In Part Three of this series examining problems facing rural hospitalists, I described three local hospitalist models in and around Rural, CA. and compared the three programs based on patient population, compensation structure, volume of patients, and ownership of the program. Some of you may have guessed that I work for the Feelgood program at Gimbels. What you probably did not guess was that Feelgood is going to be folding next month, due to a confluence of problems, but ultimately due to resignation of two key colleagues from the hospitalist group.
Obviously this is a crushing disappointment to me. I have a great attachment to Gimbels, problems and all, and a greater attachment to most of my hospitalist colleagues. I think I rediscovered the joy and misery of belonging to a team by working with this group--something I've been missing since I graduated from residency. If there is a silver lining to the collapse of Feelgood, it is the crash course in hospitalist management it put me through over the past 12-18 months. This post summarizes some of these hard-won lessons. Some of the lessons are specific to our particular program, but there are a lot of general issues applicable to other hospitalists and to doctors searching for the right job.
Before we begin, a disclaimer: Obviously I'm drawing on personal experiences with other hospitalists and hospital administrators, but both Feelgood and Gimbels are lightly fictionalized composites of several programs and hospitals I have encountered. Any resemblance to real hospitalist groups and real hospitals is coincidental and unintentional.
1. THE PERILS OF CORPORATE TRANSFER
The first thing you should understand about Feelgood is that it was a professional corporation developed and established by one group of doctors (an ER group) and then transferred to another group of doctors (the Feelgood hospitalists). There are some advantages of assuming the leadership of an already-existing business:
- Most of the petty procedural glitches have been worked out.
- You will assume the goodwill the previous owners have established with your clients.
However, there are a number of disadvantages as well:
- You will inherit a set of obligations and relationships you had nothing to do with forming.
- If the goodwill you inherit with the corporation has soured, some of that bad taste will spill onto you even if you had nothing to do with the situation that soured it.
Obviously, since this post is about the problems I encountered while co-running Feelgood, I'm going to focus on the disadvantages. These are some of the problems we had to tackle from day one:
- Souring of goodwill: The ER docs resigned en mass from the ER corporation, creating absolute chaos in the ER staffing. The reasons for their departure are many and don't really affect the story of Feelgood, except that Gimbels' CEO approached Feelgood's new management (us) with a great deal of wariness because of the collapse of the ER program.
- Inheriting an incompetent accountant: The ER docs, all great outdoorsmen and surfers, found Feelgood's accountant one day when they were shopping for bike shorts. They asked the bike short guy who he used as an accountant, and he suggested Incompetent Dan, whom we inherited with the corporation. (Note: this is NOT the way to solicit recommendations for professional services.) Incompetent Dan has made some major slipups over the last year, including submitting the wrong NPI numbers to Medicare, resulting in several months delay in our payments from that august institution. Luckily, I discovered Incompetent Dan's very able associate, Competent Julie, who has helped us correct most of his mistakes, but this process has eaten up time and energy.
- Inheriting an expensive billing service: The ER docs naturally hired their own billing company to provide coding and billing services for Feelgood. Primo Billers is based in Southern California, so at first the ER guys made their wives come and collate all our progress notes to be submitted to Primo. The wives rightly put their collective feet down, and the ER guys had Primo hire a couple of local college kids to collate our files. Naturally this premium service comes at a premium price, with Primo skimming 12% of all our collections off the top every month. This adds up to a LOT of money, and became very important to us as you'll see below.
- Inheriting a business model we didn't understand perfectly: When the ER doctors were running Feelgood, they were using a simple business model that everyone understood well. However, on the same day we assumed leadership of Feelgood, a new business model went into effect. I'll describe it below, but at this point in the story it is important to understand that this model was developed mutually by ER Doc #1, my friend and Feelgood's new CEO, and the CEO of Gimbels. So there was no deliberate intent to deceive us when we took over the corporation, but in hindsight it is clear to me that the only person who really understood the new business model before we implemented it was ER Doc #1, and even he failed to forsee some major problems the new model would raise for us. He also left Rural shortly after the corporate transfer, so both his leadership and accountability were lost to us. Big mistake.
