The Medical Center of Southern Indiana (MCSI) has had a turbulent tenure as a hospital since its inception in 1973. Unprofitable from the very beginning, MCSI has gone through multiple ownership changes, creating a distrusting atmosphere between Clark County, IN residents, the local medical community, and MCSI. The city of Charlestown purchased the hospital at the end of 1991 in the hopes of turning the facility into a profitable medical center offering key services to the community. An aggressive expansion strategy was developed by management contractor American MedTrust in 1992 and this led to an operating profit in 1998 of $480,545.
This marked a turning point for MCSI, as it was the first year in a very long time that the hospital had turned a profit. As they look to the future, MCSI needs to determine if it should continue with the aggressive strategy of expanding services or slow its expansion pace and focus on providing excellent service within its current capacity and looking for ways to reduce cost and enhance revenues.
Key Demographics and Facts
Certain elements of the MCSI case are essential in determining the appropriate strategy to pursue in the future. The external community general hospital environment has not been thriving during this time period. Of the roughly 5,000 community hospitals in the United States in 1997, 22% had bed capacity of 50-99. From the year 1980 to 1997, the number of hospitals with 50-99 beds decreased by 24%. As a 96 bed facility, the national trend does not bode well for MCSI.
When the hospital was purchased by the city of Charlestown, American MedTrust came in with its aggressive “revitalization initiatives” to help MCSI become profitable. Under American MedTrust’s leadership, MCSI spent more than $3 million from 1992 to 1998 to accomplish these aggressive strategies. Two key elements of those initiatives involved expanding the services offered and rebuilding relationships with insurance companies and the local medical community. As a full-service hospital, MCSI already
offered a variety of medical services. Because of a consistently low census (occupancy rate around 45%), developing ways to attract new patients was vital. A new inpatient geropsychiatric unit, skilled nursing facility, and a home health agency were added to the mix when hospital executives determined that there was a need in the community for these services and that the competition was not offering these services.
By 1998, all three new service lines were bringing in at least $1 million in gross revenue. Other key investments included the creation of an outpatient mall, purchasing new technology, and the creation of satellite specialty and primary care clinics. Finding and expanding sources of revenue was also a key feature in the aggressive strategic plan. MCSI knew that to enhance revenue, the hospital had to contract with managed care companies. Because of sour relationships between MCSI and the insurance companies, MCSI enlisted the help of the state legislature and the state insurance commissioner to pass the Any Willing Provider bill that required insurance companies to work with providers like MCSI and provide written explanations for any declinations of contracts. In 1994, MCSI had two managed care contracts; there were twenty-five managed care contracts in 1998. With 65% of its patient base on Medicare, it was essential for MCSI to increase these managed care contracts if the organization hoped to expand their revenue stream.
Because of the enhanced services offered, the number of full time equivalent employees also increased from 183 in 1994 to 270 in 1998. MCSI has benefited from a low 11% employee turnover and a lean organizational structure. Even with these systems in place however, the salary and wage expense has nearly tripled from $3.3 million in 1992 to $9.88 million in 1998. Of the 270 FTE employees, there are 75 active members of the medical staff. Gross revenue generated by physician was a bit lopsided in 1998 with 11 out of 75 physicians generating almost 75% of the gross revenue. As MCSI plans for the future, revenues generated by physician, by department, and the related salary expenses need to be carefully examined to determine the optimal mix of services provided to the Clark County community.
The location and demographics of Clark County continue to provide challenges for MCSI and the creation of future strategic plans. Clark County is a rural area with the majority of its population living in the southern half of the county, near the Indiana and Kentucky border. While Clark County does enjoy a low 2.7% unemployment rate, the average county household income was a middling $36, 726 in 1997. Only 11% of Clark County residents had earned a bachelor’s degree as of 1998, thus the probability of the average household income increasing by any great degree was small. 65% of the MCSI patient base in 1998 was a Medicare patient. MCSI is located in the north central section of Clark County.
