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30 CFO / FINANCE Catholic Health Initiatives CFO Dean Swindle's Advice to Other Systems: 'Don't Get Too Comfortable With Your Past Success' By Ayla Ellison E nglewood, Colo.-based Catholic Health Initiatives embarked on a turnaround plan several years ago with the goal of improving its financial picture while provid- ing high-quality care at its hospitals and oth- er facilities across the nation. e system has made great strides toward its goal, yet there is still a lot of work to be done. CHI has been laser-focused on performance improvement over the past three years, but rolling out a comprehensive turnaround plan across an organization with 100 hospitals is challenging, and progress is slow. e health system's efforts just began to take hold in the second half of fiscal year 2017. Although CHI has encountered obstacles on its path to fi- nancial stability, the system is pleased with the headway it has made and expects more improvement in the coming months. CHI's cost-cutting initiative To improve its finances, CHI set out to cut costs across the system. It put a great deal of energy into lowering labor and supply costs, which combined can make up two-thirds or more of the system's operating expenses. CHI developed plans and playbooks focused on re- ducing these costs several years ago, knowing it would not immediately see results. In the labor area, CHI President of Enter- prise Business Lines and CFO Dean Swin- dle says the system had to incur costs to cut costs. "In the second half of the year [fiscal 2017] we began to see the benefits of our la- bor activities in the markets, but we also had cost," he says. For example, CHI incurred the one-time expense of hiring advisers to help the system develop new labor management techniques. e system also cut jobs, which resulted in severance costs. "When we got to the second half of 2017, we were very confident and felt very pleased that we were seeing benefit … but it was difficult for others to see it because it was for half of the year, and we had the one-time costs that were burdening that," Mr. Swindle says. Aer factoring in expenses and one-time charges, CHI ended fiscal year 2017 with an operating loss of $585.2 million, compared to an operating loss of $371.4 million in fiscal year 2016. However, CHI saw its financial situation im- prove in the first quarter of fiscal year 2018. e system's operating loss narrowed to $77.9 million from $180.7 million in the same pe- riod a year prior. "What you were able to see in the first quarter [of fiscal 2018] … was the one-time costs had gone away for the most part; those weren't burdening our results," says Mr. Swindle. He says although the system employed more physicians, its absolute labor costs were lower year over year. CHI's supply costs, including drug costs, were also lower in the first quarter of fiscal year 2018 than in the first quarter of last year. Mr. Swindle says CHI saw its finances im- prove in a difficult operating environment. Patient volume was lower in the first quarter of fiscal year 2018 than a year prior, and the system also experienced a nearly $26 million loss from business operations as a result of Hurricane Harvey. "[is has] given us a level of confidence that we can move forward and address the difficul- ty that our industry is going to be facing over the next several years," he says. In early January, Fitch Ratings affirmed CHI's "BBB+" rating and upgraded its credit out- look to stable from negative. e credit rating agency cited the health system's strong start to the 2018 fiscal year and financial improve- ments in several markets as key reasons for the upgrade. Preparing for new challenges Although healthcare organizations are cur- rently facing many challenges, including regulatory uncertainty and dwindling reim- bursement rates, Mr. Swindle anticipates hos- pitals and health systems will face new obsta- cles over the next few years. For example, hospitals will be challenged by changes to the 340B Drug Pricing Program. CMS' 2018 Medicare Outpatient Prospective Payment System rule finalized a proposal to pay hospitals 22.5 percent less than the aver- age sales price for drugs purchased through the 340B program. Medicare previously paid the average sales price plus 6 percent. "I don't think 340B was by chance and in iso- lation," says Mr. Swindle. "I think we're en- tering one of those cycles that the whole eco- nomic environment of our industry is going to be working against us." e pressures in the industry are driving hos- pitals and health systems to join forces. Aer more than a year of talks, CHI and San Fran- cisco-based Dignity Health signed a definitive merger agreement in December 2017. e proposed transaction will create a massive nonprofit Catholic health system, comprising 139 hospitals across 28 states. In the short term, the combination of the two systems is expected to drive synergies in the $500 million range, according to Mr. Swindle. In the coming months, the two systems will dive deeper into the synergies they expect to achieve over a multiyear period. "We do believe beyond the synergies there are some strategic initiatives we can put into place as a combined organization that we couldn't do individually," Mr. Swindle says. "You won't see the benefit of those as much in the short term." "Take a deep breath" Mr. Swindle knows firsthand that develop- ing and executing an operational turnaround plan is no easy task. However, today's health- care landscape requires health systems to re-engineer their business models. "Regardless of how good your results … have been over the last five to 10 years, we're all go- ing to have to transform ourselves in our own way to meet the characteristics of our organi- zations," says Mr. Swindle. When embarking on a performance im- provement plan, the first thing health system CFOs should do is "take a deep breath," he says. en, they should focus on the things they have more control over. Mr. Swindle says it is critical for health systems to con- tinue to drive improvement in patient expe- rience and quality. ey also need to be stra- tegic cost managers. "It's not going to be as easy as just saying we're going to take these [full-time employees] out or reduce this service. You're really going to have to be very smart and very thoughtful about how you become a good cost manag- er that adds value to your communities," says Mr. Swindle. "Don't get too comfortable with your past success and your past models." n C M Y CM MY CY CMY K