June 15, 2023 at 11:34 a.m.
Marshfield Clinic ends 2022 nearly $368M in the red
System reducing personnel and salaries, consultant recommends even more
The bleeding has continued into 2023, as Marshfield Clinic Health System (the System) reported a 4.2 percent first quarter operating margin loss of $32.6 million. That ranked the System just 26th out of 30 large ranked hospital systems in the country in operating margin.
All the information and figures in this story are based on publicly available financial information.
The System attributes the mounting financial woes to ongoing inflationary pressures and problems arising from the implementation of a health records system, as operating margins for hospitals around the country continue at below normal averages.
However, consultants hired by the system have also flagged lagging physician productivity, inefficiencies in revenue cycle management and inpatient care, and the need to reduce staff size and salaries.
Earlier this year, the System's credit rating was downgraded both by Fitch and S&P Global, from "A-" to "BBB+."
"The rating action reflects our view of Marshfield's history of uneven performance with sizable operating losses in fiscal 2022, with expectation of lighter performance in 2023, and a weakened balance sheet profile," said Suzie Desai, S&P Global Ratings credit analyst.
The System has adjusted debt totaling $1.49 billion, Fitch stated in its analysis.
According to the information analyzed by The Lakeland Times, the System has internally developed a Financial Improvement Plan (FIP) to turn around its financial situation. That plan calls for attaining $185 million in annual savings by decreasing staffing levels and average salaries for full-time equivalent employees, boosting physician productivity, and improving efficiencies in revenue management and inpatient population metrics.
The plan seeks to save $70 million in labor costs, $55 million in revenue cycle management, and $60 million through increased physician productivity. In March, the System announced the layoff of 346 employees.
"We are not immune to the immense pressure and unprecedented challenges gripping the health care industry in recent years, which has required us to identify ways to be more efficient and more resourceful," Dr. Susan Turney, the System's CEO, said in announcing the layoffs. "Reducing staff is always painful. This is ultimately about preserving the long-term efficiency and sustainability of our organization."
The system also eliminated more than 500 unfilled positions.
Because it missed its debt covenant requirement that its income available for debt service be at least 110 percent of the maximum annual debt service requirement, the System was obligated to hire a consultant to assess its operations.
The consultant hired by Marshfield, Forvis LLP, recommended even more action. Among other things, Forvis stated that, based on historical and budgeted data, "it appears that the System is becoming more inefficient in its care for its inpatient population," its initial denial rates were significantly above industry benchmarks, and salaries, benefits and contract labor as a percentage of net patient service revenues were high compared to peer health systems.
The dismal numbers
The financial information reviewed by The Times show a sharp decline in the System's financial performance since 2020. For example, according to Marshfield's annual report for 2022, dated May 30, 2023, operating margins have nose-dived.
On the revenue side, numbers were solid. For 2020, operating revenues for the consolidated system totaled $2.71 billion, and those revenues increased to about $2.8 billion in 2021. In 2022, operating revenues jumped to more than $2.94 billion, an actual increase of 5.3 percent over 2021 and of 8.7 percent over 2020, perhaps reflective of a rebound from pandemic suppressed numbers.
Things were not so sanguine on the operating expenses side of the equation.
Those numbers went from about $2.6 billion in 2020 to $2.86 billion in 2021 to $3.31 billion in 2022. That's an actual increase in 2022 operating expenses of 15.9 percent over 2021 and 27.7 percent over 2020 operating expenses.
The number that stands out there is that for salaries, contract labor, and benefits. Those jumped from $1.06 billion in 2020 to $1.20 billion in 2021 to $1.38 billion in 2022. That's an increase in 2022 of 14.5 percent over 2021 of 29.9 percent over 2020.
The other notable expenditure increase was for supplies, which rose in 2022 by 6.9 percent over 2021 and by 22.3 percent over 2020.
All totaled, while the System showed a 2020 operating profit as a percent of operating revenue of $114,826,000, or 4.2 percent, it slipped to a loss of $60,188,000 in 2021, or a 2.2 percent loss as a percent of operating revenue, and tanked to a loss of $367,872,000 in 2022, or a loss of 12.5 percent.
The System's assets were taking a hit, too. In 2020, net assets totaled $1.49 billion. That climbed to $1.52 billion in 2021, and then fell sharply to $1.04 billion in 2022. Percentage-wise, net assets rose by 1.87 percent in 2021 over 2020, and then fell in 2022 by 31.5 percent from 2021.
Accrued expenses, lines of credit, and long-term debt all took significant bites as liabilities.
The number of days cash on hand was more bad news on the ledger. In 2020, the consolidated System reported 138.7 days of cash on hand. The number of days cash on hand measures the number of days that an organization can continue paying its operating expenses with the amount of cash currently available.
The preferred number varies by industry, though 90 is considered a minimum in many and 180 is preferred. In the health care industry, though, according to Perry Wiggins, the secretary and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas, the preferred number is 270 days because organizations often have to wait for reimbursement from insurance companies.
