Inside GVH: a closer look at hospital’s 2012 losses

Board of Trustees selects management firm

The Gunnison Valley Health board of trustees selected a management firm this week to help the hospital get on firm financial footing. The decision comes not long after the hospital reported a year-to-date net loss of about $1 million as of May. The trustees have identified Community Hospital Consulting as their partner of choice, and over the next few weeks, they’ll determine the exact relationship. They’ll also continue the search for a new CEO.



The move comes on top of decisions this spring to eliminate 10 positions and cut back on employee benefits. The moves feel sudden—the financial losses were uncovered at the end of March—but analysis of the financial trail shows how financial inefficiencies and turnovers in leadership positions allowed one slow winter to have a dramatic impact on hospital financials.

A slow winter

When Crested Butte Mountain Resort reported a more than 15 percent drop in skier visits, the decline in tourism affected more than lodging and restaurants. According to Michelle Campbell, GVH’s marketing and business development officer, 54 percent of the hospital’s ER patients are commercially insured. That’s a sharp contrast to other hospital systems, where Campbell says that Medicare and Medicaid can account for more than 50 percent of ER traffic. In the Gunnison Valley, second-home owners and tourists help support the entire system.
“That population has traditionally funded the services that normally cost the hospital money to provide,” Campbell said. Obstetrics (OB), for example, consistently operates at a loss. Campbell said that some hospitals need to perform about 500 births per year in order for that department to be financially profitable.
At GVH, there are about 150 births per year. But because GVH is a rural, community hospital hemmed in by mountain passes, it continues to provide OB even though many hospitals of a similar size might not.
“We naturally provide services that lose money to serve the community,” Campbell said. The business model is to “run as efficiently as we can in the money makers, so we can provide what the community needs.”
One of those money-makers is the radiology department in the new hospital expansion, where financial data shows that the use of services like mammograms, ultrasound and MRIs is continually on the rise. But this winter, as the number of paying customers declined, the percentage of charity care (uninsured or underinsured) was on the rise. The hospital’s net positive margin of just over $380,055 at the end of 2011 wasn’t big enough to absorb those losses.

By the numbers
A year-end positive margin of $380,055 (1.6 percent) in and of itself wasn’t so surprising. Over the last few years, the hospital has operated on an extremely narrow net margin. According to data provided by Campbell, GVH was $92,552 in the red as recently as 2008, and in recent years capped out at a 1.55 percent positive net margin in 2010, at $347,744. That’s significantly below the industry goal of 5 percent.
And even as the hospital finished the year in the positive, financial reports compiled by GVH CFO and interim CEO David Freshour show that the hospital posted a monthly net loss of $272,000 that same December. According to board of trustees chairman Bob Brickman, that loss was the first sign of trouble—but it came too late.
“A lot of things came to a head because there were no financial reports until March,” Brickman said. The timing of those reports had something to do with changes in the CFO position.
As reported in the Crested Butte News, former CFO Tim Cashman resigned in April 2011. An interim CFO filled in until Freshour was hired in February 2012. Internal documentation corroborates Brickman’s claim that Freshour presented January and February financial data at the March 21 board meeting, in the weeks after he was hired. By then, the hospital was more than $500,000 in the red.
The February financials show that inpatient volume was down more than 20 percent, admissions were about 18 percent below budget, and outpatient visits were down 5.8 percent. ER visits were 20 percent below budget, and bad debt and charity care were 30 percent above budget. Total patient revenue was down 7.6 percent.
“The biggest contribution to the losses were decreases in revenue and increases in expenses related to nursing staffing and overall increases in physician fees,” Brickman said.
According to February data, for example, nursing was over budget 7.5 full-time employees—or $38,000 in wages and $73,000 in contract labor. Some of the overages went toward training new staff. Physician contracts also contributed to the tune of $27,880. Compared to last year, overall expenses through the end of February were 17 percent above the same time period, and patient revenue was 2.5 percent less. Some of those expenses are easier to fix than others: physicians’ contracts are required by law to be at market value; the hospital has been working with physicians to renegotiate contracts to bring them more in line with market value. Others, like staffing nursing, are more challenging to address and have been the subject of debate for several years.

