Achieving Asset Optimization

Achieving
Asset Optimization
A Strategic Approach To Aligning
Assets With Mission and
Market Imperatives

Learning Objectives
 Attending this session will enable participants to…
– Strategically align an organization’s program and facility
assets to their mission and market needs through asset
optimization.
– Use new tools, processes, frameworks, and data points to
better understand a provider organization’s cost position
and strategic imperatives.
2

Agenda
 Introductions
 Overview
 Asset Optimization Defined
 Organizing Framework
 Governance Imperatives
 Four Steps for Planning & Executing Asset Optimization
 Discussion Examples: Rationalization vs. Optimization
 Practical Next Steps
 Questions
3

Four Ways Hospital Performance Declined in 2012
 Margins Dropped: Median operating cash flow margin declined to 8.9% in FY
2012, compared with 9.2% in FY 2010 and 2011.
 Growth in Expenses Outpaced Revenues: For the first time since FY
2008, expense growth outpaced revenue growth. Median operating revenue growth
declined from 5.4% in FY 2011 to 5.2% in FY 2012, while median expense growth
increased from 5.0% to 5.5%.
 Patient Revenue Dipped: Median net patient revenue growth rate slowed from 5.3%
in FY 2011 to 4.7% in FY 2012.
 Volumes Declined: Inpatient volumes declined by 0.6% in FY 2012 after flat growth
in FY 2011. Meanwhile, observation stay growth rate increased from 8.8% in FY 2011
to 9% in FY 2012.
Source: Moody’s Investors Service Report, ―US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance,‖ Aug 21, 2013.
http://moodys.alacra.com/research/moodys-global-credit-research---PBM_PBM157417#sthash.8fbboyGB.dpuf
4

Business Imperative:
Growing Profits in a Market of Declining Revenue
―Fitch expects that while a number of efficiencies have
been already implemented and benefits
realized, management will need to find opportunities for
further expense savings that will likely require clinical care
redesign and a rationalization of certain clinical
services, which can take longer to implement.‖
Source: Fitch Ratings' Report: 2014 Outlook: U.S. Nonprofit Hospitals and Healthcare Systems http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726237
5

Market Demands 20%–40% Performance Improvement
HEALTHCARE TRANSFORMATION STRATEGY
• Establish a strategy that leverages
organizational strengths and local market
dynamics, and delivers measurable value
• Use the healthcare transformation strategy
to inform and integrate change across the
enterprise
• Continuously evaluate organizational and
market factors to calibrate the priorities
and timing of the strategy
• Target annual improvement of 6% –10%
6

Market Demands 20%–40% Performance Improvement
SCALE AND INTEGRATION
• Establish deep operational and data
integration to improve quality, efficiency
and coordination
• Optimize assets —people and facilities —
to align with the revenue transition and
clinical transformation
• Align incentives within the enterprise and
with key partners to remove barriers and
sustain improvements
7

A Strategic Continuum
9
ASSET
RATIONALIZATION
ASSET
OPTIMIZATION

Asset Optimization Defined
10
• Marked by rushed and reactive
decisions to raise operating capital which
are usually not aligned with the
organization’s mission.
• Trapped in financial crisis with
―backs against the wall‖
• Painful.
• Marked by strategic, proactive and
thoughtful decisions that evaluate
the economic and strategic
appropriateness of all assets in
relation to mission and market
needs.
• Proactive evaluation of assets in
relation to mission and market needs
• Planful.
ASSET OPTIMIZATIONASSET RATIONALIZATION

Programmatic & Facility Asset Optimization Defined
Programmatic Asset Optimization
• Merging, consolidating, starting,
modifying or discontinuing
programs and service lines to
fulfill an organization’s mission and
address market demand.
• An organization can do
programmatic change without doing
facility change.
Facility Asset Optimization
• Modifying, consolidating, or selling
physical facilities to fulfill an
organization’s mission and address
market demand.
• An organization cannot do facility
change without also doing
programmatic change.
11

Audience Questions
12
 Has your organization executed
programmatic asset optimization?
Are you considering it in the next
1-3 years?
 Has your organization executed
facility asset optimization?
Are you considering it in the next
1-3 years?