Its closest competitor is Clark Memorial Hospital in the southern half of the county. Clark Memorial has about 3 times the number of beds as MCSI and the majority of the county’s population lives closer to Clark Memorial. Louisville, KY is about 15 miles from MCSI. Any future expansion plans must include a close analysis of the population growth trends in the area and an analysis of the service mix offered by both competitors, Clark Memorial and the Louisville-area health systems. Both of these competitors are better positioned to capitalize on any growth trends in the area and have the financial resources to aggressively expand to meet these trends.
Even though MCSI has posted an operating profit for the first time in many years, the majority of MCSI’s assets are tied up in receivables. The current ratio and days cash on hand are well below industry standards. With increasing salary expenses and various interest expenses increasing, investing in capital expenditures or investing large sums of money in new service lines might cause MCSI’s operating profits be negative.
The Medical Center of Southern Indiana should continue to grow and improve the service lines that are currently offered such as home health, skilled nursing, and geropsychiatric services. These services have been marginally profitable in the past for the facility. The home health agency has seen a tremendous growth increasing from $422,000 to $1.75 million in four years. Skilled nursing facility revenues have grown in four years from $1.07 to $4.7 million. In order to keep these existing service lines thriving, MSCI should plan moderate renovations that keep the facility up to date with current service lines. Renovations should be similar to the $300,000 remodeling that was done to the outpatient service mall and should include the purchase of medical supply equipment that will help MCSI stay up to date with its competitors. Large capital expenditures should be avoided at this time.
Additionally, MCSI should expand its marketing campaign to target the local populations and keep patients from the surrounding five counties from migrating into the Louisville area to receive care. This has been a problem for the facility in the past, and has led to losses in revenues. Another point of emphasis that should be addressed is the inclusion of the Ivy Tech College population and the Indiana University Southeast population. This population of students has yet to be targeted by the facility, and are a large source of potential revenue. The marketing strategy should also focus on the recruitment and retention of physicians. Recruitment has been an issue in the past and recruiting and retaining quality physicians is a key component to the success of a facility. Currently, a minority of physicians bring in a majority of the revenues.
Having quality physicians that provide services that the community wants and needs will also help enhance revenues. Because so much of the patient population is on Medicare, these revenue enhancement strategies need to be complemented by cost saving strategies. MCSI has a bit more control over their expenses than it does over their revenue sources. After years of having a defender style of strategic plan, this aggressive prospector strategy has allowed MCSI to have the resources to better meet the needs of the community and find a way to be profitable. However, at this point, it would be best to take a step back and shift to analyzer mode before continuing in an aggressive manner.
The Medical Center of Southern Indiana created a decision matrix to identify decision criteria in pursuing a solution going forward. MCSI choose to analyze physician partnership, its top service lines, expansion of market campaign, and expansion of the Ivy Tech population in order to decide whether or not it should continue its aggressive expansion campaign. Major criteria areas taken into account included market position, competition, potential profitability, and alignment with MCSI’s mission.
As shown in Figure 1, it was recommended for MCSI to continue building physician partnership and enhancing its top three service lines (home health agency, skilled nursing facility, and geropsychiatric services). There was the recommendation to possibly pursue expansion of its marketing campaign and Ivy Tech population. MCSI should slow down its aggressive expansion strategy of adding new services and consolidate gains from those presently in place. In doing so, MCSI would shift from a prospector to an analyzer.
MCSI achieved its largest operating profit of $480,545 in 1998. Looking to continue aggressive expansion could potentially lower its operating profit going forward. Overexpansion of services may lead to a dilution in the quality of care. The hospital is already structured as lean to help control costs. With such a low operating profit, MCSI does not have the resources to continue their expansion. As an analyzer, MCSI will look to enhance its existing resources and wait to see what the competition does. Improvements can be made to MCSI’s top three services lines. Allocating resources for future renovations and purchases of equipment will help keep these areas successful and allow them to continue generating profit. These three service lines respond to the needs of the Medicare patient base.