Taken together, these consequences of accepting an already-established business structure for our hospitalist group opened up several new cans of worms for the new shareholders, including me (the CFO) and my friend and colleague (the CEO). Effectively, we were dumped into a crash course on healthcare systems and management at the same time as we were responsible for managing the hospitalist service itself. In other words, after the transfer, two very busy doctors (me and CEO) were spending every last second of our free time poring over financial statements, editing a new draft contract with Gimbels and forming arguments to justify our new pay structure, which was much more expensive to the hospital but promised them much more coverage. Being unprepared to manage these types of business transactions put Feelgood at a significant disadvantage when it came to negotiating terms with our biggest client: Gimbels.
2. FEELGOOD AND GOLIATH--WHOOPS, I MEANT GIMBELS
At the time we assumed directorship of Feelgood, we were also working on a new contract to provide services to Gimbels. The contract process between us began in August 2007 but was still being hammered out when corporate transfer occurred AND the services being described in the new contract began. Yes, this meant we began the new set of responsibilities and the new business model without a signed contract. This was not a smart thing to do, and I hope you never get yourself into a similar pickle. However, in retrospect it was easy for us to get swept into working without a finished contract, because the five hospitalists had been working for the same program (under the old management and old contract) for several years. There was already a verbal agreement between us and the CEO, and although none of us were happy when the new year rolled around the contract was not signed, we never considered halting our services because we were used to being the good guys. So we kept seeing patients and worked on the contract in our spare time.
Some of the problems we encountered in working with Gimbels on the new contract:
- Lack of time: Gimbels had the advantage of employing at least three full-time administrators who spent their entire work day reviewing and negotiating contracts. As pointed out previously, Feelgood had only five overworked hospitalists to provide the same service. Who do you think had the advantage?
- Lack of urgency on Gimbels' part: The new business model involved a significant increase in Gimbels' monthly subsidy to Feelgood. This meant that Gimbels had no real motivation to get the contract signed, although as the months passed, it could be argued that Gimbels and Feelgood were working under an implied agreement to adhere to the new contract, so there was really no protection for Gimbels in prolonging the contract process. However, psychologically it was hard on the Feelgood doctors the longer the process went on.
- Physician-hostile contract template: Gimbels initiated the contract process with a draft contract that was about three times longer than the old Gimbels/Feelgood contract and contained a lot of heavy-handed language. Whenever we questioned Gimbels' CEO, he excused these unfriendly clauses by saying, "Oh, well we got this contract from [Big Regional Medical Center]. It's the one they used when they started a hospitalist program." Nice to have a scapegoat for an unpleasant contract.
- Awareness of problems with Gimbels' other contractual agreements: Gimbels has an unfortunate reputation of dragging their feet to finalize agreements with physicians and relying on verbal agreements which leave both the hospital and physicians unprotected. While we were trying to get to contract with Gimbels, we were aware of a number of acrimonious disagreements between the hospital and other physician groups. The talk in the doctor's lounge was dark during these days, and most of it was about Gimbels' delaying tactics, threats not to fulfill verbal agreements, and shifty financial dealings. Most of this was probably sour grapes, some of it was misunderstanding, and a small part of it was based in truth. None of it was good for morale.
- Attitudes of individual Feelgood doctors: The five of us approached the contract process in diverse ways. We all agreed on the need to be wary of Gimbels, but it became obvious that some of us were looking for solutions, and others were looking for obstacles. Our CEO was the concilator and looked for common ground with Gimbels, but one of our other doctors--I'll call her Rita the Whiner--spent most of our meetings ranting about the hostile language of the contract. It didn't help that she often showed up without having read the latest contract draft and therefore wasn't ready to get down to the nitty-gritty. Rita the Whiner significantly delayed our responses to Gimbels contract revisions, which prolonged the contract process further.
Now that I'm standing here looking down at the wreckage of Feelgood, I realize that the first mistake was ours: agreeing to continue providing services without a finished contract. Our professional services were our best negotiating chip, and we gave it up at the beginning. That was a tactical mistake, but the other individual and institutional problems killed the contract with a thousand strokes. The changing financial relationship with Gimbels didn't help either.
