Health Care's Response to the Volatility of the Markets

The never-ending fluctuations in the U.S. equity and debt markets over the last several months—which of course have been particularly intense in the last several weeks—have caused all health care leaders to pause to review their investment portfolios.

Although historically the income from investment portfolios has not been used to support operations, but rather to fund capital expenditures, the declining operating margins in U.S. health care over the last several years has changed this dependency somewhat. Therefore, the decline in the values of investment funds is not only putting capital projects at risk, but will also be affecting the operations of hospitals and health systems throughout this country.

Practically every CFO--including ours at CHRISTUS Health--thinks the changes we are seeing could never have been predicted and certainly fit into the totally “unexpected” category. This volatility clearly supports a recent projection by the American Hospital Association that approximately 1,200 hospitals in the U.S. may be forced to declare bankruptcy this fiscal year, a position that is supported by the Health Care Financial Management Association. Perhaps there is no better time in history to pause and see the advantage of being part of a larger system that began this market decline with moderate operational results and extremely strong balance sheets.

Although both have declined in recent years and months, the very size of health care systems and their accompanying balance sheets allow them able to tolerate such declines for a much longer period of time. The reality of this situation is clearly visible to CHRISTUS Health, in that three hospitals have already declared bankruptcy in several of our regions, with two already closed and the other participating in a due diligence process with us, contemplating a sale to CHRISTUS Health in the near future.

What can we do, then, in this period of time to remain focused on operations and create stability in our systems while stability, however long, is re-established in the markets? To begin, we need to take the long-term view, and--based on the history of market’s ups and downs--recognize that some time in the future the markets will re-establish themselves at an acceptable level.

However, because this time frame for stability is unknown, a health system leadership team should rethink their building projects and their capital expenditures. CHRISTUS Health prepared itself for this higher level of scrutiny two years ago by establishing a system capital allocation committee, which meets three times a year to determine how the capital will be distributed to our regions and programs in order to support their capital budgets and master building plans. With the volatility of the market, this process can be quickly controlled by determining the capital which can be safely spent and limiting the building projects to those that are already in progress and hopefully financed with bonds. All this is being done at CHRISTUS Health as we speak.

And finally, four years ago, CHRISTUS established an Investment Committee, a subcommittee of the Finance and Strategy Committee of our board, to provide outside expertise to our financial leadership team so that our portfolio is reviewed on a regular basis. During this period of time, the investment committee has been engaged at an even higher level with more frequent discussions and reviews to determine if CHRISTUS Health is doing everything possible to decrease its investment risks, including the reduction of our risk premiums on our debt obligations. One of the key responsibilities of both management and leadership is to serve as stewards of our resources. Although careful scrutiny of our operating and capital budgets is an ongoing process by management and the fiduciary overview of the system is an ongoing responsibility of the board, these extremely volatile economic times require that both scrutiny and oversight be taken to a higher level, which is characterized by more frequent conversations between leadership and governance as well as more frequent sharing of data relating to our financial and investment performance.

As we have repeatedly said, transparency is a key part of the CHRISTUS brand, and it is our commitment to complete openness and honesty that will serve us well as we continue our Journey to Excellence while creating new and different action plans to address these economic challenges.

My Viewpoint

I was recently interviewed for the first edition of CEO Viewpoint, a publication produced by the Scottsdale Institute. The institute is a non-profit association that serves executive teams in leading health care systems, and they asked me to respond to a variety of questions that address many of the topics we’ve talked about here, including the challenges of the U.S. health care system today, including declining reimbursement, the volatility of the market and whether the health care industry’s toughest challenges will change under a new administration in Washington.

I thought you might be interested in reading the interview, so in lieu of a full post today, I encourage you to peruse the first edition of CEO Viewpoint, which is available here.

The Global Economic Crisis’ Implications for CHRISTUS Health and our Response

Because of the recent events in the global economy and the uneasiness it has caused at home, we recently provided our Associates with an update CHRISTUS Health and our ministry’s response to the global economic crisis.

