PHOENIX, Arizona (April 10, 2009) – At JohnMarch Partners we believe that health system and hospital CEO turnover could reach 17 percent over the next 12 months.
This contrasts with a study scheduled for release in Monday’s edition of Modern Healthcare, a weekly publication covering issues related primarily to health systems and hospitals. The ACHE projection of a 14 percent CEO turnover rate is based on a more formalized study. It is an annual assessment and look at turnover within a calendar year.
The driver for our higher CEO turnover projection is clearly the economy and a host of related complications that are impacting healthcare organizations earlier and harder than past economic downturns. These factors, as well as some political shifts, will contribute to the increase in CEO turnover.
This deep recession has played havoc with health system and hospital investment portfolios. Moreover, it is intensifying complexity factors and driving greater concern on the part of bond issue trustees and bond insurance companies who believe they cannot afford to give struggling hospitals too much rope or time. They do not want to be the next group to be berated in front of a congressional committee for failing to do their duty.
Clearly, there will be hospitals that thrive in this downturn. In that regard, healthcare is no different than any other business sector. CEOs that have refused to accept losses or anemic gains from continuing operations are ideally positioned to grow their businesses as competitors falter. However, far too many health systems and hospitals have relied on profits or gains from their investment portfolios to offset operating losses. Some organizations that have been profitable in recent years have, or soon will, slip to the loss territory. If they bump up against bond covenants, the insurance companies who guaranteed these investments will move quickly to exercise their rights to bring in outside consultants to stop the red ink. They do not want to write a large check to satisfy bondholders, as was the case with the collapse of the Allegheny hospital system.
Management guru, the late Peter Drucker, said on more than one occasion that hospitals were among the most complex of all businesses in America to run. These complexity factors will strain some organizations. Factors such as continuing shifts in the competitive landscape, most notably with a hospital’s once loyal customers: the physicians. We are moving with increasing speed from the loyal customer model to the customer-competitor model. On some days, these “customers” become our “competitors.” It is not uncommon for these roles to change more than once in a day. There is mounting financial and political frustration as some CEOs see the rise in physician-owned specialty hospitals and gain sharing agreements as nothing more than a greed grab. Other CEOs are more circumspect and see opportunity to grow market share and align financial and quality of care incentives. But, make no mistake, bottom lines at some hospitals are being significantly eroded.
Other complexity factors include untimely government reductions in Medicaid and direct subsidy payments at a time when more and more people are losing their group insurance and cannot afford to pay for the COBRA.
With a 30 to 40 percent loss in investment income, many CEOs can ill afford a change in their precarious financial balance. Yet several JohnMarch clients are reporting negative changes in their payer mix. Now, as jobless rates explode, increasing numbers of uninsured or underinsured patients are showing up in the ERs because they can no longer afford a trip to their physicians. This is not a good sign.
The recently released IRS study on compensation suggested in clear terms that governing boards must improve their oversight on compensation and performance. Board members, who want to avoid embarrassment of a financial catastrophe, are intensifying their focus on key performance benchmarks and aligning those with CEO compensation. This is another factor that will contribute to an increase in CEO turnover.
In the past, cash flow and investment income would cover a multitude of sins. With tight credit markets, hospitals which have relied on credit lines to cover cash flow swings, either no longer have access to that money, or the cost of using those funds is now higher, based on their credit risk assessment.
And on the horizon is the promise of healthcare reform which could very well mean less money for hospitals whether they are able to reduce costs or not.
An improving economy and significant gains in the stock market could help reduce our turnover forecast, but at this point, we do not see the type of economic turnaround that will materially benefit the financial performance of marginally performing health systems and hospitals.
In today’s market, it seems that many hospital CEOs are becoming the most vulnerable among us.
John G. Self is Chairman and Senior Client Advisor of JohnMarch Partners. He is a Co-Founder of the Firm. A former investigative reporter and crime writer with more than 30-years of leadership experience in public relations, national marketing, and business development and as Chief Executive Officer of hospitals, and consulting firms, Mr. Self is highly regarded for his keen insight into business culture and the types of leaders who will succeed. You can contact Mr. Self at 214.220.1234 or JGSelf@johnmarch.com. Or, you can follow him on Twitter at Self_JohnMarch.