3. THE NEW BUSINESS MODEL BITES THE DUST
Earlier I alluded to a new business model instituted in the unfinished contract with Gimbels. The model was based upon a proforma financial program in which the two components of physician compensation were balanced against each other, resulting in different estimates in how much subsidy the hospital would have to pay out over the course of a year. Here are the basics of the old and new Feelgood business models:
Old model (pre-2008). Keep in mind, this is BEFORE the five Feelgood doctors took over the corporation. The shareholders at this time were the original ER doctors:
- Per diem: $300/day shift, $125/night shift (incomplete night coverage)
- Hospital subsidy: $300/day
- Per-encounter fee: 40% of value of services billed. Average patient encounter fee paid to physicians was $40
- Expenses paid out of revenue collected in excess of payroll
- Profit-sharing: excess revenue after payroll and expenses shared equally between Feelgood's shareholders and Gimbels
New model (2008). The shareholders are now the Feelgood hospitalists:
- Per diem: $600/shift day or night (complete night coverage)
- Hospital subsidy: $1200/day
- Per-encounter fee: fixed at $38 per patient encounter, regardless of complexity
- Total allowable expenses per year: $25,000 (hint: BIG PROBLEM ahead)
- Administrative stipend for running the program: $35,000 first year, later to be 10% of clinical income
- No profit-sharing. All monthly revenue in excess of payroll and allowed expenses used to reduce Gimbels subsidy the following month (hint: another BIG PROBLEM ahead)
- New shareholders agreed to repay a generous accounts receivable loan to the old shareholders for the value of A/R at the time of the corporate transfer. Terms: 0%, 5 years, repayments canceled if Feelgood failed to reach agreement with Gimbels.
OK, those of you with MBAs or even a couple of financial neurons that are still firing can foresee some problems. Here's a few of the big ones we encountered:
- Cash flow crisis: When we started operating under the new model, we had $66,000 cash reserve in our bank account. It took only 4.5 months to run through that reserve. With the end of profit-sharing, any extra money left over at the end of each fiscal month was applied to the stipend the hospital owed us, reducing their subsidy but also making it impossible for us to maintain a cash reserve. Any practical person understands that cash flow--the smooth balance between money coming in and money going out--is essential to a business. By giving up profit sharing and agreeing to an A/R loan that made no sense (see below), we crippled our day-to-day finances. If the hospital were better about paying their bills on time, this might not have been such a big problem.
- Over-reliance upon hospital subsidy to make payroll: You've probably already noticed that the new model quadrupled the subsidy the hospital had to pay us. Of course, the actual monthly subsidy was much less than $1,200/day because it was reduced by excess revenue the month before. However, this still left a 5-figure check owed to us every month by the hospital. Turns out that Gimbels also suffered from the unfortunate reputation of not paying their bills on time. This might have remained in the category of Sour Grapes, except that Gimbels went on to pay us late two months in a row. This resulted in payroll checks being mailed at the end of the month, doctors' checks bouncing, and a lot of griping. As CFO, I had to deal with all of this, resulting in more and more grey hairs popping out on my head.
- Major underestimation of operating expenses: The original proforma for the new model estimated monthly expenses of just over $2,000. Feelgood's actual monthly expenses during the first part off 2008 were closer to $5,000, and some desperate review of financial records under the old management verified this had been the case for some time before we took over the corporation. Why the difference? Our greatest expense was the monthly 12% fee to Primo Billing. I guessed that, at one point, this 12% was closer to 6-7% when the ER doctors had their wives collate the hospitalist progress notes. Primo Billing shouldered the responsibility of hiring college students to take over that job, with a consequence increase in their percentage. ER Doc #1 didn't adjust the proforma to account for those higher expenses, and we didn't catch it either--until we were at the helm. Dumb? Yes. When we came clean to Gimbels, they authorized up to $5,000/month allowable expenses, but this effectively came out of our administrative stipend. Feelgood's CEO and I were officially managing the company for free. Don't think that doesn't chap my hide.
