So said George Merck II, then CEO of pharmaceutical giant Merck & Company, sometime during the first half of the 1900s. Merck, in those days, hoarded cash for investment in research and development and followed a corporate philosophy that focused first on improving the human condition. Merck believed a selfless approach would be in the company’s self interest.

What a contrast is revealed in the headlines these days. Merck’s travails with its arthritis drug, Vioxx are well documented. But this week’s Time Magazine report documenting GlaxoSmithKline’s efforts to thwart the Food and Drug Administration’s investigation into its diabetes drug, Avandia, should outrage consumers.

In summary, GSK and the FDA have been aware of an increased risk of cardiovascular issues with Avandia since 1999. In 2007, GSK’s own internal study showed a 46% increased risk of heart attack for diabetics taking Avandia. Time reports that GSK’ s U.S. sales of Avandia reached $1.5 billion by 2004, six years after receiving FDA approval.

The Time article (click here) documents GSK’s corporate efforts to deceive regulators at the FDA to keep Avandia on the market. While GSK was very effective in doing so, the focus of the article is the failure of the FDA to protect citizens from corporate malfeasance. In this case, the corporation may have been knowingly causing the death of its customers! Remember, an internal study showed that you are 43% more likely to have a heart attack if you are diabetic and taking Avandia when compared to other alternatives including taking a placebo.

It is indeed an outrageous story, illustrative of today’s corporate philosophy…increase profits and shareholder value at all costs. But it also points to a more nuanced issue that pulsates through the American political landscape today. Just how much government do we need? Those describing themselves as tea partiers would suggest a small federal government with self-regulation of corporate America a very desirable thing.

While that argument appeals to business-people on many levels (myself included), Time points out that the FDA, which is largely funded by user fees paid by Big Pharma and whose officials are heavily lobbied by the industry, has become ineffective in its role as it relates to drug development and approval. In this case, we aren’t talking about upside down mortgages and bankruptcies, we are literally talking life and death.

But, let’s return to Avandia. If you, a friend or a family member is taking Avandia, you should read the Time article. I’ll bet you will be talking with your physician about alternatives therapies very soon.

Time to take my Lipitor.

Here’s the scenario. Over some period of time a hospital’s operating performance has deteriorated. Margins have declined, capital investment has been constrained, liquidity has remained the same or declined, the rating agencies have been lukewarm and, in the words of a former president, a malaise seems to have settled over the hospital.

Then, it happens. Usually pushed by a single event, when viewed in isolation, operating performance seems to fall off of a cliff. Management scrambles around looking for culprits blaming the economy, commercial payers, government reimbursement, pharmaceutical companies, device manufacturers and so on. Key physicians and members of leadership start jumping ship. Management begins calling Hail Mary’s in the form of mergers and acquisitions to save the day.

Invariably, the Board of Directors loses confidence in senior management and the CEO abruptly leaves the organization. What now?

Well, clearly, the answer to that question is, it depends. Clear huh? The truth is that it is rarely clear. Some Boards move quickly to install new management, hopefully with dynamic leadership skills and a compelling vision for the future. Others retain consultants to advise them or even run the company during the transition to new leadership. And others still, seek to complete the Hail Mary by selling the organization to another hospital or a hospital company. The answer may vary, but there are a few dos and don’ts that Boards of Directors should bear in mind. Here they are:

1. Do – Be Quick, but Don’t Hurry. John Wooden’s admonishment to his stellar basketball teams in the 1970s should be followed by Boards facing this situation. It is critical that Boards understand the root causes of the organization’s decline and apply effective solutions. In most cases, Directors are successful professionals and business people and are capable of sorting through the facts and sizing up the problem.
2. Do – Use an advisor or advisors that have a long-term vested interest in the community, not a hired gun from the coast. Those folks exist and are often discounted. College professors, area business leaders, vendors and suppliers, accountants and lawyers, government officials and others can give valuable advice. Many times their input is very revealing.
3. Don’t – turn the organization over carte blanche to a “turnaround firm.”.  By this I mean, if you are going to engage such a firm, make sure you have the proper checks and balances in place. The danger in using these firms seems intuitively obvious. First, incentives are not aligned between the consultant and the organization. The consultant is motivated to achieve  short-term gains to show that they have “turned things around” and will rarely focus on long-term value creation for the community. And, such  firms usually become an unchallenged scorekeeper, to the point that some Boards end up paying them incentive fees for achieving metrics even when bottom line results have not improved (or even declined further). You can imagine that team members would be reluctant to challenge the firms accounting when their own jobs are on the line and the turnaround firm is making the calls on who stays and who goes.
4. Don’t – be afraid to change course if the selected strategy isn’t working. I especially like FDR’s quote from the beginning of his presidency, “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.” The truth is the reasons for the organization’s decline, are often many, complex and interrelated. The solution isn’t always obvious, yet action of any kind is better than indecision and delay. If it ain’t working, stop what you are doing and try something else.

