Phoenix Children's has enjoyed years of financial stability by staying disciplined about investments and delivering high quality care. Even through the pandemic, Phoenix Children's remained focused on results and now are reaping the benefits.
"We've got a long history of very solid financial results," said Bob Meyer, president and CEO of Phoenix Children's. "We decided as part of our strategic planning process a few years ago, we had to have a certain level of profitability. Our goal year in and year out is to generate 14% EBITDA margin. That generates the cash flow we need to grow."
Mr. Meyer knew when he became CEO that he needed a strong team tied to achieving the right metrics for success. He decided to tie executive compensation to three core areas: financial performance, quality and patient experience. Executives must hit all three areas to realize their top earning potential, and they've historically succeeded.
"That discipline isn't easy to come by," said Michelle Bruhn, who joined Phoenix Children's as CFO last year. "I had heard about it during my recruiting visits, and I could bring experience creating and pulling the budget together alongside the leadership team. There is collaboration here, and that's needed. It gives us a stable and growing balanced sheet, and the flexibility to invest in the bricks and mortar, workforce and physicians."
Even after acquiring its largest competitor, a children's hospital in St. Joe's, the health system was able to stay disciplined with the budget to generate 14% EBITDA margin and successful clinical results.
"A board member once told me, 'You hit 14% EBITDA margins year in and year out. Publicly traded companies would die for this','' said Mr. Meyer. "This is what we have to do. It isn't a luxury; it has to happen. It drives how we run the company and think about productivity in our systems to generate growth. We have to grow and that's why we're building new hospitals and expanding capacity."
This year for the first time in Mr. Meyer's tenure, Phoenix Children's won't hit the 14% EBITDA mark, but for good reason: the hospital is opening a replacement NICU in May and two additional hospitals this year in the east and west valley. Phoenix Children's will incur startup costs for those facilities, including hiring around 1,400 additional employees.
On the expense side, Mr. Meyer said the system is very metrics-driven. Phoenix Children's includes hospitals, ambulatory clinics, a major medical group and a foundation that raised $82 million last year. It also has a budding research enterprise that will need a business leader and additional structure in the future. Phoenix Children’s announced just last year they hired internationally renowned scientist Vladimir Kalinichenko, MD, PhD, as director of the organization’s research institute.
"We are attempting to build a one-stop pediatric delivery system," said Mr. Meyer. "We are also building our own office building for primary care. Why would we do something that crazy? There aren't any buildings to rent. Our population is outpacing our infrastructure. We have to build the facility because the primary care physicians don't have the resources to do it. The growth is so tremendous here; we are growing so fast, but we are treading water. We have to generate financial returns to support growth."
One way Phoenix Children's aims to control cost is compressing IT spend. Mr. Meyer said the system deploys rigor around keeping IT costs around 2% of the budget, and uses a EHR system outside of the giants Epic and Oracle, for greater customization surrounding the innovation projects at the system.
The health system is also focused on working with payers to achieve contracted rates. Like many health systems, Phoenix Children's has seen an uptick in denials that can disrupt the revenue cycle. But things are looking up overall, said Ms. Bruhn, and she plans to turn her attention to upgrading the revenue cycle management systems.
"We have great contracts in place and one more negotiation coming up," she said. "We have a great reputation in the state. They believe in us and fund us because they want to support us. For the revenue cycle, we invested in our clinical systems and up next is our business systems. We are doing an assessment of the elements of our revenue cycle management in preparation of moving things to a new system."
Phoenix Children's also has a strong, 20-year relationship with the state to take care of Medicaid patients with supplemental pay to make sure there isn't a financial disincentive to care for patients.
"It's a fair system. We get total cost for the Medicaid patients, 92% to 96% of Medicaid costs, and as a result, we don't have to have a tremendous cost shift on the commercial side," said Mr. Meyer. "More states should do what Arizona has done. We are the largest state for the Medicaid program, and it was built day one as 100% managed care."
Phoenix Children's has also invested in social determinants of health programs specific to pediatrics in the last year and have received funding to build on programs they launched with commercial payers to access food, safe shelter and childcare.
"It's helped the state look at how they use their support dollars for families," he said. "We have a group that comes through and we provide fresh fruits for patients. We have no skin in the game, we don't do food banks, we just hook patients up. The state loves it. That's building the relationship with the politicians, both Democrats and Republicans."