Rescue and Recovery

CEO’s tough business tactics save a failing health-care charity

Imagine a health-care system without the elementary technology of voice mail, with only one working computer for every 100 employees, a chaotic billing and collection system, and buildings with graffiti-covered walls and carpet held together by duct tape. And those were only the most-obvious symptoms of what was ailing Northwood Health Systems as recently as 1997.

The situation was “an out-of-control storybook disaster,” says Pete Radakovich, who took over that year as chief executive officer of the Wheeling, W.Va., organization that treats low-income people who are mentally retarded, mentally ill, or addicted to drugs and alcohol.

The board’s chairman, Patrick Casey, echoes that assessment. “I remember talking about closing the doors at Northwood,” says Mr. Casey, who was serving as a member of the board in the 1990s. “We knew we needed to hire someone with a business background to lead Northwood out of financial trouble.”

In the months before Mr. Radakovich was hired, the organization had gone without a chief executive, chief operations, or chief financial officer for several months, and had laid off 19 managers. Northwood could not make its payroll and was on the verge of filing for bankruptcy.

Today things are decidedly different: In 1997, the budget was $16-million; now it stands at $23-million. The number of working computers has risen from fewer than a dozen to 300. Northwood has won praise from regulators and its local nonprofit peers for its efficiency and heightened standards of care. While the changes Mr. Radakovich set in motion resulted in personnel shakeups and cultural clashes between a nonprofit organization and its new, business-bred leader, they also saved Northwood from extinction.

‘Work Ethic Was Horrible’

The organization had some 570 employees at 20 locations and served more than 3,000 people annually when Mr. Radakovich — a former PricewaterhouseCoopers accountant and a turnaround specialist for high-technology and manufacturing companies — was invited to take a look.

“Invoices for services we had delivered were not being submitted for reimbursement, often because no one could figure out the proper way to file them,” Mr. Radakovich recalls. “There were several full-time receptionists because no one had voice mail or e-mail. The work ethic was horrible, and there were turf wars everywhere.”

Northwood had other serious problems: It consistently received poor audit-review scores from numerous regulatory agencies, which made note of incomplete medical charts, poor access to the information needed to make important clinical decisions, and a dysfunctional process for planning patient treatment.

No one in the organization was directly responsible for making sure the center complied with regulations, according to Mr. Radakovich. As a result, Northwood faced five significant malpractice claims from 1992 to 1997.

Nonetheless, he says, the task of turning around the troubled institution was a great opportunity.

“I’d been doing some soul-searching and knew that I wanted to focus my life on helping the poor and needy,” he says, “so this situation was perfect.”

And the organization was worth saving, says Jeff Knierim, executive director of United Way of the Upper Ohio Valley, in Wheeling.

“Northwood is a major force in addressing the mental-illness issues in our community,” he says. “Had Northwood closed its doors, this community would have been stretched beyond its capacity to handle these additional caseloads.”

A Business Approach

Mr. Radakovich’s first step in healing the problems at Northwood was to develop a plan that would generate new revenue and stabilize the organization. He focused primarily on bill collection.

“Doing so bought us time to fix everything else,” he says. Today, the organization’s debt is less than $1-million, down from about $5-million before he was hired, and its operating profit for the past eight years has been more than 10 percent of its revenue.

Mr. Radakovich says that behind that action, and everything else he pursued, was an effort to make sure that the nonprofit organization ran like a for-profit business to achieve its charitable mission. This approach, Mr. Radakovich concedes, was not met with universal approval by his employees, yet was a necessary step.

An organization on the verge of bankruptcy, he says, “did not get that way overnight. By the time someone like me is hired, everyone else had tried everything they could think of.”

Mary Ann Kinder, Northwood’s director of billings and collections, says the key was that Mr. Radakovich linked good business principles to providing better patient care.

“If we do not have the money to maintain our 26 vans, how are we able to provide safe, reliable transportation?” asks Ms. Kinder. She left the charity in 1996 out of frustration, but was recruited back the following year by Mr. Radakovich and Mark Games, Northwood’s director of operations.

Not everyone understood the link between fiscal responsibility and health-care delivery at Northwood, says Mr. Games. “We had a lot of very good-hearted people at all levels, but not very many who understood the importance of adhering to the bottom line,” he says. “Many were focused on trying to provide quality care, but were muddling through the financial details.”

Making the Case

Northwood’s new leader met with all the employees in groups of 20 or 30. During these meetings, Mr. Radakovich spelled out the tenets of the new office culture.

“I told everyone that they were welcome to stay if they had a strong work ethic and initiative and if they were willing to work harder and work smarter,” Mr. Radakovich says. “I made it very clear that anyone who was not interested in changing the way they worked would be best off looking for another job.”

After bolstering the charity’s finances through collecting bills more rigorously, cutting expenses, and renegotiating terms with businesses that served Northwood, Mr. Radakovich was able to purchase new computers and train the organization’s staff members to use state-of-the-art technology to handle billing and medical records, schedule appointments, and record clinicians’ notes. He estimates that technology has saved Northwood millions of dollars in operating expenses, partly by trimming staff.

The new standards, coupled with the new technology, meant that a lot of employees left or were fired, he says. For example, positions held by 12 employees who maintained paper medical records were reduced to only two, and several receptionists were laid off after voice mail and e-mail were installed. Employees who were eager to see change were heartened, says Mr. Radakovich, while those who were not were demoralized.

Ms. Kinder says one of the problems was that many staff members had little business experience and “did not understand or believe that what Pete was implementing really was how the for-profit world works,” she says. “I heard complaints that people resisted being trained to use computers, did not like that they now had to key in charges the day services were provided, and so forth.”

