The BBA sharply reduced the revenue stream of every health care provider in the United States. Inner-city hospitals have by far been the most severely hit and many are now struggling mightily to survive. These hospitals feel the squeeze of declining revenue and rising costs on all fronts—political, communal, financial, managerial, technological and even at the individual level.

A key factor that has led to such a dramatic downturn in the health of inner-city hospitals in just the last three years is the fact that these institutions have traditionally provided high levels of uncompensated care. Most inner-city hospitals, as well as most hospitals in the United States, function as private, nonprofit institutions. A relatively small number are owned and partially supported by the county or city in which they are located. Many of the non-governmental hospitals have current or prior religious sponsorship. The vast majority, though, have historical missions that direct them to care for all patients regardless of ability to pay.

Until recently, the shortfall created by providing care to the uninsured and indigent population has been covered by reimbursement from commercial insurers and by more favorable coverage and payment policies of the Medicare and Medicaid programs. Competition for commercial contracts resulting in reduced and, in some cases, below-cost pricing—as well as significant decreases in Medicare and Medicaid reimbursement—has destroyed this balance. Unfortunately, adding to this burden is the fact that the number of uninsured individuals and families is increasing steadily even today.

Previously well-supported and financially successful programs providing home care, hospital-based long-term care and rehabilitation services also have been affected by the BBA. These programs are commonly included in the service portfolios of inner-city hospitals and have substantially contributed to positive operating results. Now they are open wounds bleeding red ink and need severe cauterization to heal.

Training Ground

A majority of the nation's clinical training for medical students, interns and residents is carried out at inner-city hospitals. In the past, the cost of much of this training had been supported by direct and indirect payments from the Medicare and Medicaid programs. However, payments for post-graduate medical education have been gradually reduced in recent years and are now being drastically cut. Without adequate funding, the country faces serious questions about how such critical training will be carried out in the future. In the near-term, the issue remains one of how to restructure the training function to slow the bleeding.

Evaluating the future role of an inner-city hospital requires the understanding that the delivery of health care is undergoing a major paradigm shift from an inpatient to an outpatient setting. The shift is immutable, made possible by technological innovation and driven by managed care. No management intervention strategy, regardless of how well conceived, will be able to hold back this transition. Nor is the reimbursement climate faced by inner-city hospitals likely to show much improvement.

The paradigm shift in progress has not only lessened the need for inpatient capacity, but also forced a discussion about how many of the hospitals operating today will be needed in the future. This question has become particularly meaningful in urban areas where multiple hospitals have coexisted for several decades and where financially weak providers are seriously threatened.

The U.S. hospital marketplace has become highly specialized and competitive because of overcapacity in both facilities and beds. The large amount of overcapacity currently in the system is a byproduct of new clinical technologies that have made it possible to transfer care from the inpatient to the ambulatory setting and of the impact of managed care. But while this development may not thrill urban and other hospital administrators, the truth is that patients are receiving better and less expensive care. Those inner-city hospitals that have fallen behind in adjusting to this change are finding themselves in great difficulty.

A New Direction

Competition among specialists is now far more intense than in the past. Many physicians who were once active at inner-city hospitals now find it necessary to redirect their admissions and referrals elsewhere to attract insured patients. And skilled managed-care companies have been very successful in leveraging both the new technology and the intense competition among hospitals and physicians into additional reductions in price, admissions and length of patient stay.

Inner-city hospitals have responded to the challenge of the competitive marketplace by pursuing untested strategies of horizontal integration, ownership of managed care companies, complex and poorly understood capitation payment schemes and the employment of physicians, including the purchase of their practices. The operating experience of these initiatives has been variable and, for many of the institutions serving the inner city, very costly.

For inner-city hospitals to regain their viability, they may need to consider collaborative or asset merger relationships with other providers. The brave new world of health care consolidation consists of tough decisions and severe bottom-line restructuring. This environment represents a dramatic shift in the usual practices and procedures of the typical hospital. No longer can issues be held open for protracted discussion and political maneuvering. Hospital administrators and their boards of trustees must recognize that fast decisions and relentless pressure to implement plans are now the order of the day.

Like all hospitals, the inner-city hospital is complex, political and expensive. It does not have "earning-a-profit" as a core value. It is not surprising, therefore, that already fragile inner-city providers, in a climate where supply outruns demand, are finding themselves in financial distress. The inability to move quickly enough to implement necessary organizational change is a major obstacle to a successful health care turnaround.

Just as in any other industry, each situation will require a unique approach. Having said that, the actions required to intervene on the business side of an underperforming hospital are similar to those pursued in any other type of distressed non-health care businesses. There is a focus on cash collection, management and accumulation, implementation of revenue enhancement strategies, redevelopment of banking relationships, rapid cost reduction based on informed observation and benchmarking, and asset disposition, as appropriate. These actions are geared toward stabilizing operations in order to provide time for management to identify and implement other desirable strategic and organizational changes.

Consider Broader Issues

Once stability is achieved, the focus must turn to coordination of the strategic formulation processes required to identify long-term solutions for more severely distressed institutions. The turnaround consultant's exit plan constructed through this strategic formulation must include the steps necessary to move the severely distressed inner-city institution to a serious consideration of the broader issues that will surface once short-term fiscal stability has been restored. Indeed, the provision of this special type of leadership may well represent the most important contribution that can be made during the course of a challenging inner-city hospital engagement.

Immediate fiscal stability may well be achieved through the initial turnaround efforts. But longer-term success in the use of the hospital's assets will, in most instances, not be possible without a carefully considered plan to restore market relevancy and community value—either as a stand-alone institution or in partnership with others.

It seems clear that the introduction of improved management practices, cash- and revenue-enhancement strategies, and aggressive cost-reduction initiatives are important components of efforts to return hospitals to viability. Equally clear, these steps will not be sufficient to "save" every distressed inner-city hospital. The traditional role in the community of the inner-city hospital may well have to be re-evaluated.

This re-evaluation should also encompass other strategies. Among them are meaningful collaboration and rationalization with other providers, possibly leading to merger opportunities, a redefinition of the level of care offered at hospital sites and, in some situations, consolidation with other inner-city hospitals resulting in the closing of one or more of the existing physical facilities.

And this, of course, is where the rubber meets the road. Can any organization—especially an organization with a mission that goes to the heart of what a community is all about—take itself out of existence? From our collective experience as turnaround managers, we know it is an incredibly difficult thing to do. The innate desire to survive seems as strong in institutions as it is in human beings. So, the old turnaround homily holds true—the earlier troubled health care institutions recognize the reality of their situations and come to grips with the fact that radical change is required, the more likely it is that they can find feasible and palatable outcomes that might just preserve their ability to deliver on their mission.

Footnotes

¹ Sam Huston is a principal with Jay Alix & Associates. He is a senior health care specialist with a diverse background in managing health care organizations. He has served as the COO and CEO of several hospitals and most recently completed an engagement where he was the chief restructuring officer of a large inner-city health care institution. Return to article