The downturn in the equity markets last week has had, as we would expect, a negative impact on our portfolio. However, because of the diversification of our portfolio, the current crisis did not impact us as heavily as it did the equity markets. In the last few days, our portfolios lost 3 percent on average, while the Dow and Standard & Poor’s 500 lost approximately 9 percent each.

Obviously, for our Associates and CHRISTUS employed-physicians, the status of our retirement funds, including the Cash Balance Plan and the Matched Savings Plan, are extremely important. Since CHRISTUS Health was formed, the leadership team has made a conscious effort to ensure that the U.S. and Mexico retirement accounts are funded adequately to meet the projected needs of retirees not only for this year, but those projected to occur in future years based upon our individual ages and years of service. CHRISTUS Health has always used an external actuarial service to make the determination of what these payments in future years would be.

An actuarial is a company whose staff has the responsibility to look at the workforce, and based on its age and years of service, they determine the amount of retirement that will need to be paid out on a rolling 10-year basis. We then fund both retirement plans on a monthly basis according to the actuarial’s best estimates. Funding at the 100 percent level has been a primary goal of CHRISTUS Health. For the Cash Balance Plan, this is done through investment policies overseen by the Investment Subcommittee of the CHRISTUS Health Board of Directors. It is important to note that our Associates control the investment categories for their Matched Savings Plan.

It also should be reassuring to know that these funds are annually audited by an external auditing firm, and this report is reviewed and approved by the Audit Committee of the Board. Again, CHRISTUS Health has made an attempt to keep this retirement fund as close to 100 percent of the actuarial projections as possible and alters its monthly fund contributions in order to achieve this goal.

Obviously, with the volatility of the market, the Cash Balance Plan fund, along with the operating fund and the Emerald Assurance fund, have been affected somewhat negatively. But again, because of the diversity of our investment portfolio, the current market crisis has not as significantly affected CHRISTUS Health as it has other health systems and businesses. As the market is rebounding, it is hopeful that these losses will be partially or fully recovered quickly so as to maintain our goal of reaching 100 percent funding.

In addition, it is important to note that the retirement funds – both our Cash Balance Plan and Matched Savings Plan – are totally reserved and can never be used to support financial or operational challenges.

Because our Matched Savings Plan is an important benefit for all CHRISTUS Associates, our senior leadership team has supported our HR leaders to develop communications to encourage Associates, particularly those in the lower paid positions, to sign up for this program.

Overall, CHRISTUS Health now has nearly 30,000 Associates in our international ministry:
Full- and Part-Time Associates in the U.S. – 20,265
Per Diem Associates in the U.S. – 5,364
Mexico Associates – 3,600

In Mexico, the CHRISTUS Muguerza system is mandated by law to have a success sharing program with all their Associates. We have replicated that program on a smaller scale in the U.S. campuses, driven by patient satisfaction metrics.

In addition, in the U.S., 44.3 percent of the full- and part-time Associates contribute to the Matched Savings Plan along with 8.3 percent of the per diem Associates, resulting in an overall participation of 36.8 percent. This has grown from 8 percent over the last 10 years as CHRISTUS has continued on its Journey to Excellence.

As we review our 10-year history moving towards our 10th anniversary in February of 2009, we clearly see that CHRISTUS Health has faced many challenges. In response to these challenges, the CHRISTUS family has designed and implemented many changes which have resulted in significant progress in all of our Directions to Excellence. The market volatility we are experiencing in recent weeks is just one more challenge which we are currently addressing. We recognize that market volatility is normal and in reviewing history, we know that it must be expected periodically. To minimize the risk of this volatility both present and in the future, we rely both on our internal knowledge as well as external expertise, of our investment consultants, Investment Subcommittee, external auditors and bond rating agencies. This integrated program hopefully gives our Associates a greater sense of comfort as we travel through these challenging times.

Is Being a Health Care Leader Really Worth the Work?