Chronic inefficiencies

At a July 10 meeting between the Board of County Commissioners and the board of trustees, the trustees indicated that every healthcare consultant submitting proposals for long-term management contracts recommended reducing the number of full-time employees (FTEs) per occupied bed in the hospital. Data from Quorum Health Resources, which provided short-term management help after Randy Phelps resigned as CEO, suggested that the average is four FTEs per occupied bed; the average at GVH is seven.
The suggestion is not new. In 2009, an audit by business consultant Eide Bailey recommended a series of operational changes that could save the hospital an estimated $620,000 to $637,000 per year. A copy of the report shows that among the changes, Bailey recommended adjustments to nursing and surgery staff, and implementing a swing bed program (a form of step-down care for patients who can’t take care of themselves, but don’t need full care).
The report recommended adding staff, occupational therapy, a swing bed program and human resources, but decreasing staff in general nursing, surgery and recovery. The report cited 2008 working hours, pointing out that nursing hours for medical/surgery, ER and OB were 12,500 over the benchmark (or industry comparison).
Enacted in full, the recommended changes would have reduced staffing by 11,369 hours from 2008 levels, or 1,162 hours over benchmark. The report predicted that the revenue potential of swing beds alone was just over $300,000.
Former board of trustees chairman Bob Hall had been pushing for the implementation of a swing bed program since 2003. At that time, he said, GVH was the only critical access hospital of its kind in Colorado without one. Yet calculations confirmed by GVH’s auditor suggested that the swing bed program could have brought in more than $200,000 in revenue in 2003 alone.
“I couldn’t get the board to do it,” Hall said, adding that there was also significant resistance in the community and among hospital staff. But after the Eide Bailey report, current chairman Brickman says the trustees charged senior leadership with implementing the recommendations in the report. Some, like the swing bed program, were implemented but others, like reducing the nursing staff, were not.
At the July 10 meeting with the County Commissioners, several board members commented on the difficulty of staffing at appropriate levels. In particular, the hospital sees seasonal variations in patient volumes; at the same time, nursing is a profession where individuals often seek year-round employment.
“We’re dealing with people’s lives here,” Brickman commented. It’s a problem the trustees hope a long-term management firm can help them solve.

Seeking stability
When news of hospital losses reached the trustees in March, the hospital dipped into its reserves to cover about $400,000 in expenses, including payroll.
As of June 30, David Freshour says, the hospital still has $9 million in reserves and 115 days’ cash on hand. The goal now, as Campbell defines it, is to get expenses under control, fix the revenue cycle and maintain quality of care.
“We’re not going to close the doors and it’s very fixable,” Campbell said.
The hospital is starting to see changes. Nursing leadership has been implementing new practices to increase efficiency and maintain levels of staffing and care. According to interim chief nursing officer Chris Evans, “Five resignations in nursing have not been filled and nurses are now leaving early when activity is slow. They’re voluntarily cutting their hours to be part of the solution.”
And hospital financials are moving in the right direction—June data showed a positive margin at the hospital of $25,010. The ultimate goal now is to establish a healthier operating margin to weather future fluctuations. Information submitted to GVH by Community Health Consulting, a management firm responding to the trustees’ request for proposals, suggests that the average operating margin in a critical access hospitals they manage is 2.8 percent.
Establishing stable leadership also seems to be in order. The trustees have spoken highly of Phelps’ leadership and the initiatives he accomplished prior to 2010, including the accreditation of the hospital and the integration of senior services. Brickman and Campbell have also explicitly stated that no one was let go because of speaking out against the hospital. Staff and former staff invited to comment on leadership and the changes have not returned inquiries.
But the fact remains that shortly after the trustees charged staff with implementing the recommendations in the Eide Bailey report, there has been turnover in the CEO position, the CFO position and the board of trustees. In 2010, former CEO Phelps went on medical leave for three months and initially returned with a part-time status. In 2011, the CFO resigned and Freshour only recently took over the position. Over a similar time period, three different men took the helm of the board of trustees.
According to Campbell, Colorado Executive search firm has identified three strong candidates for the CEO position, and they will be meeting with the board of trustees. With the current leadership team in place, the CEO search under way and a management firm selected, she believes the trustees have been acting quickly over only three months to reverse the financial losses, support the staff that remain and maintain quality of care. They are feeling optimistic.

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