Keeping Natividad moving forward Part 2: A long shot: Natividad's success exceeds expectations

Part 2: Turning around a public safety-net hospital: A last-ditch effort to save Natividad suceeds beyond expectations

Laura Zehm was shocked at the fiscal mess she encountered while attending her first meeting as a member of the Natividad Medical Center board of trustees. Zehm, a veteran administrator for Community Hospital of the Monterey Peninsula, was among four representatives from Community Hospital and Salinas Valley Memorial Hospital summoned to join the county-owned hospital’s board in 2006. Officials at Community Hospital and Salinas Valley were eager to lend a hand to Natividad, fearing a countywide health care calamity if the county hospital collapsed.

Natividad had just lost $25 million in a fiscal year and was on the verge of being sold or closed. The other hospitals stepped in to offer oversight and cash in what was generally regarded as a last-ditch effort to turn Natividad’s finances around.

Zehm said she and the rest ofthe Natividad board were asked to approve expenditures, including invoices already years old, without any accompanying financial report. When Zehm spoke up, hospital officials responded defensively.

It was an eye-opener for Zehm, who was accustomed to much stricter accounting standards at the private hospital where she worked.
“I was thinking, ‘Are you kid- ding me?’ ” Zehm said. “There was no way to tell what was going on. It was absurd. If I tried that at Community Hospital I would have been fired immediately. There was no one minding the store. There was no oversight. It was obviously very poorly managed. I was surprised (Natividad) didn’t go down sooner.”

A bad reputation

It was well known that Natividad’s finances were in disarray, and had been for some time, when the county Board of Supervisors brought in the two area hospitals to help guide the turnaround effort.

The hospital’s dysfunction was readily apparent to Zehm and the other new trustees — Community Hospital’s Dr. Kurt Sligar and Salinas Valley’s Liz Lorenzi and Leonard Breschini.
But it wasn’t until the county-hired consultants from Chicago-based Huron Consulting Inc. arrived in November 2006 that the extent of Natividad’s operational challenges were made clear.

County officials hired Huron under a two-year, $3.3 million contract to offer management expertise, with the cost to be offset by up to $8 million from Salinas Valley Memorial and Community Hospital as part of their two-year agreement with the county.

By offering financial assistance and expertise, the two area hospitals acknowledged the importance of Natividad’s role: to provide care to the county’s economically disad-
vantaged residents.

Huron brought in an interim management team, including Chief Executive Officer Thomas Winston, Chief Financial Officer Harry Weis and Chief Medical Officer Dr. Jan Radke. They promised to conduct a hospital-wide needs assessment and create an improvement plan. They were met with plenty of pessimism from hospital employees and the community. Hospital employees and their union leadership worried that the consultants would recommend massive cuts in jobs and services. Patient advocates worried that the consultants would suggest measures designed to improve the hospital’s bottom line at the expense of access to care.

Few seemed convinced that anyone could turn the hospital around.

Poor management

Bill Foley, Natividad’s current interim chief executive officer, who replaced Winston in April 2007, said the consultants’ biggest concern coming in was the level of micro-management of Natividad by the county. County officials, including the supervisors and department managers, had the hospital’s finances and operations in a “vise grip” of restrictive policies and regulation, much of it due to the hospital’s history of financial struggles.

Foley said county politics had heavily influenced the makeup of the hospital’s board of trustees. According to several sources, supervisors had historically appointed trustees with little expertise in health care finance or in business. They insisted the hospital treat all patients, whether they paid anything or not, often at the expense of the hospital’s fiscal and operational efficiency. That attitude also trickled down to the hospital management and staff.

When the consultants’ needs assessment study was unveiled in early 2007, along with a sweeping improvement plan, it took direct aim at the county’s oversight.
The study said the hospital’s struggles were largely due to inept oversight by the county and as a result Natividad had become “an inefficient and ineffective organization in virtually every facet of (its) operations.”

The assessment blamed the county’s “very rigid and redundant polices” for restricting the hospital’s ability to adjust to changing conditions in the marketplace, and it found that the hospital’s wages and benefits, disciplinary process, billing procedures and patient care had all been compromised as a result.

Creating stability

In addition, according to the assessment, the hospital’s management structure had led to “constant leadership turnover with weak middle management and distrusting physicians” operating with inadequate accountability and dated equipment.

Foley said Natividad’s problems weren’t unique in the public hospital world.

“We see many hospitals out there that are managed poorly in the same areas, especially in the community, not-for-profit industry,” he said. “The hospital just can’t
be run like a department of the county.”

The consultants realized that Natividad’s troubles were so deeply ingrained, Foley said, and its image so tarnished, that any turnaround attempt would have to go beyond the financial bottom line. The hospital’s operations and service quality, as well as employee morale, had been degraded along with its finances, Foley said.

“Natividad had a very poor image in the community,” Foley said. “It was viewed as the place where, if you were sick and you had a choice, you wouldn’t go.”

