Quality of Earnings

Chief executive Dr. Ronald Weaver is facing shrinking demand for services at Union Hospital. His executives are giving him conflicting opinions about how to solve the hospital’s immediate cash flow problems. Examine the facts presented for Union Hospital and determine the course of action you believe Dr. Weaver should follow. Background Dr. Rodney Weaver has been the chief executive officer of Union Hospital for the past seven years. He has been affiliated with the hospital for the 25 years, first as a physician, then in various administrative roles and finally as CEO. Dr. Weaver had a small private practice and for many years he was quite content with simply being a family physician. He entered hospital administration because he wanted to make a difference in an area in which he felt that effective leadership was sorely lacking. Today, Union Hospital and Dr. Weaver face a serious dilemma, one that is not unique to the hospital industry, but one that is in fact timeless. The hospital industry has excess supply and waning demand for inpatient services. Many hospitals are struggling to remain economically viable. Union‟s survival depends on the quality of the decisions made by its senior leadership. In the face of adversity, how will Dr. Weaver and his management team respond? Dr. Weaver takes great pride in “doing the right thing.” In this case, the right choice may not be obvious. Union Hospital is a not-for-profit hospital located in the heart of the inner city. It has a long and distinguished record of providing care to the citizens in its service area regardless of their ability to pay. The hospital generates about $125 million annually in revenue and spends nearly all of it on patient care, community outreach and the maintenance of its aging facilities. It employs well over a thousand people in the community and it is renowned for its positive labor relations. Union actively sponsors health awareness and prevention activities and it has gained fame for its community outreach programs. For the last few years, the number of inpatient admissions at Union has decreased by 3% to 5% percent annually. At the same time, the average payment per inpatient case has stayed flat. This is due to the pressures associated with managed care and with tight Medicare and Medicaid regulations. Managed care is the collection of business practices adopted by insurance companies to reduce health care costs. Medicare is the federal program that provides care to senior citizens. Medicaid is a joint federal and state program that provides care to certain indigent residents. Payment rates from insurance companies, Medicare and Medicaid have been under significant pressure to remain flat or decline. At the same time, the costs of providing care have been increasing,