I began my career with Appalachian Regional Healthcare in Lexington, Kentucky. ARH at the time (1980) had a negative fund balance and the previous year the outside accountants had disclaimed an opinion on the fairness of the financial statements because they believed ARH wasn’t a going concern. The Board of ARH made one change, replacing its CEO with Robert  Johnson, a respected and experienced health system leader. Mr. Johnson made only one change in senior management that I can recall, yet ARH quickly reversed its fortunes entering a period of unprecedented growth and development.

Which is the last do. The fiduciary responsibilities of a tax-exempt hospital’s Board of Directors are many and varied and yet one is clear-cut. That is selecting the right leader for the organization. A selfless leader with a passion and vision for the hospital, a commitment to its community (employees, doctors, patients, etc.), excellent communications skills  and an ability to marshal commitment to a game plan is always the first solution.

And, as ARH’s Board of Trustees demonstrated in 1979, leadership is sometimes the only change needed.

The strategy is interesting. Here’s what happened.

The City assessed property taxes against one of Covenant’s ambulatory clinics asserting that it was a doctor’s office and not really an extension of the tax-exempt hospital. Covenant challenged the assessment in court and ultimately, a Wisconsin Court of Court of Appeals, overturning the trial court, found that the St. Joseph Outpatient Center was indeed operated as a doctors’ office and not as a hospital and therefore does not qualify for property tax exemption under Wisconsin law.

This trend of attacking the property tax exemptions of exempt hospitals began more than a decade ago.  As states and localities, hit hard by the recent economic downturn, search high and low for more revenues, exempt hospitals should expect this trend to accelerate. 

Health care executives should be alert to this trend, review the organization’s operations to insure this exposure is minimized and, if necessary, consider establishing a tax reserve if the requirements of generally accepted accounting principles are met.

The full case may be viewed at http://www.leagle.com/unsecure/page.htm?shortname=inwico20100810a44

But, isn’t there an upside? Would access to an annual routine physical exam as a covered benefit under Medicare, with no co-payment, qualify as a positive outcome? What about closing the “donut” hole? How about eliminating the denial of insurance coverage for pre-existing conditions. Isn’t the focus on primary care and preventive medicine a good thing? Especially with our nation leading obesity stats?

Tom Eblen, writing in the Herald-Leader last week pointed out a new report from Kentucky Voices for Health that highlights the positive impact health care reform will have on Kentuckians. While acknowledging that there are big questions that are unanswered such as what impact the law will have on rising costs, Eblen points out that there are many positives, especially for a poor state like Kentucky.

His piece was followed up in the H-L opinion pages in a letter from Judy Myers, a member of the Board of Directors of the Friedell Committee for Health System Transformation (full disclosure…I am a member of this group). One of Judy’s sentences resonates with me: 

“I am concerned that resistance — coupled with insufficient vision and knowledge of what is possible — may lead us to squander this opportunity.”

She is absolutely right. Rather than predicting the end of times, we need to look for the opportunities that the reform presents to our cash and health-poor state. That’s why I am an advocate for reforming Medicaid through the use of a managed care (or better said, ‘managed health”) approach. And, her point of view reflects a feeling on the part of many that our legislators and members of the administration should be more concerned about the welfare of all Kentuckians than their own political welfare.

In the end, we need to start substituting the connective “and” instead of “or” when we look at our opportunities. The question usually is can we have better health or lower costs? Let’s ask how we can have better health AND lower costs?

That frame of reference may lead us to a much different place.

One person’s (out-of-control) cost is another person’s revenue.

Deborah Yetter’s article in this mornings Courier-Journal, “Medicaid Cuts: Can Kentucky Limit the Pain?” uses Main Street in tiny Bedford, Kentucky to drive the point home. She spoke with Bob Yowler, pharmacist and owner of Morgan Drugs, who described the importance of his store’s Medicaid patients to his business and to the local economy. Morgan Drugs employs 12 people, which isn’t a trivial number in Trimble County which has a population of about 8,000 and an unemployment rate of 14%.

There is no denying that the Commonwealth faces a daunting task in terms of trying to balance the health needs of Kentucky’s poorest citizens with available revenues. However, one cannot ignore the devastating economic impact of slashing the $5 billion program by 20%. Little Bedford might not scare you, but cut 20% out of the Medicaid budget in Louisville and every single health care provider, supplier, pharmacy, and vendor will be laying people off in droves.

