Evaluation of Management Team Can Provide Insight into Hospital Credit Quality
The many complexities of operating a hospital in today’s environment require a solid management team. In the course of conducting hospital due diligence, the assessment of the management team is viewed by many as more of an art than a science.
While perhaps the most subjective piece of the process, evaluating a hospital management team can be one of the most important factors in determining a hospital’s credit quality – and its future performance. Listed below are eight factors to consider when analyzing a hospital management team:
- Performance Record: Successful management teams have a history of achieving solid “core” operating results and meeting clear budgets. They have a record of effectively dealing with change and successfully implementing new ideas and strategies, and also show a willingness to adjust and/or reverse strategies if required. They are held to clear performance benchmarks which they will share during due diligence discussions.
- Logical Strategic Business Plan: The Board and the management team should have a cohesive strategic business plan that is believable and appropriate to the size, market, and competitive position of the hospital. Are the strategies and expenditures reasonable? Is there a well-integrated business, clinical, capital and financial plan?
- Hospital and Physician Alignment: Physicians are the key drivers to a hospital’s patient flow and revenue generation. Consequently, alignment between the financial and clinical incentives of physicians and the hospital is extremely important. Does management have a history of successfully partnering with physicians through employment, joint ventures, and professional office building locations? Hospitals and physicians that have aligned incentives tend to be better positioned to negotiate more attractive managed care contracts.
- Daily/Weekly Management Focus: Hospital management teams that focus daily – or at least several times a week – on physician alignment issues, utilization and volume figures, related nurse and departmental staffing levels, cash collection and revenue cycle management issues tend to operate more successfully than those hospitals that do not.
- Clear Capital Plans and Investment Management Policies: Management should be able to clearly articulate the hospital’s capital plans and investment management policies. Capital expenditure plans should be reasonable and should demonstrate a strong link to future cash flow generation. (1)
- Appropriate Balance of Mission and Margin: While the need to satisfy numerous stakeholders and community needs often pulls management in different directions, the team must be able to strike a balance between operating profitably with sufficient cash flow to prepare for the hospital’s future. (2) Hospital management teams that do not have a proper balance of mission and margin tend to either incur poor operating performance or tend to alienate the hospital in the community by not meeting the community’s needs.
- Risk Management and Quality of Care: Management’s leadership in setting the culture for quality of care excellence is vital to the hospital’s reputation, patient flow and competitiveness. However, validating that quality of care goes beyond “talk.”
- Has the hospital earned third-party quality of care awards (both at the clinical and hospital department level) over the past several years?
- What leadership and clinical awards have key physicians on the medical staff achieved?
- Have third-party surveys been conducted on the hospital’s clinical reputation?
- What benchmarking is the hospital doing to exceed Joint Commission on the Accreditation of Healthcare Organizations (JCAHO) standards and the National Quality Forum for Safe Practices?
- Fund Raising Track Record: As hospitals are likely to be increasingly financially challenged in future years with tightening reimbursement, increased competition and increased capital demands-philanthropic support can be an important source of funding capital programs and maintaining financial strength. Especially when a portion of a hospital’s capital plan is based on philanthropy, it is essential to understand-the Boards composition and links to the community donor base, as well as the diversity and depth of the potential donor base. Understanding of past campaign successes and the current status of external fund raising efforts is an essential part of the philanthropic assessment.
By Jack Wells
Notes: (1), (2) Moody’s Rating Methodology, Not-For-Profit Hospitals and Health Systems, January 2008, page 12, 13.
About the Author: Jack Wells is a health care analyst with 25 years of hospital due diligence experience in both the investment grade and high yield markets. He has worked on both the “buy-side” and credit enhancement side of the hospital bond business. Mr. Wells has a Master of Management degree from Northwestern University (Kellogg Graduate School of Management) with concentrations in both Finance and Health Services Management. He is a Governing Member of Rush-Copley Medical Center, Aurora, IL and is also a member of the Finance Committee.