Heading into the 2012 calendar year, Seattle-based Swedish Health Services was in a bind.
The five-hospital system was hemorrhaging money through the first two months after several consequent months of lower volumes. Also, in February 2012, Swedish finalized its affiliation with Providence Health & Services, based in Renton, Wash., giving it a new outlook to face a grim reality.
Providence and Swedish announced several leadership changes as part of the affiliation. Dan Harris, a veteran of the Providence system, joined Swedish as CFO. Prior to joining Swedish, Mr. Harris served as CFO of Providence's operations, and he was CFO of the Washington/Montana region of Providence for 10 years.
When Mr. Harris was brought in at Swedish, it was clear the non-profit system needed a firmer financial foundation, but there was no silver bullet for success. Here, he explains how Swedish has been able to turn around its balance sheet since last year, what the Providence affiliation has meant for Swedish, why CFOs need to prepare themselves for a new normal and how patient quality is the top goal of every hospital department — even finance.
Question: Roughly one year ago, Swedish was in some financial hardship. Can you explain that situation? Why was Swedish losing so much money?
Dan Harris: When I got here in February 2012, Swedish had a $16.7 million loss from operations through the first two months. We forecasted Swedish was on track to lose $7.5 million per month for the rest of the year. Nothing like a crisis for a CFO to get someone's attention. That was where we were at, but we ended the year with a $40 million profit. We forecasted a $90 million loss but actually made $40 million, a difference of $130 million.
It was about September 2011 when volumes dropped. Volumes are kind of like the stock market. They go up and down, so this was not unusual since September is the slowest month. This tends to be seasonal. Then [volumes] dropped a little bit more in October, November and December, and people were wondering, "What's going on?" Births, surgeries, inpatient stays were all down. After the first six months of 2012, [volumes] flattened out. We realized this was the new world we lived in. Maybe it's due to more high-deductible health plans and people watching their care, as well as the economy — but this is the world we're going to live in.
From 2010 through 2012, in each of those years, payments per case dropped. There was also charity care, more bad debt, and Medicaid was making cuts. This is something a lot of hospitals have seen, and others were telling the same story.
Q: Since then, Swedish finalized its affiliation with Providence Health & Services. How has the partnership helped turn the organization around both financially and strategically?
DH: Swedish would've had to do this turnaround plan if the affiliation plan had happened with someone else, but having this partnership helped a lot in many fronts. I was actually from Providence, so I knew the people, the procedures and what we could tap into. We took all those ideas from across the Providence system and into a Swedish-branded plan.
There was the revenue cycle — our accounts receivable went from 70 to 44 days in a year by centralizing our operations. Our supply chain colleagues lowered our supply spend to 14.2 percent of operating income, which was a reduction from 17 percent. Each percent is worth about $20 million, so a 3 percent improvement is about $60 million in supply spend savings.
For productivity, we reduced staffing by around 750 employees. If you look at major staff reductions, it's a painful process and difficult on employees. We first told the community, here's where we are at [financially] and why we are here. We knew we had to make these cuts, but we wanted to do them as respectfully as possible. We first asked for volunteers — maybe there were people who wanted the opportunity to leave or were able to — and offered them an enhanced severance package. Through attrition and the voluntary program, we achieved almost all of the layoffs we had to do. This was the greatest accomplishment from a CFO's viewpoint: to work with staff and unions to shuffle people around and save jobs and employees as best we could, when we could.
Q: Overall, how was Swedish able to post such a positive, profitable fiscal year in 2012?
DH: We created an operations improvement plan and got leadership buy-in. Swedish runs five hospitals with almost 10,000 employees. It's a big organization. For us, it was about creating a plan that people can buy into, support and then execute.
Our operations improvement plan [last year] was probably more cost reduction and also process improvement along with some growth initiatives and revenue enhancement projects. The big three, though, are revenue cycle, supply chain and productivity. The filler is volumes, and there are programs that are growing. This was a process that we borrowed from Providence, and at Swedish, we created our own [vision].
Q: There are many hospitals out there that are either in the middle of their own financial struggles or are bracing for upcoming challenges. What advice can you give to those hospitals? What improvements need to be made first?
DH: Part of it is, from a CFO's viewpoint, there are benchmarks out there to help. Benchmark productivity to make sure it's where it's need to be, and benchmark supply costs. A lot of it is very mundane and boring, making sure the nuts and bolts are in order so the hospital works. But from the beginning, the culture of Swedish is around quality and safety. No matter what we did, those always had to be the first two priorities.
This is why I think this is a sustainable turnaround effort. If you look at our safety indicators, they've all improved. Our quality indicators have all improved. Those things tell me we didn't make any foolish mistakes. That's what I'd advise to other folks — you can't cut your way to success and profitability and expect that to hold.
Q: In your mind, what should be the biggest priorities for hospital CFOs right now as they enter the second quarter of this calendar year?
DH: We've already created next year's operational improvement plan. It's guaranteed in the hospital sector that no matter what happens, you're going to be paid less. If you're not ready for that and planning for that, you're going to get behind. No matter where you're at, make sure the rest of the leadership team understands what that means.
All of the foundational areas have to be there: Supply has to be under control, productivity needs to be satisfactory and all processes for billing, collections and government processes need to be in order. From a CFO's viewpoint, those are the things we can control and watch.
Swedish is now part of a bigger system, and maybe that's how the world is coming at us. You need a little more strength to survive. Right out of the gate with our affiliation with Providence, we became part of same obligated group for debt. Swedish refinanced its debt under the Providence umbrella, and under the bond ratings of Providence, we saved $74 million in debt payments.