So, legislative leaders, especially those that aspire to the governor’s office,  may want to watch the rhetoric on this issue. Even forgetting the negative economic impact of our nation-leading poor health status, there is a business case to be made that expanding Medicaid is in the best interests of the Commonwealth. We simply need to look at new models and approaches, not the tactics employed by political Chainsaw Al.

If you have never done so, it’s interesting to read the comments associated with the article on the website. Here’s an example or four:

Someone named Acebass (obviously a crack angler) commented as follows:

“Only in America could this happen, because all the other countries have universal health care where patient health trumps cost.”

It’s a shame we have to pay for everything.

Writer52 commented:

“Out of network reimbursement typically involves paying off a massive deductible, being reimbursed at a lower rate, and paying a fee that is not discounted…often much higher than the “in-network” fee. Policy holders get shafted while the Humana execs and stockholders reap the benefits. BTW, it is in Humana’s interest to prolong this…after all, they are saving a bundle by not reimbursing the doctors during the period in which there is no contract!”

Now, to be clear, while I am 52, I am no writer, so don’t blame me for that one.

spndsmom wrote:

“The difference is a little more than just the 10% in in-network vs out of network. Last year, my daughter had to have surgery in the middle of the Norton/Anthem squabble. She had the surgery at Kosair. Now, there was a wonderful humanitarian article ran that stated Anthem would graciously pay Kosair bills at in-network rates, so as not to further burden families of ill children. Guess what? I got billed for well over $100,000.00 which was the difference between what they billed and what Anthem paid. There was no “agreed upon” billing rate or “usual and customary” writeoffs so we were balance billed the ENTIRE remainder of the bill. Don’t believe the “in-network” talk – it is meaningless. Norton asserted their “right” to balance bill patients for anything the insurance company did not pay because they had no contract with Anthem. Read the fine print people. This is a bigger financial disaster for patients than it appears on the surface.”

Ok, I have to take exception to this one. While I believe that spndsmom received a balance bill, I am certain that Norton would have made it right if it were brought to the attention of the business office, and perhaps, even if it weren’t. But that doesn’t matter as most people will believe what spndsmom posted.

Employers aren’t spared either, majjam posted the following:

“The Humana plan that my employer thoughtfully provides does not allow for out of network care, so it isn’t a matter of an extra 10% for some of us. So, the doctors that I have searched long and hard for that treat my lung cancer are out of my reach for right now.”

Thoughtfully? I detect a sarcastic tone here majjam.

The point is that everyone gets a black eye in a dispute like this one. There can be no denying that these types of disputes come at a real cost to patients and ultimately to employers paying for the care. And, there is no end in sight given the increasing financial pressures felt by all providers and especially by physicians.

So, hang on folks. The party’s just getting started.

Those of you who follow the Louisville market would find KDMC to be an interesting place. It dominates the Ashland market with nearly 21,000 inpatients annually. It is horizontally integrated and has successfully joined the care continuum in that area of the state. They are even a player across the river in Huntington.

Most impressive though is its profitability and financial position. Last year, KDMC generated $28 million in operating income (that doesn’t include investment income) on $555 million in total revenue. That performance isn’t an aberration. KDMC has consistently been one of the top performing hospitals in the Commonwealth. It’s balance sheet is quite healthy with nearly $240 million in cash reserves and $197 million in long-term debt and interest rate swap obligations. On a relative basis, KDMC eclipses all the Louisville area hospitals in terms of profitability. KDMC’s first quarter (the three months ended December 31, 2009) wasn’t bad either as it earned $5 million from operations on $155 million in revenue.

Something happened since the holidays though. According to the Herald Leader, in an article largely taken from KDMC’s press release and an article in the Ashland Daily Independent, the hospital rounded up the usual suspects, attributing its recent declining financial performance to increasing charitable care and bad debts. (I tried to find quarterly data for March 31 and June 30 and was unsuccessful, so I could not independently verify that performance was indeed declining.)

Why does this matter?

Well, one thing that’s a little different in Ashland is that KDMC’s service workers are represented by the SEIU, District 1199…the much loathed, at least in health system C-suites, Andy Stern was the driving force behind the SEIU. Andy is no longer the leader of that group, but the SEIU has had a bit of a growth industry in the healthcare business, particularly targeting non-profits.

Certain of the SEIU’s tactics are playing out in Ashland. Here’s the scenario:

KDMC announces layoffs (in this case engaging an existing bargaining unit), SEIU makes sure the press has KDMC’s financial results and they show the press how to find the compensation of the CEO and other key executives. According to payscale.com most reporters make somewhere between $26,000 and $44,000, so the CEO’s salary at KDMC looks pretty healthy, especially for a tax-exempt, public charity, so it gets published in the article.

It sure looks bad to John Q. Public who has a median annual income of about $50,000, and especially to nurses, housekeepers, cafeteria workers and others with annual incomes that are a single digit fraction of the CEOs.

