Rocking the boat can be the best course for hospital boards

By Clare Moylan, Derek Pierce

Sense of urgency

Turnaround professionals often encounter boards and management teams facing a crisis — but unaware of how serious and imminent it is. In severe crises, boards sometimes are not even aware that their organization is in danger of failing, particularly if the hospital’s monthly operating reports do not include metrics that would indicate problems early on.

Even with the right information, a typical community hospital board member often does not have the skills to see such a situation for what it really is. Turnaround professionals frequently arrive at an organization to discover there is not the sense of urgency one might expect in an emergency. 

Taking action

There are structural mechanisms that can be implemented and specific facts that board members should learn to watch out for, both of which can mitigate the risk an organization faces in a sudden crisis:

Be informed. Ask management for a financial report card. There are certain facts about a hospital that a prudent board member or manager can monitor to know when to call for external help. Here are some “crisis benchmarks” to watch for on the monthly operations report:

  • Having less than 14 days cash on hand: When cash is very low, the organization may not be able to cover its payroll. This is an immediate and severe crisis.
  • Having more than 50 days' accounts receivable or accounts payable: A rise in the time frame for AR indicates issues in the billing and collections department, which very quickly results in reduced cash inflow. A rise in the time frame for AP indicates creditors are waiting longer to get paid, which also can have operational ramifications if not managed appropriately.
  • Performance against loan/bond covenants: The board needs to understand the hospital's current and forecast position against financial loan covenants (as specified in loan documents). If there is an issue, engage specialist restructuring counsel and turnaround advisers.

Require 13-week and 12-month cash flow forecasts. By making cash forecasting (not only profit and loss forecasting) a clear and expected part of reports from the CEO, the board can always understand the cash status of the hospital and take action early — by refinancing debt, raising capital, considering strategic options or engaging turnaround professionals — if potential problems are identified.

Trust, but verify. Trust your management team and its representations, but make it a discipline of requesting appropriate verification of information on which the board is going to act. Don’t be afraid to engage independent experts on matters in which the board is making significant decisions; apart from the benefits of hearing from an outsider with a fresh perspective, the conversation can become more factual and less personal.

View questions as questions, not accusations. Boards that strive to cultivate a culture in which there are no bad questions are better able to hold their CEOs accountable. Asking the right question can shed light on a problem that could otherwise go unaddressed for months or years. Board members should ask questions to understand how the organization is performing while not stepping beyond the boundary between governing and managing operations.

Train your board members. All board members must fully understand what it takes to be effective in their roles. It is absolutely vital to have a disciplined approach to ongoing board member education — particularly because of the diverse backgrounds of community hospital board members.

Maintain board succession plans. Board membership also plays a critical role in organizational success. To avoid stagnation yet maintain institutional knowledge and culture, members should serve in planned, staggered board terms. That is, members should not be able to renew their participation indefinitely, and organizations should take care that too many board members don’t roll off the board at once.

Study the people who vote with their feet. Look for turnover and patterns — in staff and patients. Review staff turnover reports; engage a consultant to assess patient migration patterns; and, in particular, ensure the CEO is actively managing a physician succession plan. These are measures to monitor the CEO’s performance and keep on top of organizational success.

Plan your strategy. Your hospital should have a strategic assessment and a three-year strategic plan. From these, the board can understand the hospital’s “as is” position and prepare a list of strategic initiatives that will help the hospital achieve its mission. It is often helpful to have external advisers lead the strategic assessment and planning effort because they bring the latest knowledge about sector opportunities and act as an independent set of eyes. Once the plan is in place, the CEO should provide progress reports on each initiative.

Preserve the hospital? Or preserve high-quality health care services? Many board members believe their role is to give their community a state-of-the-art hospital. But the more appropriate objective may be to ensure the community has state-of-the-art health care. Be realistic and think creatively about how that mission can best be achieved in the long term.

Staying afloat

Access to high-quality health care is one of the most precious resources in any community, and those who serve on the boards of health care organizations are doing a profound service. Being a hospital board member is challenging, valuable work that takes strength of will, courage, integrity and critical thinking. Holding your CEO to account, and acting early and decisively, means the hospital will have more options available to it — and value to the organization and community can be preserved.

In other words, “rocking the boat” sometimes is the only thing that will keep it from sinking.

Clare Moylan (cmoylan@hcmpllc.com) and Derek Pierce (dpierce@hcmpllc.com) are managing directors at Healthcare Management Partners LLC in Nashville, Tenn.