In 2020, Marshfield was close to that number with 229.3 days of cash on hand for the system. That fell to 186.7 days in 2021 and slumped to 138.7 days in 2022.
The system's financial slump has continued into the first quarter of 2023.
For the three months ending March 31, 2023, for example, the operating margin is -4.2 percent, compared to last year's first quarter, which was -1.5 percent. The number of days of cash in hand was 143 compared to 174 for the first quarter of 2022..
Specifically, in the first three months of 2023, the System generated earnings before interest, depreciation and amortization (EBIDA) of $9.4 million ( a 1.2-percent margin), in comparison to $25.2 million in the prior year, a decrease of $15.8 million compared to the first three months of the prior year. The System generated an operating loss of $32.6 million (-4.2% margin), compared to an operating loss of $11.3 million in the prior year.
"For the quarter ended March 31, 2023, ... the System is showing a negative operating margin and losses and rising operating expenses greater than the rise in revenues," the financial report stated. "The negative financial results of the System are driven by a continuing convergence of factors, including additional costs related to inflation pressures on wages and supplies, the effects of the One System EHR implementation that is causing an unexpected level of productivity disruptions reducing revenues and additional operational costs to support the activations."
The consultant's report
Marshfield System was compelled to hire Forvis because the documents governing the System's outstanding bonds and obligations require the System to have an income available for debt service that meets a certain threshold, which is 110 percent of the System's maximum annual debt service.
The System did not meet that threshold, in fact, it was far from it. Specifically, according to the documents, Marshfield had -$27.4 million in available income for debt service for 2022, that is to say, less than nothing, while the maximum annual debt service for the year was $81.9 million. To say it another way, Marshfield's available debt service income was more than $109 million short of what it needed to meet the threshold.
Under such a condition, the master trustee requires the System to hire a consultant to make recommendations with respect to rates, fees, and charges, as well as to assess the System's methods of operation and other factors affecting its financial condition that may be necessary to meet the threshold.
Marshfield hired Forvis, and the consultants analyzed the System's financial and operational results for the years 2019 through 2022, the budget for the fiscal year ending December 31, 2023, the internally developed Financial Improvement Plan (the "FIP"), statistical data, and discussions with management regarding historical and future operations.
Marshfield was already actively seeking to address its fiscal position, the Forvis report stated.
"The FIP includes several strategic initiatives that aim to decrease staffing levels and average salary per FTE, increase physician productivity aimed at Primary Care providers, improve efficiency metrics for its inpatient population, and improve its revenue cycle management," the report states.
Traditionally, the report continued, salaries, contract labor, and benefits are the biggest operating expenses for health care organizations, and Marshfield was no exception. That being the case, the consultants stated, effective labor management while maintaining safe staff-to-patient ratios is crucial in controlling that line item.
Not only that, Forvis reported, but the proportion going to those categories was growing at Marshfield, while overall salaries, benefits and contract labor as a percentage of net patient service revenue were high compared to peer health systems.
In 2019, salaries, contract labor, and benefits represented 39.7 percent of operating revenue, the report stated; in 2020, it was 39.2 percent; in 2021, 43.1 percent; and in 2022, 46.1 percent, though that latter figure was unaudited.
"Since the beginning of the Covid-19 pandemic, contract labor cost has risen exponentially, making patient care retention more important than ever," the report stated. " ... FY 2022 saw a significant increase in labor cost as a percent of operating revenue. The 3 percent increase equated to approximately $92 [million] in additional labor costs."
The consultants identified opportunities for consolidation and identified several non-direct patient care departments for labor reductions. Still, the consultants said its own advice in the face of last year's challenges would have been similar to the reductions in staffing levels and average salaries Marshfield developed in its FIP.
That plan is to save $70 million in labor expense management through personnel reductions and lower salaries, and this spring the System notified key stakeholders that effective mid-May it had pared labor costs and other expenses by tens of millions of dollars.
"In early March 2023, the System issued an internal notification to key stakeholders of a labor reduction totaling $56.4 [million] effective mid-May which included both employed and contract labor," the consultant's report stated. "Additional opportunities totaling $13.6 [million] were targeted for expense reduction including high cost pay codes, regional leadership consolidations and ongoing labor productivity management."
Based on its assessment, Forvis concluded, Marshfield's $70 million improvement target appeared to be an achievable goal, but the consultant recommended even more aggressive action.
"Further consideration should be given to reducing staffing levels in revenue-producing departments and revenue cycle management departments," the report stated. "Additional cost reduction opportunities may exist in employee benefits and should be assessed. Further analysis of labor reduction impacts on cost-based reimbursement is recommended."
Physician productivity and average length of stay
In its FIP, the Marshfield System estimated an annualized net benefit of $60 million in improvements related to patient access and physician productivity, to be achieved through the actions of an internal Patient Access Council.