The five-hospital system was hemorrhaging money through the first two months after several consequent months of lower volumes. Also, in February 2012, Swedish finalized its affiliation with Providence Health & Services, based in Renton, Wash., giving it a new outlook to face a grim reality.
Providence and Swedish announced several leadership changes as part of the affiliation. Dan Harris, a veteran of the Providence system, joined Swedish as CFO. Prior to joining Swedish, Mr. Harris served as CFO of Providence's operations, and he was CFO of the Washington/Montana region of Providence for 10 years.
When Mr. Harris was brought in at Swedish, it was clear the non-profit system needed a firmer financial foundation, but there was no silver bullet for success. Here, he explains how Swedish has been able to turn around its balance sheet since last year, what the Providence affiliation has meant for Swedish, why CFOs need to prepare themselves for a new normal and how patient quality is the top goal of every hospital department — even finance.
Question: Roughly one year ago, Swedish was in some financial hardship. Can you explain that situation? Why was Swedish losing so much money?
Dan Harris: When I got here in February 2012, Swedish had a $16.7 million loss from operations through the first two months. We forecasted Swedish was on track to lose $7.5 million per month for the rest of the year. Nothing like a crisis for a CFO to get someone's attention. That was where we were at, but we ended the year with a $40 million profit. We forecasted a $90 million loss but actually made $40 million, a difference of $130 million.It was about September 2011 when volumes dropped. Volumes are kind of like the stock market. They go up and down, so this was not unusual since September is the slowest month. This tends to be seasonal. Then [volumes] dropped a little bit more in October, November and December, and people were wondering, "What's going on?" Births, surgeries, inpatient stays were all down. After the first six months of 2012, [volumes] flattened out. We realized this was the new world we lived in. Maybe it's due to more high-deductible health plans and people watching their care, as well as the economy — but this is the world we're going to live in.
From 2010 through 2012, in each of those years, payments per case dropped. There was also charity care, more bad debt, and Medicaid was making cuts. This is something a lot of hospitals have seen, and others were telling the same story.
Q: Since then, Swedish finalized its affiliation with Providence Health & Services. How has the partnership helped turn the organization around both financially and strategically?
DH: Swedish would've had to do this turnaround plan if the affiliation plan had happened with someone else, but having this partnership helped a lot in many fronts. I was actually from Providence, so I knew the people, the procedures and what we could tap into. We took all those ideas from across the Providence system and into a Swedish-branded plan.
There was the revenue cycle — our accounts receivable went from 70 to 44 days in a year by centralizing our operations. Our supply chain colleagues lowered our supply spend to 14.2 percent of operating income, which was a reduction from 17 percent. Each percent is worth about $20 million, so a 3 percent improvement is about $60 million in supply spend savings.
For productivity, we reduced staffing by around 750 employees. If you look at major staff reductions, it's a painful process and difficult on employees. We first told the community, here's where we are at [financially] and why we are here. We knew we had to make these cuts, but we wanted to do them as respectfully as possible. We first asked for volunteers — maybe there were people who wanted the opportunity to leave or were able to — and offered them an enhanced severance package. Through attrition and the voluntary program, we achieved almost all of the layoffs we had to do. This was the greatest accomplishment from a CFO's viewpoint: to work with staff and unions to shuffle people around and save jobs and employees as best we could, when we could.
Q: Overall, how was Swedish able to post such a positive, profitable fiscal year in 2012?
DH: We created an operations improvement plan and got leadership buy-in. Swedish runs five hospitals with almost 10,000 employees. It's a big organization. For us, it was about creating a plan that people can buy into, support and then execute.
Our operations improvement plan [last year] was probably more cost reduction and also process improvement along with some growth initiatives and revenue enhancement projects. The big three, though, are revenue cycle, supply chain and productivity. The filler is volumes, and there are programs that are growing. This was a process that we borrowed from Providence, and at Swedish, we created our own [vision].
Q: There are many hospitals out there that are either in the middle of their own financial struggles or are bracing for upcoming challenges. What advice can you give to those hospitals? What improvements need to be made first?
DH: Part of it is, from a CFO's viewpoint, there are benchmarks out there to help. Benchmark productivity to make sure it's where it's need to be, and benchmark supply costs. A lot of it is very mundane and boring, making sure the nuts and bolts are in order so the hospital works. But from the beginning, the culture of Swedish is around quality and safety. No matter what we did, those always had to be the first two priorities.
This is why I think this is a sustainable turnaround effort. If you look at our safety indicators, they've all improved. Our quality indicators have all improved. Those things tell me we didn't make any foolish mistakes. That's what I'd advise to other folks — you can't cut your way to success and profitability and expect that to hold.
Q: In your mind, what should be the biggest priorities for hospital CFOs right now as they enter the second quarter of this calendar year?
DH: We've already created next year's operational improvement plan. It's guaranteed in the hospital sector that no matter what happens, you're going to be paid less. If you're not ready for that and planning for that, you're going to get behind. No matter where you're at, make sure the rest of the leadership team understands what that means.
All of the foundational areas have to be there: Supply has to be under control, productivity needs to be satisfactory and all processes for billing, collections and government processes need to be in order. From a CFO's viewpoint, those are the things we can control and watch.
Swedish is now part of a bigger system, and maybe that's how the world is coming at us. You need a little more strength to survive. Right out of the gate with our affiliation with Providence, we became part of same obligated group for debt. Swedish refinanced its debt under the Providence umbrella, and under the bond ratings of Providence, we saved $74 million in debt payments.
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