- Failure to understand role of A/R after profit sharing ended: When the Feelgood corporation changed hands, the outgoing shareholders took their share of the 2007 year-end profits. Fair enough. They also insisted on an A/R loan agreement, described above, to be repaid over five years, for the value of the outstanding A/R at the time of the transfer. At first it made sense for the old shareholders to get repaid for the revenue generated while they were in control of the business. This is standard for most private practices: new partners need to "buy in" to the partnership by providing upfront capital to the practice, or committing a portion of the A/R they generate to an operational fund. However, what the A/R loan failed to recognize was that, after the transfer, we were now returning our profits to the hospital. As the A/R generated in 2007 was paid out into our bank account, it entered calculations as excess revenue which in turn was used to offset the hospital's subsidy. In other words, we were paying back money we never got to enjoy, because it was being used to reduce the payment Gimbels made to us each month. Now, I know this sounds so pathetically stupid and ignorant as I write about it, but it took months to figure out and ER Doc #1, who insisted on the loan, was quite sheepish about the whole thing. The problem is the entire concept of accounts receivable is hard for anyone to grasp, and practically impossible for Incompetent Dan who didn't catch this problem before we went forward.
Now, I wouldn't blame you if tears of laughter are running down your face right now as you read about the Three Stooges mistakes Feelgood has been making over the past year. I would laugh about it myself, except I'm too busy hitting myself over the head. I told you at the beginning, I learned a LOT from this experience, mostly from my own mistakes. I'm a philosopher that way. Unfortunately, my Feelgood colleagues took different lessons from the same experience, and that was the final nail in Feelgood's coffin.
4. LOOKING FOR DR. FEELGOOD
Ultimately, Feelgood is only as effective as its physicians. We went into the new business model with 4.3 full-time equivalents. This meant we could schedule two 12-hour shifts per day, using a 7 day on/7 day off model. The fifth hospitalist was part-time but his contribution was a degree of flexibility in case of vacations, etc. However, this compact staffing arrangement soon hit a crisis point when one of the hospitalists gave notice to Feelgood. He's the oldest of us and was starting to feel the pain of working long shifts and being awake at night. That was a blow. But the last straw was Rita's resignation. She'd already applied and been turned down for a job before we'd taken Feelgood over. Before we proceeded, we'd asked her what her commitment was, and she said she was good for the whole ride. Yet I had my suspicions that Rita would bail on us sooner or later, and indeed, she dropped the bomb at the end of March. With the loss of two full-time hospitalists, we were down to 2.3 FTEs and were no longer able to staff the services outlined in the draft contract. So we gave notice to Gimbels.
What I learned from these staffing upheavals is this: Any healthcare program should be planning for attrition from day one. Doctors come and doctors go, and there is always the possibility of illness or family emergencies to make you wish you had another warm body to come in and do the work. In retrospect, I can see that our 4.3 FTE "full-time" program would have run aground within a year, because even with this many doctors, I had a lot of difficulty scheduling around holidays and vacations. I worked nine 12-hour day shifts in a row once, and another time I worked 7 12-hour days, had a night off, then 8 12-hour nights--all because of vacations, illnesses, etc. A hospitalist program needs more staff than it appears to need on paper.
5. TAKE HOME LESSONS
As usual, it's been both embarrassing and liberating to share with you the mistakes I've made in my professional life to date. Once you stop laughing and wipe the tears of merriment from your eyes, you might jot down the following take-home points. I've taken all of these to heart since working with Feelgood:
- Never start a job without a finished contract.
- Never join an organization without a good understanding of its business model. If you are an employee, this might be less important, but if you are a partner or shareholder, you should understand the ebb and flow of money through your group.
- If you will be assuming management responsibilities for a new group, ask to review a full year's financial and operational records. I might have caught the underestimate of Feelgood's monthly expenses if I had, and I know I would have anticipated the cash flow crisis.
- Understand who you're working with. I had misgivings about Gimbels' administrators and about Rita the Whiner, but I chose to proceed with Feelgood anyway. The reasons for doing so were complex, but I think I should have paid more attention to those misgivings, because they really turned out to be true and could have saved me some aggravation.
- Build the unexpected into your business plan. We all want to provide the most efficient solution possible to any problem, but a certain amount of error is inevitable. I wish we'd factored in more staffing needs and a percentage of financial error into our proforma. This would not have prevented the collapse of Feelgood, but it would have buffered the blows to the program as they came.
Next week, I'll spell out the dilemma I'm currently facing as I look for another hospitalist job.