There was a lot of work to do, according to the Forvis consultants.
"More than half of the System's physicians and Advanced Practice Clinicians (APC) productivity benchmarked below the 50th percentile, with the majority of underperformance stemming from medical and surgical specialty providers," the report stated. "Only 25 percent of physicians and 24 percent of APCs demonstrated productivity and compensation alignment."
In addition, the System reported significant outstanding referrals, and patient scheduling functions lacked standardization.
Still, the System estimated that opening physician and APC schedules such that each specialty category achieves the 50th percentile for productivity would realize an estimated $12 million in annualized net benefit in the first year of the plan, while additional downstream revenue from year 1 would net $60M in financial benefit.
Achieving those goals could be long term, the consultants concluded. For one thing, Forvis wrote, "it appears that the System is becoming more inefficient in its care for its inpatient population."
That is to say, the average length of a hospital stay is on the rise. That length has increased from 4.5 days in 2019 to 4.68 days in 2020 to 4.89 days in 2021. There was an even bigger jump between 2021 and 2022, from 4.89 days to 5.27 days, or a year-over-year increase of 7.8 percent.
All of which was to say that average length of stay was not at an acceptable level, Forvis reported.
"In order to reduce length of stay to an acceptable level, Forvis recommends the following strategies: establish quality metrics and performance expectations; quarterly chart review; and multidisciplinary rounding," the report stated.
The System might achieve its estimated $60 million financial benefit, Forvis stated, but it could take time.
"Results may be delayed given the nature of planning efforts, physician conversations, appointment and referral scheduling, and billing functions required prior to realizing revenues," the report states. "Further consideration should be given to physician compensation planning and redesign to appropriately align productivity with pay."
What's more, Forvis continued, the System should undertake efforts to assess current data capabilities for calculating so-called worked "Relative Value Units" in a timely and accurate fashion.
"Increased appointment and referral activity expectations should be preceded by appropriate planning/staffing efforts with patient access and revenue cycle leadership to account for necessary prior authorizations and scheduling increases," they concluded.
Revenue Cycle
Net patient service revenue per adjusted discharge is a metric used to determine an organization's ability to collect on the services it provides, the consultants wrote.
"In order to maintain a sustainable operating margin in the healthcare industry, organizations should strive for a minimum of a 3 percent increase in this metric each year," the report stated. "Excluding the FY 2020 metric that included federal funding from the CARES Act, the System should have collected approximately $13,454 per adjusted discharge in FY 2022. This would have equated to approximately $43 [million] in additional net patient service revenue in FY 2022."
Through its FIP, the System sought improvements related to the revenue cycle and set an estimated annualized net benefit of $55 million.
"Specifically, $38 [million] was identified as potential opportunity associated with denial prevention and write off reductions, $16 [million] from pricing and charge capture, and $1.5 [million] from Clinical Documentation Improvement optimization," the report stated.
Forvis said it would have recommended devising a similar revenue cycle management strategy involving the improvement of denial prevention, charge capture, and CDI optimization.
Prior to Forvis, as a result of the FIP, Marshfield had hired a consulting firm (Chartis) to look for opportunities and improvements related to the System's revenue cycle. That assessment found a number of deficiencies in the System's operations.
Among other things, gross days in accounts receivables and "Discharged But Not Final Billed" were unfavorable compared to industry benchmarks, while initial denial rates were significantly above industry benchmarks and could cause significant rework and lost revenue for certain fatal denial categories such as medical necessity, timely filing, and prior authorization, the report found.
Still, assuming that sufficient staffing resources and subject matter expertise were appropriately allocated and structured, Forvis felt the $55M improvement target set by the System was an achievable goal.
"Further consideration should be given to the impact of aged A/R and potential clean-up efforts, vendor alignment, and staff development," the consultant concluded.
Marshfield Clinic Health System, Inc. is an integrated health system serving Wisconsin and Michigan's Upper Peninsula with more than 12,000 employees including more than 1,600 providers comprising over 170 specialties, a health plan, and research and education programs, the report observed.
"Primary operations include more than 60 Marshfield Clinic locations, 11 hospitals, Marshfield Children's Hospital, Marshfield Clinic Research Institute, Security Health Plan and Marshfield Clinic Health System Foundation," the report stated.
Last year, in October, Essentia Health of Minnesota and Marshfield Clinic Health System announced that they had signed a Memorandum of Understanding to evaluate how the two organizations might combine to form an integrated regional health system.
A combined organization would feature a diverse network of 3,800 providers serving more than two million people in rural and mid-urban communities through more than 150 sites of care, including 25 hospitals, the two systems stated.
The merger is not a done deal, however. It is not a binding MOU, and Marshfield stressed in its first quarter report that there is no guarantee that the two groups will reach a definitive agreement to combine the two organizations.
Richard Moore is the author of "Dark State" and may be reached at richardd3d.substack.com.
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