Emanuel Medical Center: Challenges, and Options - Case Study Example

Emanuel Medical Center: Operational Challenges, Strategic Options Health care financing has undergone numerous changes since Robert Moen became CEO of Emanuel Medical Center (EMC) 23 years ago, and continues to be in a state of flux and red ink. To deal with these changes, stay in business, and remain competitive, EMC is faced with some major operational challenges. A recent investigation by the California Department of Health Services (CDHS) found that the emergency department at EMC had failed to follow proper procedures when they treated a four-year-old patient, and concluded that the ED did not act in a considerate and respectful manner. While this was a public relations problem in the short term, the issue pointed out the larger systemic problems that exist at EMC. The ED has increasingly become a cost center, and staff morale and quality of care is reflected in this dilemma. The Emergency Medical Treatment and Active Labor Act (EMTALA) of 1986 mandated that emergency rooms must treat all patients, without regards to their ability to pay. This legislation took effect at the same time that the numbers of under and uninsured people in California began to escalate. Lacking primary care physicians, the uninsured have made the ED the primary clinic for their health care. This further exacerbated EMC's financial position from two aspects. First; uninsured people were using the most expensive delivery system available, which overloaded the capacity of the ED. Second; people were waiting until their condition was chronic or terminal before seeking treatment, which further drove up costs. The outdated ED was operating well in excess of capacity, which put an additional strain on nurse availability, response time, and specialty services. With half of the patients that were admitted through the ED either uninsured or underinsured through Medi-Cal, Moen's challenge was to find areas that could compensate for the large losses incurred by the ED. With all of health care experiencing declining reimbursements and increasing expenses, it has been a difficult task to find areas of profitability. EMC expenses have outpaced revenue growth in the period of 1997-2002. Wages and salaries, the largest single expense, grew by 28 percent during this period, while revenues increased by only 23 percent. The nursing shortage has contributed to the problem, as it has forced EMC to hire temporary nurses, and reduce the number of beds available, which have both negatively impacted the bottom line. During this same era, reimbursements from Medi-care, Medi-Cal, and HMOs were declining. An experiment with capitation in the late 1990s did not prove successful, and the hope of vertical integration became an insurmountable expense. Area competition has also put pressure on EMC. Specialties and high-tech procedures are largely not available at EMC, and this business goes to the competition. The financial reality of EMC operating at a loss for the past several years has made capital investment in new equipment and technology out of reach of financing. In addition, closures and consolidations have increased the hostility of the external operating environment. All of these factors; increasing expenses, reduced reimbursement, competition, and escalating salaries have all combined to form the perfect storm. The only bright spot on the balance sheet has been the investments that EMC made in the 1990s, which managed to keep them operating into the 21st century. In fact, without these investments the financial solvency of EMC would be in doubt. In addition, EMC enjoys a significant amount of community support, and has aggressively sought community involvement through a matching grant from the Mary Stuart Rogers Foundation. Moen's greatest operational challenge will be to reduce operating expenses, and increase patient revenue within the realities of their current financial situation. 2.) There are numerous strategic options available to Robert Moen, though they all have a large degree of uncertainty in regards to their financial implications. Moen is challenged by unfunded government mandates, a changing palette of government regulations, and an increasing economic disparity among area health care providers. The CEO is also challenged by EMC's small town mission of providing service in a Christian environment that calls for justice in the treatment of all individuals, and stewardship of the lives entrusted to it. Moen has already affirmed that EMC has no desire to follow several other area hospitals and will not close its doors. This somewhat limits EMC's ability to reduce necessary services and patient care in an effort to make a profit at any price. One option that faces EMC is to be acquired by, or enter into a contractual arrangement, with another health care provider that would be able to devote some financial resources towards the improvement and updating of EMC's patient services. At this time, it seems the most likely candidate would be Kaiser Permanente. If EMC does not reach an agreement with Kaiser in the coming months, Kaiser is financially capable of bringing significant competitive pressure to bear on EMC. An influx of