For physician partnership, MCSI must keep its physicians who represent a majority of gross revenue. There is a large disparity for both gross revenue brought in and patients seen amongst physicians. Keeping MCSI’s top physicians while also looking to recruit other good physicians can lead to an increased efficiency of patient care and a reduction of cost. Involving the physicians in issues central to care and day-to-day operations is needed for a high physician retention rate for MCSI. It is important to have physicians included in the processes because they are the ones caring for the patients. If MCSI has the available resources, it should pursue expanding its marketing campaign and look into expansion of the Ivy Tech population.
The solution for MCSI to focus on its current service lines instead of continued aggressive expansion will require coordination amongst a wide-range of sections within the medical center. Kevin J. Miller, the President and Chief Executive Officer of MCSI is responsible for asserting leadership of the planning and implementation of this solution. He must be involved in the process to avoid disengagement within MCSI. It is critical for him to be a leader, but not take over the entire process. The next step would be defining and communicating the responsibilities and roles of the organizational leaders in the various departments of the medical center through the Board of Directors and Board of Trustees. It is their role to provide oversight and then let the organization take control.
Physician partnership through Independent Practice Association (IPA), home health agency, skilled nursing facility, and geropsychiatric services would involve those under the Physician Affiliates, Chief Nursing Officer, and Assistant Administrator of Specialty Services, respectively. Expansion of marketing campaign and Ivy Tech population would involve those under the Director of Human Resources and Director of Business Development. Those under the Chief Quality Officer are then responsible for insuring the facilities are up-to-date through renovations for these service lines. Those under the Chief Financial Officer would be responsible for keeping track of the records and looking at the profitability from services already in place. All of these areas of MCSI must work with each other through active communication.
It is necessary to have strategic plan schedules in order for the solution to be successful. Starting with monitoring day-to-day activities, MCSI should complete a full strategic planning process every three years with annual updates on each of the areas in the decision matrix. MCSI must have the resources to provide for this solution. The solution identified by the decision matrix is responsible for MCSI’s ability to earn and increase annual profit. Collecting data in these areas in addition to monitoring the internal and external environment can allow for MCSI to evaluate effectiveness of consolidating gains from services already in place in the future. Current Status of the Medical Center of Southern Indiana
The Medical Center of Southern Indiana became a subsidiary of Saint Catherine Healthcare LLC on May 1, 2006. Questions from the end of the Case:
1.Should MCSI slow down its aggressive expansion strategy of adding new services and consolidate the gains from those presently in place, or continue the aggressive expansion strategy of adding and investing in even more services? We feel that MCSI should not continue its aggressive expansion strategy. Rather, they should focus on continuing the upkeep of their current service lines that have been so profitable for them the past four years (home health, skilled nursing facilities, and geropsychiatric services) Continuing to expand these existing services is what has allowed MCSI to grow and beat out competitors in some areas. Instead of focusing on expanding the service lines any further, money should be invested to keep existing facilities “top of the line”.
2.Should MCSI reassess present services and retrench those that are not yet breaking even? MCSI should definitely carefully consider all present services, especially those that are not yet breaking even. Certain service lines will never break even, but are required as part of the community hospital services. However, reducing or retrenching these services could possibly be the best strategy moving forward.
3.Should MCSI change its fiscal orientation and focus on cost reduction versus revenue enhancement? With 65% of the patient base on Medicare, revenue enhancement might not be guaranteed. A combination of cost minimization and revenue enhancement strategies through increasing the number of managed care contracts would be the best orientation for MCSI.
4.Should MCSI pursue a joint venture with physicians in limited partnerships? Yes, MCSI should pursue a joint venture with physicians in limited partnerships. In 1998, 4 of MCSI’s 75 physicians brought in 44% of the gross revenue and 11 physicians brought in almost 75% of the gross revenue, which was $39,679,356. It is critical to identify the top earning physicians and keep them at MCSI. Part of MCSI’s mission is to “increase physician recruitment, retention, and collaboration.” MCSI must continue to involve the physicians in issues central to quality and their day-to-day operations.