The changes being made in a relatively small town had plenty of reverberations. “If I were to terminate people in Pittsburgh and the surrounding county, which has a population of two million, those changes are more readily absorbed than in Wheeling, which has perhaps 30,000 people,” notes Mr. Radakovich. “We are one of the 10 largest employers in our service area. The dynamics of a turnaround in a small community are much different than in a larger environment.”

Not only did the new leader get rid of many workers, he also instituted a permanent, longer — by about 10 hours — work week for salaried employees, who he says were mostly working 35 hours a week or less, and cut back what he calls an “obscene” six weeks of annual paid leave. (Mr. Radakovich would not reveal how much vacation time Northwood employees currently receive, characterizing it only as being comparable to what for-profit businesses offer.) After Northwood’s financial situation began to improve, the organization beefed up its health care and retirement plans.

“In a turnaround situation, one has to act decisively and quickly,” Mr. Radakovich says. “Not only do you first have to know what to do, you then must have the courage and conviction to make changes that are decisive — and many of which will be unpopular.”

Mr. Radakovich and others acknowledge that some hard feelings among employees still linger.

“We did lose some well-intentioned individuals who said, ‘I knew it was going to be hard, but I didn’t realize it was going to be this hard,’” says Ms. Kinder. Even so, putting in more hours and enjoying fewer vacation days was, for many, a better option than unemployment, especially in an economically struggling region, she says.

Ms. Kinder says Mr. Radakovich took pains to try to bring employees around to his way of thinking.

“Pete is very good at communicating, particularly when the upheavals were going on — he actually figured out what was the best way to communicate with different employees,” says Ms. Kinder. “For instance, some employees responded better to voice mail, while others preferred e-mail, and then there were those who did best face to face. I thought this was a very insightful detail on his part.”

Cash Flow

To bolster revenue, Northwood ended its relationship with about 12 health-maintenance organizations and insurance companies that would not accept Northwood’s new standardized invoices, says Mr. Games. Patients whose care was covered by those companies and HMO’s were transferred to different insurance carriers.

“When I got here, Northwood was providing services that it was losing money on,” Mr. Radakovich says. “We started getting our billing in order so that we were reimbursed for the services we provided, and we sued those who owed us money.”

By the end of the first year, Northwood began to emerge from its difficulties, he says: “At the end of the second year, everyone knew we were out of danger and that we had a future.”

The organization also made a decision that could seem counterintuitive: It got rid of its fund-raising operation. The center had a development director until 2000, but it was not raising enough from private sources to justify the position, says Mr. Games.

Focusing on keeping expenses lean and being diligent about bill collection, says Mr. Games, made more sense: “Profitable operations is a more consistent resource than fund raising.”

Northwood also overhauled its board to enhance its effectiveness. When Mr. Radakovich arrived, he says, the board was composed of local people who genuinely cared about the institution, but not all of them really understood its problems.

Today the board includes lawyers and accountants with experience dealing with nonprofit organizations, as well as business people and psychiatrists.

Mr. Radokovich has also worked to upgrade the skills of Northwood’s employees by offering them opportunities to get training. And the organization intensified its recruiting efforts, an approach that is beginning to bear fruit.

“For the first three or four years, we couldn’t attract anyone here. Everyone knew we had previously been on the verge of bankruptcy,” says Mr. Radakovich. “It has only been in the past year that we have been able to attract people from world-class organizations.”

A Bright Future

Today Northwood’s fortunes — and its reputation — have turned around. It has fewer employees (about 500, 70 fewer than in 1997) but serves more clients (3,396, up nearly 400 from before its makeover). In 2003, 2004, and 2005, two independent agencies — the state licensing board and APS Healthcare-West Virginia, a for-profit managed-care organization that has contracts with the state — audited Northwood’s “quality of patient care” and determined it to be the very best in its peer group in West Virginia.

Since 1998, says Mr. Radakovich, Northwood has spent more than 10 percent of its revenue from patient fees to provide free care for those not covered by insurance programs.

The average amount spent on care for the uninsured by West Virginia health-care institutions was 2.5 percent in 2004, the last year for which figures are available, according to Mike Robbins, vice president for financial policy at the West Virginia Hospital Association, in Charleston.

Other nonprofit organizations have noticed Northwood’s makeover, and believe it has benefited other local charities.

“To say that there were a lot of changes in leadership over the years would be an understatement,” says Mr. Knierim, of the United Way of the Upper Ohio Valley, which raises money through an employee drive at Northwood. “Mr. Radakovich certainly stabilized the institution and has been very proactive in taking care of the mental-health needs in this community.”

This sentiment is echoed by Maj. Thomas Friddle, commander of the Salvation Army chapter in Wheeling, which has sought Northwood’s help with people at its homeless shelter who have substance abuse or mental issues.

For example, Maj. Friddle recalls a 12-year-old girl who was threatening to commit suicide.

“Northwood counselors came to our facility, calmed the child down, and adjusted her medication,” he notes. “Whenever we’re in doubt, I just have to make one phone call to get the ball rolling — oftentimes, social-service agencies can be territorial and afraid of sharing, but that is not the case with Northwood.”

Northwood’s resurrection over the past decade has increased its ability to carry out its mission, says Mr. Radakovich.

“I really believe in my heart that we are a model for providing world-class care for people who have spent their entire lives being poor,” he says. “We really take our mission seriously, and while I believe that the people in the not-for-profit sector are wonderful, if more nonprofits were run like a business, there would be greater opportunities to achieve their charitable goals.”