 A strategic, proactive evaluation of the value of all
programs and facility assets in relation to mission and
market needs
 Leverage clinical transformation, operational
excellence, scale and integration for peak clinical and
financial performance
 Create balance between capacity and demand
 Avoid rushed, painful asset rationalization decisions
 Achieve financial and clinical health in the long term
What can asset
optimization
do for your
organization?
Benefits of Asset Optimization
13

Organizing Framework For
Approaching Asset Optimization
14

Key Focus Areas Strategic Framework
Key Focus Areas Scenario-Based
Short-Term Impact
(1-3 years)
Scenario-Based
Long-Term Impact
(3-5 years)
Mission Impact
Market Strategy
Operations Strategy
Financial Strategy
Political/Community
Need Strategy
15

Key Stakeholder Communications Strategic Framework
Key
Stakeholders
Direct Impact and
Action Imperatives
Short-Term
Direct Impact and
Action Imperatives
Long-Term
Organizational
Mission Impact
Long-Term
Organizational
Economic Viability
Impact
Governance/
Boards
Patients
Staff
Medical Staff
Legislators
Community Leaders
Donors
Other
(Specific to Your
Organization)
16

Governance Imperatives
For Achieving Asset Optimization
17

Unprecedented Governance Complexity To Begin With
―Even small healthcare institutions are
complex, barely manageable places…large
healthcare institutions may be the most complex
organizations in human history.‖
— Peter Drucker
18

Unprecedented Governance Complexity —
Now Magnified By:
 Fundamental restructuring of health care
 Movement from cost-based pricing to price-based costing
 Movement from 50 years of expanding market to contracting
market
19

Governance Transformation Required
 The quality of governance that was sufficient to get your
organization where it is today will be insufficient to get it
where it needs to be tomorrow.
 Governance must change to facilitate effective asset
optimization.
20

Audience Questions
21
How many of you would see
your boards being comfortable
with the concept of asset
optimization?
How many of you would
anticipate your board would
resist the concept of asset
optimization?

Most Boards Are:
 Institutionally loyal as opposed to mission loyal
 Unfamiliar with asset optimization, and regard it as a ―retreat‖
or a ―defeat.‖
 Suspicious of CEOs who suggest it out of context
22

Boards Must Adopt a New Mindset
Innovations and practices that…
 Change culture, behavior, and the organization
 Create a collective body of knowledge and a new set
of habits
23

Six Practical Steps To Evolve Governance to Facilitate
Asset Optimization
1. Assess the structures, dynamics, and cultures of current governance and
leadership models to identify vestiges of old models and necessary
attributes to succeed in the new model.
2. Develop the board through a multifaceted strategy including education;
competency-based selection; governance restructuring;
and involving the board earlier in strategic planning processes
3. Develop a set of conceptual principles to guide the practical
restructuring of governance and leadership. Examples: non-representational
governance at system/parent board, but some representational governance at
subsidiary boards.
Continued…
24

Six Practical Steps To Evolve Governance to Facilitate
Asset Optimization (continued)
4. Develop clear delineation of relative roles, responsibility, and authority of
different boards and clinical leadership groups. Codify this with Authority
Matrices, and then use them!
5. Centralize authority, decentralize decision-making. Ensure ultimate
responsibility and accountability for system rests clearly with the system/parent
board. Subsidiary and physician boards are provided specific, accountable goals
for clinical transformation that focus on clinical quality, cost, and population
health metrics. Each subsidiary board and clinical leadership group is held
accountable to specific metrics.
6. Nimbleness is key! Governance and leadership structures cannot be set in
stone. Leaders must be able to change and adapt as circumstances warrant. 25

Four Steps for Planning & Executing
Asset Optimization
26

Asset Optimization: Four Steps
Understand the Changing Market
Understand How Your Organization's
Programmatic Assets Meet the Needs
of the Market
Understand How Your Facility assets
Meet the Needs of the Market
Understand the Gaps and
Opportunities in Achieving
Asset Optimization
Programmatic Assets Meet the
Needs of the Market
27

Asset Optimization: Questions To Ask
• Who are our competitors?
• How will emerging provider groups be
positioned in our market?
• What are our profits and losses in the
markets we serve?
• Are patient volumes declining or growing?
• Which competitors could potentially be our
partners?
• Which competitors will have the most
attractive networks (i.e., locations and
services)?
of the Market
Asset Optimization
of the Market
Understand How Your Facility Assets
28

• Which population groups do we serve?
Are there unmet needs or excess
capacity/inefficiencies?
• Are there service lines not currently
provided in the areas we serve? What
might be the return on investment to
build, expand or partner to offer these
services?
• What programs and services might our
communities not support? Who would
provide these programs and services if our
organization does not?
of the Market
Asset Optimization
Programmatic Assets Meet the
Needs of the Market
29

• What are the most attractive locations for
our inpatient and outpatient programs?
• Are our current locations the best or might
they be provided more efficiently in
alternative settings?
• How should our facilities and real estate be
reconfigured to best support asset
delivery?
• Where should our major medical
equipment assets be deployed to optimize
patient access?
of the Market
Asset Optimization
of the Market
Understand How Your Facility
Assets Meet the Needs of the Market
30

