Credit: MD Anderson
For more than a year, MD Anderson was losing money. A considerable share of that can be attributed to a one-time major EHR installation, the kind that has tripped up other provider's finances, but that was not the only problem.
CFO Ben Melson, in fact, described MD Anderson's situation as a perfect storm that included, in addition to that EHR install, a significant drop in patient volumes and a major Hurricane named Harvey.
Melson said it took the whole MD Anderson team, complete with new leadership and systemwide buy-in, to get the floodwaters to recede and gain sound financial footing.
Healthcare Finance spoke with Melson about how the system overcame its challenges and began earning a profit once again.
How long were you in the red and losing money?
From December 2015 on a month-to-month basis through Feb 2017 when we started turning a monthly profit.
What do you attribute that year of losses to?
Part of it was a reduction in the number of patients we were seeing. Part of it was bringing Epic live, which has been a great system for us, but as we brought Epic live, we had planned for a decrease in patient volumes. So when Epic came on board in the Spring of 2016 we were seeing a lot fewer patients and we had a lot of costs to bring Epic up and get it going. The number of new patients we saw was down about 5.4 percent. We also had a big legacy system that we took out and the first half of 2017 we had a lot of bad debt write-offs from that legacy system. And, frankly, we were hiring a lot of people. Our controls around hiring are certainly much improved from where they were in 2016 and the early part of 2017. Peaking at 21,000 full-time equivalents in the mid part of FY16 it had grown fairly dramatically. Our operating margin runs from 1 to 4 percent. It's not a big margin.
How did you turn things around?
We had a couple things occur. We got the Epic system up and running so that was good. We also had new leadership come into the organization. A chief operating officer and an interim president came in and the focus was to increase patient activity. We've got patients that want to be here so let's focus on increasing that activity. Reductions in workforce happened and then literally the number of new patients started to grow. Diagnostic imaging grew 9 percent. Surgery increased 4 percent. Patient days grew 2.5 percent. The new leadership at the top made it a priority and gathered the leadership in the organization to do it, the volume started to pick up nicely and by the end of 2017, we were close to a breakeven. And the volume increase was really in the latter half of the FY17 year. It's actually carrying over to this fiscal year as well. We are seeing increases in volumes this year as well. We ended with a slight loss at the end of FY17 as a whole. We would have had a profit in 2017 but Harvey cost us.
We'll get back to Harvey. First, how did you grow those patient volumes?
More than anything else it's connectivity with the faculty of 1,000 plus physicians here. They're employed by MD Anderson and we aligned incentives. So it's faculty productivity. It's opening up slots in the clinic when we have patients waiting. It's improving our front door so that when patients call wanting an appointment we are more able to bring those patients into MD Anderson and get them seen. So it was a full-court press around getting new patients in the front door and opening up clinic space with our faculty. Our president is an MD. Our COO is an MD and by them working with our faculty we were able to be more productive -- and that's a race without a finish. We're still working on it today. Part of it is growing the use of mid-level practitioners, PAs and nurse practitioners, we have 600 of those in-house. It's giving people the Epic tool. Although it's a work in progress, it's a tool many of our physicians have embraced and helps facilitate patient movement.
What were the lessons learned from the Epic rollout?
I wasn't here when they rolled out with Epic but it's really important that faculty be involved in the selection and installation. Here that was the case. They were very involved. I think it's also the realization that once it's installed, it's there but it's just the beginning of the journey. Optimization has to occur to really leverage the tool as best as possible. That continues today. The Epic revenue cycle solution has been unbelievable. Our days in accounts receivable are in the 40s. Our charge capture has been terrific. We have just begun to learn how to extract information from Epic to help with research, case management and protocols/standards of care.
How would you advise other hospital finance executives to prepare ahead of an EHR rollout?
We prepared and we budgeted for that. It was just a lot more than we thought. So I think they should budget for a slowdown and learn from what others have done. Send a team to a system that has done a big Epic install and really dig down into the lessons learned about that slowdown and what it can mean.
Ok back to Harvey now. Where were you right before Harvey hit?
We were about two weeks into August. August is our fiscal year end and we were forecasting a year-end operating margin of $25 to 35 million positive. The August revenue was looking good and through July we were seeing positive numbers. Harvey hit that last week and we did extremely well from a patient care and safety perspective. We had 500 patients in-house, but for about a 5-day period we had to cancel all of our outpatient appointments and basically, we were underwater at the main campus. The bottom line impact of Harvey was around $50 million made up of lost revenue and payroll, overtime and facility costs. It boiled down to about $40 million in revenue, $7.5 in payroll and $3 to $4 million in facility costs. We had a little bit of flooding and leakage with 50 inches of rain. The facility stayed intact pretty well. So the year ended 8-31 and we didn't make up any of that revenue in FY2017. We've made up some of it in FY2018. We ended up losing about $12 million from operations instead of making $25 or 30 million. We still had a 15 percent operating cash flow margin but a slight loss. We carry business interruption insurance through the University of Texas. It has a $50 million deductible but with other components of the U-T system that got impacted, we broke through the deductible and will recoup some of the losses but it will take a while.
After you climbed out of this red hole and were seeing good numbers, then you get hit with a freak storm. What was the mindset?
We were conflicted. We felt good that this was an anomaly and the volume and activity had actually kicked back in. We were very bullish and optimistic. The other feeling was we had thousands of employees whose cars and homes and lives were destroyed or damaged and we pulled together as an organization and raised more than $1 million to distribute to employees that needed help with clothes, temporary housing before FEMA came in.
How is FY2018 setting up? Is MD Anderson's financial upswing continuing?
MD Anderson has shown strong financial performance in Fiscal Year 2018. For the first six months, our operating margin was $124 million and our gross patient revenue is up 6.3 percent from the prior year. This puts us in a good position for the remainder of the year, and we're continuing to focus on monitoring our expenses and long-term financial sustainability. We've got good hiring controls that are hard-wired into the organization and doing a better job of monitoring costs. So we are feeling good about 2018. But it took a village. It took a team effort to make that happen.
What we've got to do now is spend more time on our long-term capital plan and where we will build and grow over the next 6 years. In the next 3 to 5 years, we'll be needing a new bed tower, some more research facilities, equipment turn is about $120 million a year. So we're going to be deploying some of our cash. We have about 367 days cash on hand and we'll be deploying some capital over the next few years. If we're making money on the operating margin we can be nimble and more thoughtful about our strategies for the future.