Perspective is Imperative
As John Paton brought in outside advisors such as Jeff Jarvis and Jay Rosen, health systems would be well-advised to do the same. They can go a step further and partner with innovators driving new models. They can be project managers or partners. One example is Dr. Rushika Fernandopulle founded Iora Health and was highlighted in now-famous The Hot Spotters article linked to in The Hot Spotters Sequel: Population Health Heroes. Iora Health has partnered with hospitals such as Dartmouth-Hitchcock. From reports I hear, their CEO is using Iora Health to catalyze change amongst his medical staff as they can see a modern delivery model in action that is unencumbered by the flawed fee-for-service model.
Like local media executives in the late 90’s, healthcare leaders can view the present time period as either the best or worst time to be in their role. The health system leaders who believe it’s the best of times would do well to ask themselves “What Would John Do?” John Paton demonstrates how a strong leader can reinvent and reinvigorate a lumbering giant turning it into a dynamic organization.