• What asset distribution options better serve
our population in the most cost-efficient
manner?
• What options eliminate duplication and
create more favorable variable and fixed
cost structures?
• What are the projected profit and loss and
capital implications of each asset
optimization option?
of the Market
Asset Optimization
of the Market
31

Discussion Examples:
Rationalization vs. Optimization
32

Example: Reactive Rationalization
―We fought the good fight as long as we could."
 Independent community hospital experienced deteriorating finances
over many years
 Major money-losing areas were psychiatric and obstetric services.
 Board rejected senior leadership’s proposed changes to
services, citing mission and personal reasons.
 Finances continued to deteriorate; hospital was ultimately sold to a for-
profit chain.
33

Example: Proactive Optimization
Successful consolidation with improved services
to the community.
 Leaders at a municipally-owned hospital and a nonprofit Catholic
hospital, located within a few miles of each other, saw benefits of a merger.
 Engaged the board, executives and the community to examine all options.
 Multi-year process required difficult decisions regarding which campus would
absorb consolidated services, medical staff preferences, religious
directives, reductions in force, and community reaction.
 Merger and consolidation successful, with significant improvement in the
system's cost structure, quality, patient access, and competitive position.
34

TRANSFORMATIONAL
MINDSET
STRATEGIC
FRAMEWORK
PLANNING
AND EXECUTION
Overcoming Obstacles and Common Mistakes
Programmatic Assets Meet the Needs of
the Market
Understand How Your Facility assets Meet
the Needs of the Market
Understand the Gaps and Opportunities in
Achieving
Asset Optimization
Programmatic Assets Meet the Needs of
the Market
Understand How Your Facility assets Meet
the Needs of the Market
36
20% – 40% Imperative
Key Focus Areas and
Stakeholder Communication
Four-Step Planning
and Execution

Overcoming Obstacles to Asset Optimization
 Avoid being institutionally loyal, placing emphasis on preservation of
facilities and programs over everything else.
 Consider assets as they serve the mission, instead of assets being the
mission.
 Implement structural change based on an asset optimization plan with the
organization’s assets as tools in service of the mission.
 Do not underestimate organization resistance to programmatic/ facility
asset optimization.
 Do not underestimate the timeline required to successfully implement
asset changes.
37

Asset Optimization Imperatives for Success
 Make asset optimization reviews ―standard‖ components of every health system
strategic planning cycle.
 Spend significant time assembling diagnostic/planning tools to develop market,
community impact, operations, clinical, medical staff, financial, facility/real estate
baselines and scenario-based planning options.
 Goals for asset optimization should be built into the management and board
objectives and receive regular reviews and evaluations.
 Assign people/roles/tasks for moving through asset optimization, establishing formal
accountability and organizational discipline to manage through the planning and
execution of asset optimization.
 Ensure that stakeholders are continuously informed and engaged: communicate
systematically and in a transparent manner over a long period of time.
38

Curt Whelan, Managing Director, Huron Healthcare | cwhelan@huronconsultinggroup.com
Curt is an Executive Leadership Team member for Huron Healthcare. He leads the Integrated Project
Leadership division and is responsible for Huron’s organic market growth plans. He brings more than 25
years of experience managing comprehensive healthcare consulting and performance improvement
engagements. His expertise includes integrating and translating market-based demand analysis, physician
alignment, operations improvement, facility asset distribution and financial planning into actionable plans.
Curt is nationally recognized for his knowledge of emerging healthcare delivery models, coupled with his
functional approach to project management and planning, provides the required expertise to build
organizational consensus with management and governance to successfully implement strategic and cost
repositioning plans.
James E. Orlikoff, President, Orlikoff & Associates, Inc. | j.orlikoff@att.net
James Orlikoff has been involved in leadership, quality, and strategy issues for more than 33 years and is
president of Orlikoff & Associates, Inc., a consulting firm specializing in healthcare governance and
leadership, strategy, quality, patient safety, and organizational development. He also serves as the senior
consultant to the Center for Healthcare Governance and is the national advisor on governance and leadership
to the American Hospital Association and Health Forum. Mr. Orlikoff is vice-chairman of the board of Virginia
Mason Health System and serves on the board of the Virginia Mason Institute. Mr. Orlikoff has authored 15
books and more than 100 articles and has served on hospital, college, and civic boards. He has consulted
with hospitals, health systems, and governments in 12 countries.
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Achieving Asset Optimization

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