CEOs at risk in hospital shake-ups
Executives under pressure in health care’s shifting landscape
HOUSTON — After Michael Covert submitted his resignation as chief executive officer of the St. Luke’s Health System in June, the initial announcement came not from his Houston bosses, but from the Colorado headquarters of St. Luke’s owner, Catholic Health Initiatives.
The Houston Chronicle reports the internal email, sent to Catholic Health CEOs around the nation and absent customary expressions of thanks, widely was interpreted as evidence the move was driven by the national office, unhappy about St. Luke’s multimilliondollar losses.
Around the country, health care system governing boards increasingly are losing patience as their hospitals struggle to adjust to a rapidly shifting health care landscape — one characterized by declining insurance reimbursements, a push to get patients into outpatient clinics, policy uncertainty in Washington and the replacement of the old fee-for-service model with valuebased care. The combined forces have resulted in a sharp downturn in the operating margins of hospitals.
The logical fall guy: the CEO.
In just the past six months, the CEOs of 30 medium to large hospitals around the nation have departed, according to Janis Orlowski, chief health care officer for the Association of American Medical Colleges. Some were because of retirements and career advance-
● ments, but many were involuntary.
“That’s an increase in turnover, probably a reflection of the current volatility of the health care market,” said Orlowski. “Many hospitals are losing money now and the future only looks rockier, with more uninsured and less Medicaid support. Boards want the right person to lead them into such turbulent times.”
Nowhere has there been more change at the top than Houston — home to the world’s largest medical complex — where not just Covert, but MD Anderson Cancer Center’s Dr. Ron DePinho and Memorial Hermann Health System’s Dr. Benjamin Chu also recently left unceremoniously. A fourth CEO, Texas Medical Center’s Dr. Robert Robbins, also stepped down in April but it was to become president of the University of Arizona.
The shake-ups demonstrate the challenges and pressures CEOs face from board members who, in addition to watching the bottom line, now feel more pressure to stay engaged and ahead of change. Harvard University health-policy professor Ashish Jha said CEOs are “likely to struggle if they’re still operating under the assumptions of the hospital industry of 10 years ago.”
The Houston departures also show the difficulties outsiders — Chu, Covert and DePinho all came from outside the state — face navigating Texas Medical Center, known for its tricky geopolitics. Baylor College of Medicine President Dr. Paul Klotman, one of the few to succeed, calls it the “most complex political environment I’ve ever been in, including New York City — a product of 57 institutions next to each other, competing and collaborating.”
Houston’s turnover was big news not just locally but nationally, where more than one observer invoked the phrase “dropping like flies” to describe the city’s recent spate of departures. The moves drew attention because DePinho and Chu, in particular, are nationally known figures.
The Houston CEOs and representatives of their boards all declined interview requests or were not available, spokesmen said.
“It’s kind of unusual to have so many prominent people disappear that quickly in one city,” said Jeff Goldsmith, professor of public health sciences at the University of Virginia.
Goldsmith and others said they were most surprised by the June 19 exit of Chu, considered a big-time hire by Memorial Hermann in 2016. Modern
Healthcare magazine ranked him No. 8 on its 2017 list of the nation’s “Most Influential Physician Executives and Leaders,” a testament to his reputation as a leading thinker about the changes in the industry.
Memorial Hermann layoffs were part of Chu’s short tenure, about 110 in the spring, 350 the week after his departure. System officials insist there was no connection between the two, noting its financial challenges and initiative to become more efficient predated Chu’s hiring.
Instead, Chu and Memorial Hermann turned out to be a poor fit, said people familiar with the situation — a first-time CEO whose experience at a long-established managed-care consortium in California did not prepare him for a sprawling health system relatively new to such changes. Chu struggled, they said, to adjust to the new role and the culture change.
So did DePinho, whose 5 ½-year tenure was full of tumult, including financial difficulties that led to the layoffs of 778 employees in January. Financial experts said MD Anderson’s problems — it lost more than $460 million over 16 months — came as a surprise because cancer care is considered so lucrative in the health care industry.
In his resignation speech, DePinho, whose background primarily is as a laboratory scientist, made reference to the challenges faced by today’s hospital leaders when he noted that it had become clear to him that MD Anderson needs “a new president who will inspire greater unity and a sharp operational focus on navigating the tectonic changes in health care delivery and economics.”
Covert’s resignation came as much a surprise locally as Chu’s the week before. The St. Luke’s board of directors did not request it nor see it coming, said Klotman, a board member.
In retrospect, the departure may have been inevitable.
St. Luke’s and two sister systems of CHI hospitals in Texas reported a $51 million decline in a key measure of operating income between July 2016 and March 2017, compared with the same period the year before, according to CHI financial reports. During that period the Texas division laid off 810 employees and cut its payroll by 1,295 jobs, most of them at St. Luke’s.
CHI made no secret of its disappointment, including at an investor presentation in February.
“The Texas division financial results for the fiscal year to date (are) behind expectations,” according to the slide presentation made to investors by CHI officials. “Volumes and service line mix have deteriorated and labor costs have increased.”
In that respect, Orlowski suggested, Covert’s departure was not surprising.
“Covert got three years, a typical time frame at which CEOs lose their jobs if boards don’t see a bounce back from significant financial struggles,” she said. “Boards commonly make a change at that point if there’s not a quick turnabout.”
Texas Medical Center in Houston is one of 30 medium to large hospitals around the nation to lose its chief executive in the past six months.