An ambitious improvement plan recommended changes at every level of the hospital’s operations. It called for hiring a series of top-level managers, as well as a team of consultants to oversee the improvements. The consultants were allowed to institute the changes recommended in the improvement plan in a series of six-month phases
beginning in April 2007, each followed by a progress report. The improvement plan boosted the cost of the consultants’ contract to $12.4 million over a 30-month span after the supervisors asked them to stay an additional six months through April 2009.

The consultants have made major strides in several areas, Foley said, including recruitment and retention of management, physicians and medical staff; revenue cycle improvements; service and performance tracking; and labor and productivity tracking.

Progress, he said, is continuing on the delegation of authority, which would grant the hospital management a level of autonomy from the county in certain day-to-day business decisions. Under Weis’ direction, the hospital renegotiated payer contracts, including commercial insurance payers, and updated its charging procedures, some nearly a decade
old.

It also improved the accuracy of its registration, as well as its billing and collections processes. And the consultants were able to convince the supervisors to allow the hospital to invest in technology to aid its tracking processes. In addition, Weis secured about $7.6 million in settlements from Medicare on accounts dating back to the late 1990s.

Money matters                      

As a result, the hospital was able to boost its revenue from about $100.4 million in 2005-06 to $141.3 million in 2007-08, and is projecting $146.5 million in revenue this fiscal year. It also managed to keep costs relatively in check without layoffs and major service cuts.

Meanwhile, hospital management got the usually tight-fisted county board to agree to a revamped employee compensation policy in an attempt to make Natividad salaries competitive, which helped with recruitment and retention of top managers, physicians, nurses and medical staff.

“We tried to educate the Board of Supervisors that if you’re going to be competitive you have to pay competitively, so we’re not just comparing ourselves to other public hospitals but the entire industry,” Foley said.

The hospital also saw a steady growth in patients, which Foley credits to improvements in the hospital’s image, such as changes in key women’s health and primary care services,
including the creation of the new Natividad Medical Group, a family medicine outpatient practice. The rate of privately insured patients seeking care at Natividad is expected to
rise to more than 20 percent this year, which should also boost the hospital’s earning potential in a key area.

The improvement efforts were reflected in the hospital’s bottom line almost immediately. At the end of the 2006-07 fiscal year, Natividad had cut its operating losses to just $3.8 million and posted its first positive cash balance in recent memory — $12 million, including the $10 million county subsidy. In the 2007-08 fiscal year, the hospital posted a record
$10.5 million profit, and collected $24 million in cash, including a $4.2 million county subsidy.

Giving back                             

Weis’ projections indicate the hospital will likely end up breaking about even in the fiscal year ending June 30, largely due to the rising costs of providing health care to a growing uninsured population, the drooping economy and shrinking government reimbursement. But he has also suggested the hospital may decline the county’s budgeted $1.55 million subsidy because of the county’s own $24.9 million budget deficit.

As a result, the consultants have earned high praise, especially Weis for his work on the finances.

“It’s beyond anybody’s expectations,” Supervisor Dave Potter said. “Everybody knew there were a lot of opportunities (for improvements) at Natividad, but it’s such a dramatic turnaround.”

Potter said he believed the consultants succeeded by bringing a private hospital model to a public institution, and they managed the turnaround without a “scorched earth” policy of drastic cutbacks and employee layoffs so common in the private world.

Community Hospital’s Zehm said Natividad’s improvements range far beyond its bottom line, which she said is merely an indicator of a more fundamental change. “This is a much better place than it was 21⁄2 years ago,” Zehm said. “Good management is making the difference. The quality processes are part of the way they do business now. It’s not magic. I don’t know why it wasn’t being done before.” Dr. Marc Tunzi, a Natividad veteran and former chief of staff who sat on the hospital board during much
of the turnaround, praised the consultants.

“We didn’t have leadership before they came,” Tunzi said. “They’re phenomenally effective at recognizing broken systems. And Harry Weis is a bit of a wizard.”

Nevertheless, there is general consensus that there remains much work to be done. A permanent CEO and his executive management team have yet to be installed, and a new hospital board of trustees appointed, even though the consultants will leave soon. A new CEO is expected to be announced by the end of the month, and could be in place by March.

The strategic plan for the hospital’s future, unveiled nearly two years ago, is still in the fledgling stages. And, though Foley insists progress is being made, there are already concerns that a controversial proposal to merge Natividad with the county’s primary health clinics is delaying implementation of long-range improvements.

There are also indications the hospital’s finances will face long-term challenges as the cost of health care rises and one-time revenue improvement opportunities are no longer available.

“It’s been a pretty remarkable journey,” Weis said. “But it’s a journey and we have a long way to go. It’s my mission to prepare Monterey County for the future.”

Jim Johnson can be reached at 753-6753 or jjohnson@ montereyherald.com.