Last July AHM was able to raise in the public markets $100 million in unsecured debt at 10% interest. That's no small feat for a company that had emerged from bankruptcy just three and a half years earlier, with every available asset secured to one creditor or another.
Despite the substantial improvements, AHM lags behind its competitors in occupancy rates and operating margins. (See "Elements of a Turnaround," page 6.) Company management says that's inevitable, given the markets in which AHM operates. In any case, Volla argues, occupancy rates are an archaic measurement of hospital success because hospitals these days make money by releasing patients quickly, not by keeping them.
Then there's always health-care reform, a giant question mark for anybody in health care these days. AHM's management argues convincingly that on the whole, the company is well positioned for reform. After all, AHM has extensive experience in providing efficient primary care to fixed-reimbursement customers -- a plus under any reform scenario. Still, Volla admits, if new health-care-purchasing alliances are too big and bureaucratic, they could end up negotiating only with big providers, leaving out smaller players like AHM's hospitals. In part because of that fear, the company is hastening to form strategic alliances with large not-for-profit hospitals that provide specialized care. (The theory is that primary-care hospitals like AHM can provide patient referrals to their partners while benefiting from the big hospitals' marketing clout.)
Whatever the future, Volla's results so far are impressive by any measure. There's no magic here, either: AHM is simply disciplined, with a relentless focus on on-line quantitative measurements as a way of achieving its goals.
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1. Operations
Stanching the bleeding
When Volla started his new job at the end of December 1989, he quickly flew to Dallas, where AHM was then headquartered. One of his early requests was to see December's internal financial reports so he could get a feel for how the company was doing. At Volla's old employer, such reports were available by about the 12th or 15th of the next month. So when he found out AHM's December numbers wouldn't be ready until March, Volla wasn't impressed.
He quickly discovered that the Dallas operation was highly decentralized. It took headquarters staff members two months to put together reports because they first had to get the data shipped from each hospital and then spent weeks reconciling all the accounts so they'd be strictly comparable. Although the hospitals all had variations of the same computer system, headquarters inexplicably wasn't using it to consolidate the data. And because each hospital controller had autonomy, all had modified their general ledgers to meet their own needs. That was good for the hospitals, but it made any corporate financial comparisons difficult.
This was never going to work, Volla thought. After all, AHM was a business so starved for cash that it had started life out of bankruptcy with only $10 million in working capital, for an almost $300-million company. (To make matters worse, AHM had to make its first interest payment, of $3.5 million, within days of Volla's taking over. That left enough, Volla figured, to run the company for less than a week.) Without a strong day-to-day handle on the company's financial performance, Volla couldn't possibly succeed; he had no margin of error. "It was very obvious that the whole culture was going to have to change," he says.
Volla had to move quickly to improve the company's cash position. Within months he cut the size of the corporate staff from more than 100 to fewer than 60. In September he moved the company from Dallas to smaller, lower-rent quarters in King of Prussia, Pa., a Philadelphia suburb that was his home territory. The net result was a decrease in corporate overhead of $4 million, on an annualized basis. Besides, in King of Prussia Volla knew good people whom he could persuade to join what was effectively a new company -- and one with exceptionally dim prospects.
Like a start-up, AHM after the move had virtually no institutional memory. Controller Bruce Colburn, who came on board in mid-1990, recalls that his first big problem was simply figuring out whom AHM owed and who owed AHM, since the company had gone through a flurry of acquisitions in the early '80s, then a flurry of asset sales. In those early months, as the new staff was unpacking boxes in Pennsylvania, Colburn recalls, "one of the things that always scared me was that someone would quit paying me and I'd never know!"
With interest payments looming, Volla needed to do even more to free up cash. He sold assets and negotiated with professional advisers for lower fees. He brought in new people to work on collecting accounts receivable, setting up a sort of in-house collection agency, before the company turned to outsiders. By the end of 1990, days outstanding on accounts receivable had dropped from a high of more than 70 to 55. Volla also worked on improving relationships with vendors, many of whom had been so burned they had placed individual hospitals on COD terms. The new management worked out repayment plans, aiming to get reasonably current by the end of 1990.
But that still didn't give Volla the day-to-day control he needed. So he quickly began converting the company to a highly centralized IBM AS/400 minicomputer system and building proprietary software to track the numbers he wanted. (To maintain a state-of-the-art system without using up his superscarce capital, Volla set up an unusual arrangement with his computer vendor. Rather than buying or leasing a computer, AHM pays a linkage fee for each device the company hooks up to the AS/400, which belongs to the vendor. As a result, AHM pays more in operating costs, but uses no capital in purchases or upgrades.) By September 1990 Volla could get day-to-day financial information from the company's computer system. It was "the single most important thing we did," Volla says.
Today that on-line system drives the company's management style. All the hospitals use the same accounting structure, so corporate management can extract daily reports on revenues, number of patients, cash position, or just about any other relevant financial statistics. (Some, such as staffing, come in weekly.) By the sixth working day of each month, each hospital sends a financial report for the preceding month to headquarters. Four or five days later headquarters gets what Bob Fleming, senior vice-president of operations, calls its "infamous blue books": blue binders three or four inches thick, each full of computer printouts on the financial status of a hospital -- down to every check written. All of AHM's top managers scan the books, searching for numbers that don't look right. Then they hold marathon meetings comparing notes and getting on the phone with the hospital administrators. Their questions are pointed, specific, and tough: Why do you have too many nurses on the third shift? Why are your average stays per patient up? Why are we spending so much money on Baxter Laboratories this month?
