Critical care Featured

8:00pm EDT April 25, 2007
When Integrated Healthcare Holdings Inc. bought four struggling Orange County hospitals in 2005, Bruce Mogel knew that, like a gravely ill patient, the facilities would need more than simply a few aspirin, a stitch or two and a kindly bedside manner to bring them back to health.

While the institutions had strong labor forces and physician staffs, uncertainty had taken its toll among the ranks between the time that giant Tenet Healthcare had put them on the block and when Integrated Healthcare took the keys.

“One of the biggest challenges was resurrecting facilities that had been in a state of impairment for probably years,” says Mogel, CEO of the company. “Our transaction took about 18 months, and the divestiture announcement was made before that. So for almost two years before we could get inside the hospital and make changes, people were facing uncertainty: ‘Who are these guys, will the deal close, what are they going to do, will they strip it down to the chassis, will there be major layoffs, will they honor contracts, will they get along with the physicians?’”

Mogel was fully aware that the first thing he had to do was to stabilize the hospitals, just as a physician would do with a sick patient. The four hospitals offered up for sale by Tenet were losing money, but Mogel and his investors were convinced that they could turn them around by gaining — and keeping — the trust of their employees and physicians. That, he reasoned, would allow for leaner administrative overhead and stronger profitability.

“In any new emerging corporation, there are a lot of different changes,” Mogel says. “I think the first thing that we looked to do was create stability, get people to accept the different changes while we built a new infrastructure and to gain confidence in the management team and the organization and how we’re going to operate.”

If Mogel was unable to retain the hospitals’ employees in a tight labor market for health care professionals, streamline administrative costs and improve financial performance, the prospects for survival, let alone success, were dim.

An entrepreneurial team
Mogel wanted to make sure that each of the hospitals held its management team in place when Integrated Healthcare took over.

His vision was to give each hospital CEO more control over his or her facility, reversing the top-down corporate structure that Tenet had in place with a more entrepreneurial environment and, at the same time, limiting the size of its corporate-level staff. Once the agreement to acquire was struck, Mogel and his investors met with key employees at each hospital to explain their plans.

“One of the things we made certain of was once we got to the point where we were identified as the successful bidders and it came to the point where we needed to close the transaction, we were able to meet with the CEOs, CFOs, chief medical officers in the facilities, talk with them about our strategies, talk with them about the direction we wanted to take and what kind of views we had about this,” says Mogel. “I think that gave them a lot of comfort.”

And it gave them a degree of confidence in the company, enough so that nearly all stayed on with Integrated Healthcare.

Mogel says the model has worked well, with the individual hospital CEOs putting their energies into running their respective institutions more efficiently.

“Take the same people, put them in an environment where they have three or four levels of approval, where creativity and entrepreneurial spirit are not necessarily the hallmark, it’s not something that people are rewarded for, necessarily, and put the same people in an environment where they have the freedom to do what they know how to do,” Mogel says.

“If you give people that freedom, you can be amazed at what you see. Here, in the environment that we have, there are three decision-makers at a corporate level, and we put as much responsibility down to the CEOs as possible so that they are, in fact, the leaders of their organizations.”

The entrepreneurial approach has led to improvements initiated at the hospital level. Mogel says CEOs have introduced cost-cutting measures, recruited physicians and established new programs, efforts that would have been difficult while the hospitals were under Tenet.

The CEOs are freed up from spending time with many of the routine administrative tasks because, while management responsibility for the hospitals is disbursed, the IT systems that manage functions like payroll or patient data are centralized on a common platform.

“In terms of the support process, what we like to do is first give them the ability to have confidence in the basics,” says Mogel. “They shouldn’t be spending their time wondering how payroll’s going to get done or if financial or patient data or any of those things are functioning properly. We have a solid platform where those things are now given and don’t take any of their time, so they can go about the business of improving the facilities, providing better quality medicine, attracting physicians that meet the needs of the community.”

Mogel says handling things such as insurance, billing and collections, and human resources at the corporate level saves a substantial amount of money.

