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JOHN G. SELF, Founder
& Chairman | JohnMarch Partners, Inc.

Dallas, Texas Saturday, October 25, 2008 – I just returned from an 11-day trip, visiting clients in Indianapolis, Atlanta, Newark, and Buffalo. As I was driving to my client’s office in Buffalo, it began to snow. For a Houston native who knows more about humidity than winter weather, snow in October is a little startling. It must be a portent of things to come, and I am not thinking about a debate on global warming.

In talking to healthcare executives in those cities, there is a consistent theme: the economy that we are worried about today is not half as bad as the economy we will live with in 2009. Forecasts for a deep recession are more common now than three months ago. Given all that has happened in our economy over the past four weeks – all that is seen and a lot that is not – the growing angst in healthcare is not surprising. Hint: it is those economic developments not readily visible today that send a cold chill down the backs of many in the financial industry.

In the near term, the economic slowdown means for hospitals that there will be fewer profitable elective admissions and more bad debt. Anatomical enhancements and the sculpting of other body parts are discretionary expenditures that drop off household budgets when times are tight. Sadly there are essential admissions that many working people cannot afford. Some hospitals are beginning to take steps to prepare for the worst.

Carrie Vaughan, Senior Editor-Leadership, HealthLeaders.Com is doing a great job chronicling these developments and the challenges for healthcare leaders. Here is a snippet from her Friday email alert:

Cuts, Closures, and Bankruptcies

Many healthcare facilities are struggling to keep their doors open and some are losing the battle. Others are taking a close look at operations and cutting staff or services as needed. The sheer volume of stories about healthcare organizations closing, laying off staff, cutting services, or requesting a bailout the past few weeks has been unbelievable. Here’s a sampling from this week: University of Pittsburgh Medical Center is laying off about 500 employees as part of the health system’s ongoing cost savings initiatives. South Carolina-based Providence Hospitals is laying off 30 employees in an effort to stem projected losses of $1 million this year and $7 million next year. Birmingham, AL-based Physicians Medical Center Carraway is closing after 100 years. Chicago’s Lincoln Park Hospital is closing in the face of financial troubles. Clayton County, GA’s only hospital, Southern Regional Health System, must wait several more weeks to learn if the county’s government will move forward with a financial bailout.

If you do not receive her reports, now is a good time to start.

Thin margins at major health systems, including some “name brand” organizations, will trigger some executive changes if those CEOs and CFOs do not act quickly. Hospital boards are comprised of people from all walks of life. These are the same people who are more than a little concerned about the economic mess we find ourselves in. Board members tend to react differently when their hospitals start losing money in good economic times. In bad times, they act with a deep sense of awareness of their own financial loss. CEOs need to be more sensitive and begin to plan ahead rather wait to react.

Hospital financial statements in November and December will show real carnage as healthcare CFOs disclose losses from their institutional investment portfolios. One large east coast organization which reported that 65 percent of their investment holdings were in equities, is preparing for a huge balance sheet adjustment, estimating a $90 million loss in value. That, combined with a profit of less than .75 percent of $700 million in net revenue, is not a pretty picture. No one knows how their bond insurer will react. I am guessing not well.

Hospitals that have consistently relied on investment income to offset poor decisions, bad reimbursement, or both, will face tough scrutiny from boards and bondholders.
One CEO who is skating on the thin ice of very small operating margins remarked that it would be a cold day in hell before he let a “slash and burn” management turnaround team in his organization.

I sense a chill in the air.

John G. Self, Chairman of JohnMarch Partners, is the Firm’s senior client advisor. He is a former investigative reporter and crime writer for a major daily newspaper. Candidates and clients say he is one of the most thorough executive recruiters working in the healthcare industry.