Growing Pains: the Difference Between Strategic and Nonstrategic Growth
Community General Hospital (a fictitious institution) is a 250-bed hospital located at the periphery of a major metropolitan area. Community General’s revenues were flat for the three years ending 2001, and with rising expenses, the hospital’s operating deficit increased from $2 million in 1998 to $5 million in 2001. The hospital’s financial managers applied every measure they could think o[ to control expenses and increase revenue yield, but their efforts only slowed the rate of financial decline.
At the end of 2001, the board decided to replace the CEO.
The new CEO declared that the hospital had a revenue problem and embarked on an aggressive set of initiatives to expand revenue, based on the premise that with the hospital’s high fixed costs, almost any incremental revenue would yield contribution margin and, more likely, net margin. Revenues grew from $100 million in 2001 to $125 million in 2003, but operating losses rose to $10 million as well.
Again, the board elected to fire the CEO, this time along with the senior financial executives. What went wrong?
Lessons Learned
This fictitious case study highlights three important lessons that hospitals should keep in mind when seeking to balance new revenue growth with controlling expenses.
Start by getting the house in order and have a solid foundation on which to grow. As all good financial managers know, there’s no substitute for sound fundamentals. Community General may indeed have had a revenue problem, but it also had an expense problem. The second CEO could and should have found ways to reduce costs further.
Sound easy? Most of these recommendations are simple business discipline essential for successful growth, but surprisingly lacking in today’s healthcare industry.
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