“We’ve put them all on a single platform, and while there are some minor variations from hospital to hospital, it’s basically the same platform,” Mogel says. “We do one set of negotiations for insurance, one set for collective bargaining and so on. That’s a very efficient model.”

Mogel says with a smaller organization than Tenet maintained and a flatter management structure, decision-making is fast when needed. With a corporate staff of fewer than a dozen and no secretaries, even the senior-level officers answer their own phones.

“We’re very lean, we’re self-sufficient and sharp businesspeople, and we try to create a dynamic environment, where if we need to do something, instead of running it up through the corporate headquarters, if there’s an immediate situation where something needs to happen and we have to spin on a dime, we do,” says Mogel.

To boost the top line, Mogel’s team set out to increase insurance reimbursements that it found too low. In many areas, Integrated Healthcare was the lowest paid or below market on reimbursements for the services it provided.

“The day we took over these hospitals, we set out on a strategy to renegotiate higher rates for doing the same types of services because we felt we were drastically underpaid in many areas,” says Mogel. “We were successful on many contracts, totaling millions of dollars in reimbursements for the same book of business.

“We took a very hard look at that, renegotiating a lot of the contracts, and were able to save millions of dollars while providing the same services and, in some cases, better services. We were able to do better in our insurance portfolio than

Tenet was able to do with, at one time, over 100 hospitals. You would think that they would have better leverage, but we did better almost across the board than they did in virtually every facet of insurance. And we have substantially reduced rates now from what we were able to negotiate initially because of outstanding claims management and performance over the last three years.”

Keeping the work force
Mogel says it was critical to keep the employee population intact as much as possible to ensure the success of the acquisition. To stabilize the work force and ease speculation around job security, Integrated Healthcare offered jobs to every employee in the four hospitals.

There had been horror stories circulating around California, some of them about divested Tenet hospitals, where services had been cut or employees hadn’t received checks. Those stories fueled speculation about the stability of anyone who might acquire a hospital.

“The first thing to do was to make sure the day we took over that any of the things that were patient- or employee-related, that we were on solid ground,” says Mogel. “We switched a payroll system for 3,000-plus people and we didn’t have a glitch.”

Integrated Healthcare agreed to honor all contracts, including labor agreements that Tenet had committed to not long before it decided to sell the hospitals. “We made a commitment that we would assume responsibility for all contracts, and we kept that promise,” Mogel says.

“And we promised to honor all collective bargaining agreements that Tenet had made.”

Tenet had signed what is referred to as a peace accord with two unions, which included model contracts and election procedure agreements. The election procedure agreement described how elections would be held in the future, and the model agreement was the agreement for all of the facilities, subject only to negotiations of some items at individual hospitals.

“So when we inherited the facilities, we were in the midst of local bargaining with each of the facilities, so we were kind of thrown immediately into that framework,” says Mogel.

To deal constructively with the unions, Integrated Healthcare identified someone at each hospital responsible for keeping the union stewards informed.

“When we planned to have layoffs, we brought the unions in and told them about it,” says Mogel. “We did what that contract said we should do and fully joined the union as a partner in those decisions. In fact, in some cases where there were seniority issues ... we essentially let the unions tell us what they wanted and abided by that to the extent that we could.”

As a result, union issues have been minimal over the last two years. The company also promised — and delivered — a better benefits package to its employees.

“We added a world-class benefits system which, in our view, is better than what the employees had in about every category, including a free HMO for all of our employees who opted for it for themselves and their families,” says Mogel. “We improved the benefits structure without spending a lot of money doing it.”

While Integrated Healthcare hasn’t completely turned around the four hospitals, it has made significant progress in two years. For the nine months ending Dec. 31, 2006, it posted an operating loss of $7.3 million on net operating revenue of $264 million, compared to an operating loss of $14.8 million on $262 million in revenue during the same nine-month period in 2005.

Says Mogel: “So much of this is about retaining the key people that you want, and the strategies to do that are communication, living up to your word, doing exactly what you say you’re going to do, and making sure, from Day One, the little things that upset people or cause them to leave, that all of those things are taken care of.”

HOW TO REACH: Integrated Healthcare Holdings Inc., www.ihhioc.com