capital from Kaiser would relieve some of the pressure to reduce services in an effort to increase operating margins. Closing the ED has also been examined as an option to save money. One of the drawbacks to this is that a significant number of patient admissions come through the ED. Closing the ED would also place a substantial hardship on the patient population that has come to rely on it for their primary care. However, the ED is responsible for a significant portion of EMC's operating losses. With the large ratio of uninsured patients, expenses will continue to outpace revenue. The ideal solution would be to realign the mix of insured and uninsured patients that visit the ED, and the hospital in general. Current patients that use the ED as a primary care outlet need to be re-educated, and EMC needs to make some pro-active changes in an effort to save at least a portion of this expense. Overall, the best strategic option would be to attract a greater number of insured patients that have the ability to pay full fees for services and surgeries. This will require that EMC differentiate its facility from the other area hospitals, so that potential patients seek out EMC for services. Expansion of the 49 bed assisted living quarters should be a consideration that is on the table, as it is profitable and operating at near capacity. Continuing to tread water as they have for the past several years will result in a financial collapse. Creating some strategic options that have to date been unexplored may be the path that EMC needs to take into the future. 3.) In making a recommendation to CEO Robert Moen, it should be emphasized that there is no single remedy for their current situation. Changes will be made in several areas that will all contribute to the overall financial health of EMC. Most significantly, EMC needs to update its technology and high-tech services. EMC should enter into a cooperative arrangement with Kaiser Permanente for EMC to operate a technology center, where patients could receive MRIs, advanced imaging, specialized testing, and state of the art diagnosis. Both EMC and Kaiser could utilize the facility with Kaiser funding the project and profits split accordingly. Why would Kaiser enter into such an arrangement The technology center would be too large in scope for a single facility to operate profitably. However, by sharing the facility it could operate at a higher capacity and the return on investment would be proportionally higher. In addition, it would direct insured patients to Kaiser, as well as EMC, and give them both a distinctive brand image based on modern high technology medicine. The technology center would help EMC's mix of insured patients and increase their revenue stream significantly. Further improvement could be made by reducing the costs of the uninsured in the ED. Patient education would be a prudent first step. In addition, it is likely that some of the ED patients are eligible for medical benefits that have gone unclaimed. These may be veterans' benefits, or other state and national programs. EMC needs to set up a department that could investigate patient eligibility for health benefits of the uninsured ED clients. Expansion of the assisted living facility would be a timely move. EMC's population base is expanding rapidly, and many are Baby Boomers. In 1999, over 40 percent of the base was age 65 or older, and this figure is expected to grow. This has the opportunity of generating significant revenue over a long-term period with stability. Down the road, it is planned that EMC will attract a greater proportion of insured patients seeking elective, high technology, and specialized services. The fact that EMC has been traditionally known as a high quality service, will brand well with the small town image it already has. Nurses and physicians that are in short supply need to be treated in a manner that will insure greater retention. This will be an additional expense, but the long-term cost is less than a high turnover rate. In conclusion, implementing these changes will be dependent upon Kaiser's reaction to a joint effort in technology. EMC was unable to reach an agreement on reimbursement rates during past negotiations with Kaiser. However, this plan will directly benefit Kaiser and gives them several advantages over the other area hospitals. Expansion of the assisted care living facility will need to be financed, though it is a solid long-term investment with less risk than is generally associated with health care systems. Maintaining the nurse and physician staff will be an ongoing and deliberate effort that is long-term in scope and strategy. The same is true for reducing the expense of the ED. Continual efforts will need to be devoted to these areas and the expected progress will be steady and moderate. Taken alone, none of these goals will save EMC. EMC needs to be reworked and revitalized on the number of fronts that are specified in this report. Bibliography Harris, Randall, Kevin Vogt, and Armand Gilinsky. "Emanuel Medical Center: Crisis in the Health Care Industry." Strategic Management of Health Care Organizations. Eds. Linda E. Swayne Walter J. Duncan, and Peter M. Ginter. Malden, MA: Wiley, 2006. 724-45. Read More