I am not bashing CEOs. The responsibilities and pressures are immense and that is reflected in the declining average tenure of a health system CEO, now about 5 years. Certainly, KDMC’s CEO’s earning pale in comparison to those of most publicly traded company CEOs. And, health system CEOs lead organizations that deal in life or death situations hourly.

Like many, I don’t really see the need for unions anymore, particularly when compared to working conditions that existed in the first half of the 1900s and today. But, my frame of reference comes from spending 30 years as a suite. In any event, the situation in Ashland bears watching. One cannot deny that the financial pressures on hospitals are getting to the point of blowing the cap off of an increasingly restive healthcare workforce. Louisville was once very much a union town and while that has changed over the years with the decline in manufacturing, health systems would do well to pay heed to the gathering storm.

So what?

The traditional, and typical, approach of health system human resources directors when faced with a union threat is to engage a labor relations consultant, stir up the worst fears of the management and then undertake a series of actions intended to thwart an organizing effort. And, while this approach has generally worked in Louisville, it is not effective at addressing the core problem of a lack of employee engagement.

In order to get at that problem, hospitals need to make sure that their human resources policies are keeping pace with the changing environment, both in terms of the health care economy and in terms of the cultural and demographic changes taking place in the workforce. In other words, make the organization a great pl;ace to work from the standpoint of the lowest wage earner on the staff.

If I were in a C-suite today, I would watch what’s happening in Ashland closely. But, I would spend far more time and energy looking at my system’s approach it’s only real asset, its people. The strategic goal should be to make it really hard for a good employee to leave the system for another position elsewhere. If you can do that, you won’t have to worry about beating back the SEIU.

PostScript: If you want to learn more about KDMC, following are two links that might help. They are large PDF files.

Official Statement – KDMC

KDMC 2008 Form 990

In the piece, Altman cites the trend towards shifting more of the responsibility for paying for care to the individual. As an illustration, the percentage of workers paying a deductible greater than $1,000 has increased from 10% in 2006 to 22% in 2009. Kaiser’s research and forecasting shows that trend is expected to accelerate under the new law.

So, one of the key principles of conservatism, personal responsibility, was somehow embedded in the legislation. An interesting perspective from Altman.

That reports seems a bit at odds with Community Health System’s attempt to acquire Jewish Hospital & St. Mary’s Healthcare as reported in Business First.

A recent USA Today article about the for-profit acquisition of the long struggling Detroit Medical Center would suggest that the for-profits perhaps know what they are doing. One paragraph in that article illuminates their thinking:

“Cash-poor non-profit hospitals, unable to borrow money for needed improvements in facilities and equipment, are eagerly seeking for-profit suitors. And for-profit hospital companies and investment firms — eyeing the improving economy and the expected influx of millions more insured Americans as a result of the new federal health overhaul law — see opportunity in the non-profit sector.”

I suppose it comes down to whether you are a glass half full or half empty person. It looks like the tax-exempt hospitals, particularly those which are indeed non-profit, are taking a dim view of the future. Those driven by a need to increase shareholder value are taking a bullish approach.

Who’s right?

Well, from a purely financial point of view, for-profits have dramatically outperformed tax-exempts over time. And, while some might think that I lean a little left from time to time, I am a devout capitalist; and, most assuredly so are for-profit hospital company executives. Those folks are betting that health care reform will be good for hospitals.

Now, if you bother to read the entire USA Today article, you will note that it focuses on whether these for-profit acquisitions are good for patients, questioning whether an “overemphasis” on profits poses a threat to patient care. A legitimate question to be sure.

So, just for kicks, I did a quick review of published quality data comparing HCA’s flagship hospital, Centennial Medical Center and Vanderbilt University Hospital using Medicare’s Hospital Compare website. In that admittedly small sample there was no real difference in quality and patient satisfaction between the two. There was a real difference in cost, however, with Vandy receiving substantially higher Medicare payments than Centennial (justifiably so in my view…see my recent post on Medical Education).

In any event, the point of all of this mumbo jumbo is this…no one really knows what the impact of health care reform will be over the next ten years. It all depends upon the constituency of which you are a member. Having said that, there may be some hints of what the big players think buried in recent headlines and copy.

My recommendation?

It’s critical that health care professionals stay well-informed over the next few years. This will require a real commitment to keeping up. But the importance of doing so cannot be over-emphasized. We have already been inundated with reports, both pro and con, with a myriad of statistical and financial detail. And, there is more to come. Just wading through all that stuff isn’t easy and is certainly time-consuming. Even so, it would be good to keep in mind a famous Mark Twain quote, “Facts are stubborn things, but statistics are more pliable.”

So long, I need to log on to Schwab and see where CHS is trading.