I am often asked by leaders both inside and outside CHRISTUS how I got where I am in my career, and if I had to do it over, would I take the same path? I think the reason why this question enters the minds of many people in health care today is because the time and energy it takes to be a leader in our field is enormous.

This is probably evident by the short life that CEOS have in health care, particularly in large systems which average a 5-7 year span. In addition, the complexity of health care often creates challenges for leaders in balancing their personal and professional lives. Consequently, they ask frequently, “Is it really worth it to be a health care leader in 2009?”

For me, the answer to this question throughout out my entire nearly 40 years in health care leadership has been yes. Although I might say that my leadership journey officially began when I was selected to be the chief surgical resident during my last year of residency and was elected president of the house staff association during both my junior and senior years of residency. However, my leadership experience truly began during my secondary education, when I found myself taking on responsibilities that led me to become the editor of the newspaper, the assistant editor of the yearbook and the president of my class.

Because I believe that some leadership skills are innate, the characteristic I saw in myself early on which really did not need any development was the desire to facilitate the correction of problems or to fill voids by taking leadership responsibilities which no one else readily wanted.

Assuming these leadership roles early in my career caused me to understand that I really enjoyed taking on these responsibilities. Therefore, as I continued my college, medical school, residency and two years of military service, I again found myself seeking leadership opportunities which gave me the ability to say that I was truly making a difference in the environment in which I was living and working.

However, it was not until I returned to civilian life and was working in my first health system in the roles of the Chair of the Department of Emergency Medicine and the Director of the Surgical Educational program that I found myself reflecting on the question, “What are the competencies of a successful leader in health care?”

This reflection was motivated by two major factors. First, I found myself dissatisfied with the leadership of some people to whom I reported, and therefore had to ask the question, “What were they doing or what skills did they lack that I found unpleasant?”

Second, people began asking me how I became a physician leader, which then caused me to analyze the art of leadership (often those innate and interpersonal skills which one possesses) vs. the science of leadership (those skills and talents which can be taught and learned).

As a result of these reflections, I determined that there were lists of both curriculum and operational competencies which every health care leader needed to develop a leadership team that would be willing to follow his/her direction. Consequently, as I was promoted to the Senior Vice President and Medical Director of the Geisinger Health System in Pennsylvania, I immediately partnered with Susquehanna University to offer a health care leadership course which was required for all clinical as well as administrative leaders in the system. This one-year course made up of 12 three-day sessions consisted of required readings, lectures from external and internal faculty as well as problem-solving projects. In essence, this course provided the experience equivalent to a mini-MBA program and significantly increased my commitment to the ongoing development of leadership competencies as well as to life-long learning, since health care is an ever-changing environment.

Throughout this entire process, I continued to find that assuming leadership roles and developing educational opportunities for future leaders was as enjoyable and satisfying as it was for me to train surgical residents to assume the future surgical practices in America.

An additional question that parallels those listed above is whether or not I found the physician leadership role in administrative matters to be as satisfying as the clinical leadership roles which I had engaged in throughout my career.

Clearly, in the early ‘80s, I needed to pause and reflect on whether or not leaving a full-time surgical practice and melding administrative responsibilities with emergency medicine responsibilities would present me with career fulfillment. I decided to make this transition, believing that although I was improving the health of each individual I operated on in my clinical roles, as a physician leader, I would be improving the life of communities of people as well as training competent future health care leaders.

I have always believed that both tracks are equally important, but I am content that choosing the route to perhaps influence a greater number of people through my leadership responsibilities in health systems has been very beneficial and rewarding.

So in closing, my advice to people who are pondering the questions, “Should I take the clinical or administrative leadership track?” and “Will it ultimately be worth it?” My answer is very simple: follow your heart and do what you believe you will enjoy the most; make sure you have the competencies for whatever track you decide to take and remember: whatever role you play in health care, is a sacred role and if you are happy and if your loved ones are happy, it will be worth it.

