Case Study: East Chestnut Regional Health System
Within the last 10 years, East Chestnut Regional Health System (ECRH) was formed from the merger of three organizations: the East River Medical Center, the Northern Mountain Hospital Consortium, and the Archway Hospital.
East River Medical Center (ERMC)
ERMC is the anchor hospital for the system. The medical center resides along the east side of the Chestnut River. Historically, ERMC was recognized as the location of choice for medical care. However, this reputation has deteriorated over the last 3 to 5 years. As the city of Chestnut has grown, ERMC has found itself on the edge of an urban blight. Safety has been a concern for patients, visitors, and physicians who use and serve the medical center. The technology offered at the medical center has been maintained at an excellent level of proficiency. At the same time, the medical staff is aging with the average age of the physicians being 57. There are younger primary care physicians who serve the specialists, but the specialists are aging as well. ERMC boasts a Level 1 Trauma Center with an air service. The total number of licensed beds for ERMC is 550. On any given day, the occupancy rate is 300 heads on the beds.
Northern Mountain Hospital Consortium (NMHC)
NMHC was originally formed in response to the migration of patients to Chestnut. Due to the rather aggressive strategies carried out by the hospitals in Chestnut, these rural hospitals decided to create a consortium of rural hospitals so that they could gain economies of scale in a number of areas, which include group purchasing, benefit administration, and physician and staff recruitment. Additionally, they worked together to stem any further deterioration of their market share. Patients were selecting to go to the larger community for services and leaving the smaller communities that collared the Chestnut metropolitan area. NMHC represented individual hospitals in four counties that circled Chestnut County: Walnut, Butternut, Oak, and Maple. Walnut and Butternut Counties had good employment with Oak and Maple Counties being mostly rural. In each county, the inpatient facilities averaged about 20 years of age. The upkeep of these facilities has been sketchy. No facility needs any major upgrades, but modernization is needed. The state does not have a Certificate of Need (CON) process. The medical staff makeup varies each location. The hospitals in Oak and Maple Counties are critical access hospitals. Further details will be provided regarding these organizations later in the case study.
Archway Hospital (AH)
AH is located directly in the community of Chestnut. It fully resides in the urban area of the community. The hospital has 200 registered beds, but on any given day there are only 50 to 75 patients in this facility. This hospital was a Doctor of Osteopathy (DO) hospital; therefore, most of the physicians that worked out of this facility were DOs. The payer mix for this hospital was heavily burdened with Medicare and Medicaid. This payer mix composed nearly 85% of the reimbursement. The facility is aging and needs considerable repairs. It is questionable if it will be worth the investment in this facility.
Leadership and Organizational Culture
The original merger that created the East Chestnut Regional Health System (ECRH) occurred 10 years ago. This merger was between ERMC and AH. AH had a rather dynamic leader who was about 57 years old at the time of the merger. The AH CEO became the new President and Chief Executive Officer of ECRH after the merger. Since this CEO had only worked in a smaller organization, he had not experienced the cultural changes and demands that occur after the merging of a large organization. Additionally, he began to change the culture of the organization such that decisions were made on a decentralized basis. He trusted the management team at AH to do the right things and make the right decisions with low supervision. However, the Chief Operating Officer (COO) who was put in charge was originally from AH but left 2 years after the merger with a new COO being put in place. This COO developed a rather poor reputation and was known to want to build his own empire at AH and to be dishonest at times. This reputation created a culture within the traditional AH that lacked a cohesive team effort to create a system. This positioning of the COO was left unattended by the President and CEO of ECRH since he was actively pursuing the acquisition of NMHC. The hospitals of NMHC were doing okay, but those in the consortium realized that their ability to stand alone was becoming difficult in today’s market. When the leadership of the consortium assessed the market as to a partnership, they decided that ECRH would be the best choice. The other option was to develop a for-profit hospital that also resided in Chestnut. The leadership was attracted to what they saw happen with AH. They liked that the central leadership of the system allowed AH to continue on as their own entity without a lot of centralized control.
By the time all of this was put together, the President and CEO of ECRH was near retirement. He retired about three years after all of the merger activity was complete. During those three years, he became lax in his leadership role. ECRH deteriorated in market share and profitability during this time. Upon his retirement, the Board of ECRH performed a national search for a replacement. They employed Hunter Brown as the new President and CEO. Mr. Brown was the CEO of a smaller health system and had been in that position for nearly 10 years. Therefore, he had limited experience from other markets in the art of strategic implementation. However, he was also well trained, bright, and articulate in expressing his knowledge. He has now been the President/CEO of ECRH for nine months.
