Atlantic Health System’s Kevin Lenahan gets creative as the day-to-day realities of the Affordable Care Act emerge

By Julie Barker

Managing finance in a changing environment is like riding a wave. “You don’t want to hit the wave too soon or too late and get washed out,” says Kevin Lenahan, Atlantic Health System’s vice president of finance and CFO. Amid the opportunities and potential perils facing a large hospital system today looms a large question: just when to take on additional risk in negotiated insurance contracts.

Since the Patient Protection and Affordable Care Act (also known as the Affordable Care Act) was signed into law in 2009, hospitals have been on a journey from the old way of handling patient care and making money to a new way. As Lenahan navigates familiar waters of the fee-for-service model, he is also watching for the right moment to take on the monster waves of risk-bearing contracts. Meanwhile, he’s making deals to share knowledge and costs.

“Regardless of any changes that may happen to the law going forward, I think the model is going to change,” he says. “We need to be smarter about how we do things. Size and scale are going to matter, and that’s why we continue to grow.”

Including Morristown Medical Center, Overlook Medical Center, Newton Medical Center, Chilton Medical Center, and Goryeb Children’s Hospital, Atlantic Health System is one of the largest non-profit health care systems in New Jersey, and arguably the best run, having received the highest ratings by Moody’s (A1) and Standard & Poor’s (A+). It’s a testament to Lenahan’s and CEO Joseph A. Trunfio’s leadership that Atlantic Health System has stayed financially strong despite losing about $11 million a year due to Medicare Sequestration cuts. Lenahan, who has been with Atlantic Health System for 18 years and became CFO in 2010, oversaw the various negotiations, two of which led to mergers.

With a close eye on costs and opportunities and the will to eliminate such redundancies as multiple payroll departments, Atlantic Health does make money. Margins, says Lenahan, are 2 to 3 percent, which is “consistent with the major hospital systems in New Jersey.” Every dollar earned is reinvested in the organization. “We spend over $100 million a year in capital, a lot of it going for new technology and upgrading our facilities,” he says. As an example, Lenahan has just approved about $18 million for new electronic medical records (EMR) for physician practices.

Working Smarter

Bringing new physicians into the system is one of Lenahan’s focuses, as the physician practices department reports up through him. “It gives me the complete understanding of how the operations work. I’m not in a finance ivory tower two miles from the hospital. I’m meeting with physicians every day.” He negotiates their contracts, including benchmarks. He aligns physician and hospital incentives. And he keeps an eye on the results. “The value of care will trump the volume of care eventually,” he says.

Through mergers, Atlantic Health System set out to not only expand the organization, but make the care it provides more effective. Big enough now to purchase in bulk, the health care organization is looking to buy direct, cutting out the middleman in many situations. A year ago, it created an off-site central warehouse, which not only freed up space at the individual campuses, but enabled Atlantic Health System to expand bulk purchasing initiatives. “We probably saved about $2 million with that central warehouse,” says Lenahan.

As each acquisition closed — the most recent was the Chilton merger last January — Atlantic Health System’s leadership took steps to reengineer processes. Layoffs are not countenanced, so retooling is the answer.

On the patient-care side, similar scrutiny of processes is resulting in better financial outcomes and better quality of care. Atlantic Health System is set on reducing the overall cost of care for New Jersey’s Medicare population through its Accountable Care Organization (ACO), one of the largest in the country, says Lenahan, who is CFO of that business entity. If Atlantic Health System is successful in this, the government will share some of the savings with Atlantic Accountable Care Organization, which in turn will share the savings with the physicians, who are thus incented to make smart choices. The total spend for Medicare would be reduced by achieving a lower readmission rate, for example. Medicare is not a money-making proposition for the hospital system, paying about 95 to 96 cents on the dollar, and thus, there’s no incentive for providers to try to keep Medicare spending high.

Although it is in name and in fact a hospital system, Atlantic Health System does not need to keep patients in hospital beds to earn income. Atlantic Home Care is the arm that provides follow-up care and, not incidentally, helps keep patient insurance costs down. Atlantic Health System also owns a patient transportation company and a durable medical equipment company providing items such as respirators and oxygen.

In the new environment created by the Affordable Care Act, “your size gives you some ability [to make money], but you have to do something with that ability and I think we’ve been successful at that,” says Lenahan, who credits his mentors Kevin Shanley — his predecessor as CFO — and Trunfio. From the latter, he learned “to try to understand the big picture.”

“Patients have options and choices,” he says, but as the organization moves toward the implementation of electronic medical records, “we can more quickly and efficiently get the health care information to each of their doctors, and to the right specialists.” And after leaving the hospital, patients in Atlantic Health’s system can opt to use Atlantic Home Care, which is aligned with the hospital network’s physicians to ensure a quick recovery and minimize the necessity for readmissions. “So we’re controlling the care continuum.”

Looking to the Future

A three-year goal of Atlantic Health System, articulated in 2013, was to reach $2 billion in revenue, and according to Lenahan, the organization will likely achieve that goal in 2015, a year ahead of schedule. The purchase of Hackettstown Regional Medical Center, which, if given state approval, should be completed by the end of Q1 2015, achieves that objective in Atlantic Health System’s planned growth.

And what’s the next goal? Because Atlantic Health System has infrastructure in place, a large pool of high-quality physicians experienced with accountable care, and enjoyed good outcomes, Lenahan feels that the time is nearing to become aggressive and negotiate risk-bearing contracts. “My team and I are spending a lot of time analyzing the implications and helping our sites and our operations staff understand the impact of [that] change.”

A risk-bearing contract with a payor, whether Medicare Advantage or a commercial insurance company, would essentially state, “We’ll take upside-downside risk that we can manage the overall cost of care.” Atlantic Health System might have to discount some of its rates in such a negotiation, and “as you do that,” says Lenahan, “you’re going to need a certain amount of volume — new volume — to make up for it.”

Lenahan, who counts as one of his biggest pleasures visits to Long Beach Island with his family (two sons: one in college and one beginning his last year of high school), finds a natural metaphor in ocean waves. “Do you jump in with two feet, or do you ease your way in?” he asks.

Presently, he is anticipating the moment when all conditions are right for a smooth ride on a big wave, ahead of the curl and ahead of the competition.