More Lessons from the Storm: The differences between Ike and Rita

As we are now on the other side of Hurricanes Gustav and Ike, it is appropriate to reflect on what were the differences between these most recent hurricanes and Rita, which we experienced three years ago and spoke about in a recent post.

For CHRISTUS Health, the main differences can be articulated as follows:
1. The management process in the hurricanes from both the system and regional command centers was much more organized, and at no time did the leadership team feel that the situation was out of control. This was because we spent a great deal of time and energy debriefing after Hurricane Rita and created tools and processes for improvement as a result.
2. The regions were much more proactive in determining the potential effects of these hurricanes and made plans to move their patients more quickly throughout the CHRISTUS system. It appears that a total of 13,859 patients were transferred or discharged (on their own care or to other facilities) over the Hurricane Ike period (Sept. 9-Sept. 15) from five of our sites as well as four long-term acute care facilities. Many of these were transferred to other CHRISTUS facilities, which created significant comfort for the patients and their families and expedited the knowledge of the new caregivers regarding the patients’ conditions and treatment plans.
3. Generators large enough to support an entire facility were in place much earlier and helped prevent much of the major discomfort which results in the almost immediate loss of electricity and water sources after a major hurricane.
4. Hurricane Ike covered a much greater cross-section of the Gulf Coast and had more intense strength in key areas for us including Houston, Lake Charles, La. and Beaumont, Texas. Consequently, we sustained about $125 million in damage to our facilities due to water intrusion. This is almost three times the damage we sustained in Hurricane Rita. In fact, the damage from Rita was mainly due to power interruptions and some water damage, whereas the damage in Hurricane Ike was due to predominately roof damage.
5. A larger number of our Associates were affected by Ike. We estimate that over 200 of Associates lost their homes due to the damage from intense flooding, and almost every Associate in our CHRISTUS Health Gulf Coast and CHRISTUS Health Southeast Texas regions (at least 2,000) along with our physicians and volunteers were without electricity for approximately 10 days after landfall. In addition to the personal burdens, which we are working to help alleviate, we understandably are experiencing some staffing issues because these people cannot quickly resume their work responsibilities.
6. It is our observation that the federal, state and local governments did a much better job in understanding their roles and responsibilities in this hurricane compared to Rita. There was much more clarity in their directions and much less overlap or disagreement about what each of their expectations were. However, again, the major problem that was similar to Rita was that the state would often report that supplies from the federal or state government were due at a certain time or were already in a specific location, and unfortunately we found that in numerous cases, this was not the case.

These were, then, the significant differences between hurricanes separated by only three years. The short timeframe between these occurrences is extremely concerning to us and other health care systems that have facilities and assets in the Gulf Coast, because since 1996, this frequency was unheard of for almost 50 years prior to Rita. In addition, weather forecasters are predicting a very warm 2009 summer, which is always the precursor to an aggressive hurricane season.

Therefore, based on our lessons learned and the predictions for more frequent hurricanes to potentially hit Lake Charles, La. and the Beaumont/Houston and Corpus Christi regions of Texas, CHRISTUS Health is undertaking three major activities as we continue our Journey to Excellence:
1. We will extensively and intensely debrief regarding our responses and processes in Hurricane Ike in order to make our future control centers more effective going forward.
2. We will continue to prepare our facilities in the potential paths of hurricanes so they all have generators and fuel supplies permanently in place to run their entire facilities so we do not need to depend on generators moving into these locations when a hurricane is predicted, which is usually less than a two-week timeframe.
3. As we renovate our buildings that were significantly damaged, we’ll take the opportunity to reflect on the best uses for those buildings gong forward and what programs should be grown and strengthened in them.

Although we have had devastating results from our hurricane experiences in the last several years, excellent organizations walk through these times with positive attitudes and utilize these events as significant learning opportunities to accelerate the Journey to Excellence. This is exactly what CHRISTUS has done in the past and will continue to do in the future.