As for the remainder of the leadership team for ECRH, there is a newly hired corporate counsel. She has 15 years of experience and is extremely competent in the work that she does.
The CEO also hired a new Chief Financial Officer. He has taken good strides in managing the accounts receivable throughout the system as well as extracting exceptional dollars from high quality supply chain management.
The Chief Operating Officer (COO) is new and has three years of previous experience from the same organization where the CEO departed.
The Chief Medical Officer (CMO) has been retained from the old leadership team. His reputation is excellent, and he works well with other physicians, including the medical staff and the employed physicians.
The Chief Nursing Officer (CNO) is three years away from retirement. She is known for not getting along with the medical staff and will always defend nursing when at times this is not appropriate.
The Senior Vice President for Human Resources is competent and respected by management and staff throughout the organization.
The remainder of the leadership team was retained from the old regime. This included information technology, employed physician group leadership, marketing, human resources, and other vice presidents or directors responsible for varying service lines. It should be noted that the IT leadership is just completing the implementation of the EPIC system. The future for this team depends on how well the overall implementation of the system goes. Likewise those in the marketing department will need to be stellar in senior leadership advisement regarding the marketing of complex issues that will be encountered ahead. They have been told if marketing misses the target, then replacements will occur within this department.
The new CEO inherited the management team of AH and NMHC. For NMHC the organizational structure was left intact with the COOs for each of the individual hospitals being retained. It was agreed that this traditional structure would be left intact for at least five years. This agreement was near its end and the new CEO had plans to change the existing structure as well as management. This change was being considered for this year’s strategic plan development. Even if the structure of NMHC was going to be changed to a more direct relationship with corporate leadership, all of the existing COO’s would be retained as they have performed well since the merger. As for the COO of AH, he had been recently terminated. An interim COO is now in place pending the board approved closure of this hospital.
ECRH was not the only provider of care in the community. There was a for-profit hospital, Banford Medical Center (BMC), that had been purchased by a large publicly traded for-profit health system about 10 years ago. The for-profit health system was the largest in the country. The CEO of this hospital was good at optimizing performance as a result of the weaknesses of ECRH and its leadership. He was an effective opportunist.
BMC has 400 registered beds with a current occupancy rate of 85%. They have been effective at taking market share away from ECRH. For each loss of service line market share by ECRH, BMC has shown proportional gains. After the acquisition of BMC, the for-profit immediately moved to build a new facility. This new facility is located on the growing wealthy edge of the community. Additionally, at the time that this new facility was developed, the for-profit syndicated ownership to the physicians. The highest level of syndication occurred with the obstetrics and gynecology physicians in the community. Therefore, women’s services deteriorated at ECRH. It should be noted that this physician syndication occurred before the Affordable Care Act was passed, which precluded hospital ownership by physicians.
It is important that additional information is provided regarding ECRH. ECRH recently purchased 100 acres of land across the interstate from BMC. This land is located northwest of Chester. The intention is to eventually build a new medical center on this location. The initial planning of this land has occurred and it has been approved to build a regional oncology center on this site. The construction of the project is already underway with an anticipated completion in 6 months.
In addition, ECRH has an orthopedic hospital attached to the current ERMC site and a behavioral health hospital at this same location. ECRH also has two ambulatory surgical centers that are conveniently located on the growing northwest and southwest side in the community. The one surgical center is located on the 100 acre development site. The orthopedic hospital has done well and has been listed in the top 100 orthopedic hospitals. However, the behavioral health hospital is losing significant dollars, so the Board of Directors for ECRH has decided to close down this hospital. ECRH has also developed a joint venture imaging center with the radiologists. This center resides across from a major shopping area in the community. It is conveniently located near heavily populated neighborhoods and shopping. The only downside is the location is not close to physician offices that would refer to this center. However, if a new facility is built on the 100 acres, which would include physician offices, the imaging center will be in an ideal location. Leadership is developing a free standing emergency center on the 100 acre site, which is on the northwest side of Chestnut.
The last competitive issue is the location of a medical school and hospital in the city of Chestnut. The facility resides in a downtown location. This medical school had been established by the state nearly 45 years ago and is associated with Greenbranch University. It mostly serves the indigent community in Chestnut and the surrounding area. This academic center has a rather negative reputation in the surrounding area. There are four other medical academic centers in the state as well as a medical center with a world renowned reputation. There have been ongoing rumors that this world renowned organization was planning on assuming the responsibility of the Chestnut academic center. This change would substantially alter the complexion of the local medical community if it were to occur. Speed in ECRH dealing with some of its market issues is an imperative.