Paul Willging Says…

When it comes to quality, Wall Street might be a problem

I remember so vividly the early days of the Medicare Prospective Payment System (PPS) for nursing homes and the howls of pain that emanated from corporate headquarters-how the very future of long-term care was in jeopardy, given the impending bankruptcy of 10% of the industry. How the quality of service stood on the precipice, and only additional federal dollars could avert Armageddon.

It looks as though brighter days are ahead for the big companies, both financially and in terms of quality. But let’s look back for a moment: For example, what about those 1,600 “bankrupt” facilities? Indeed, the inadequacies of PPS were disproportionately shouldered by the multifacility corporations, not by the industry as a whole. An overwhelming majority of the 1,600 were owned and operated by the very multifacility corporations that filed for Chapter 11. Very few were managed by small and midsize operators, even though they constituted 80% of the industry.

Why all the pain for the big companies? Take, for example, their emphasis on the provision of “subacute” care which, unfortunately, PPS inadequately reimbursed, at least initially. Also, high levels of debt and corporate overhead were not compensated by PPS (nor should this have been expected). Finally, corporate ownership of ancillary services (such as therapy companies) became a drag on profitability when PPS turned “revenue centers” into “cost centers.”

So their cries of protest notwithstanding, multifacility operators were at least partially culpable for their own financial difficulties. That was one problem they faced. The other was, in my opinion, their disinclination to recognize the critical nexus between reimbursement and public perception. Success in the legislative and regulatory arenas is, to a considerable extent, a function of public perception. What is the perceived value of the taxpayers’ investment in long-term care? If the product is seen as desirable and valuable, then public sentiment is likely to be favorably inclined toward supporting it. If the public is skeptical, then even the most vigorous advocacy will achieve only minimal and temporary success.

As an organizational leader, I found this to be a difficult concept to sell. Too many among my contemporaries in corporate headquarters assumed that success was largely a function of political action and grassroots involvement. While both are indeed critical, absent a credible product, they cannot succeed.

Indeed, they can create even worse problems. Take, for example, the involvement of multifacility nursing home corporations in a recent political brouhaha in Texas. In a criminal indictment handed down last year by the District Court of Travis County, the defendant was The Alliance for Quality Nursing Home Care-an organization of the country’s largest nursing home chains (and headquartered in the corporate offices of one of them). Now, why were the chains so eager to get embroiled in Texas politics? The political contribution that got them into trouble was made out to “Texans for a Republican Majority.” I suspect the multifacility operators were less concerned with a Republican majority in the Texas statehouse (or the U.S. Congress) than they were in currying favor with Tom Delay (R-Texas), majority leader in the U.S. House of Representatives.

That sort of political involvement is not unique in the history of multifacility corporation politics. Too often, the assumption was that political favor could be curried with political contributions and “name” lobbyists. Personally, during my years with the American Health Care Association, I was never sure that such expenditures bought us much more than a reputation for attempting to circumvent the public perception (warranted or otherwise) of our product. I recall more than one frustrating meeting with those who now make up the Alliance where it seemed that investments in the political process seemed more easy to come by than investments in improving quality.

What’s changed since then? I would suggest that the change I see underway today is one of vision. I see in many of the multifacility corporations an increasing recognition that the value of the product is an indispensable prerequisite for legislative and regulatory success. It is not all that persuasive to argue that $1 of costs is being reimbursed at 80ó if the public thinks the product is only worth 70ó.

It is this recognition of “value” that, I believe, has motivated dramatic change among many of the larger players. I’ve had the pleasure of chatting with a number of them during the past few months, and this sense of renewed vision is gratifying. I’ve also seen their sincere support of campaigns (such as “Quality First”) launched by the major trade associations within the past few years. And while I suggested four columns ago (January 2005) that Quality First was old wine in new bottles, that doesn’t mean the old wine wasn’t a pretty good vintage to start with.

Quality First is, after all, a variation on a theme, a theme that did not start just within the past two years. Its essential elements are those entailed in the concept of quality management, and quality management was certainly not invented by the current proponents of Quality First. But if quality is now to finally become a primary focus of the multifacility corporations, that might, indeed, signal a hopeful development in their approach to political involvement, both in Washington and in state capitals.

There remains, however, a worrisome factor. Some would argue that the elemental financial underpinnings of the publicly traded multifacility corporations are antithetical to the very essence of quality management. How so? Well, let’s go back to the basic theses of quality management: First, and most important, it is customer-focused. Second, it is data-driven. Third, it is staff-empowered. All three are critical. None can be ignored.

I can give the “multis” the benefit of the doubt on items two and three. Certainly, one of the advantages of these companies’ size is the financial ability to fund a degree of infrastructure, including information systems, that might stretch the resources of smaller companies. And while some might argue that the centralized bureaucracy of the large corporation does not lend itself to staff empowerment, nothing inherent in size would prevent it.

What might be, however, inherently incompatible between the multis and quality management has to do with customer focus. It really gets down to your definition of customer. I have argued in past columns that one of the difficulties facing the nursing home industry as a whole is a confusion about customer. In focusing, for example, on government as the industry’s primary customer, the industry lost sight of the resident and the resident’s family as its true customer-and that customer reciprocated by turning against, or away from, the industry itself.

Forget the concept of government as the primary customer. That’s bad enough. Now compound that with the sense that Wall Street analysts are your primary customer. Herein lies, in my humble opinion, the real dilemma facing publicly traded corporations when they espouse the concept of quality management. I’m just not sure it can be done under the current rules of the game.

I know of more than one company that has declined to go public for that very reason. As one CEO suggested in a private conversation, he preferred to make his decisions based on what was best for his real customers, not what Wall Street demanded of him. His ownership position would have made him a very wealthy man indeed. But the quality of his company’s service was more important to him than the size of his house.

Can quality and Wall Street be combined so that they don’t compete as a company’s first priority? Can the focus on Wall Street simultaneously allow a comparable focus on the resident, without having to choose one over the other? I think the answer has to do with time frames. Unfortunately, for Wall Street, those time frames are short. A fiscal quarter is about as far as the future extends. And that time frame doesn’t allow for the types of investment that might enhance the long-term care product and, eventually, its customer support. Earnings growth, quarter after quarter, is what drives the “Street.” Long-term investments in quality usually work at cross-purposes with a mandate for an unending progression of favorable earnings reports.

I believe that was, to a considerable extent, the underlying rationale for the acquisition frenzy that marked the multifacility environment in the 1970s and ’80s. Slow, steady growth through improved product and customer allegiance wasn’t going to satisfy Wall Street. Earnings growth was more easily achieved through acquisitions. The resulting feeding frenzy led to a debt burden so large so that, with the slightest downturn in fortune, only Chapter 11 could provide relief.

Given my queries throughout the profession of late, there is little question in my mind that the multis’ vision has changed-and changed for the better. There is clearly new recognition that value is important and that political success is highly dependent on perceived value. But public perceptions are difficult to change; they can’t be altered overnight. A fiscal quarter-or even a fiscal year-will not suffice.

So here is the multimillion-dollar question: Will a failure to see immediate returns from the multis’ new emphasis on quality suffer from the impatience that is the hallmark of Wall Street? The answer will tell whether publicly traded companies really can get serious about quality.