Challenge
A mid-sized regional health system grappled with a common yet misguided perception: that its rural affiliates, four Critical Access Hospitals (CAHs) generating $55 million in combined operating revenue, were a financial burden. System leadership viewed these hospitals as loss leaders and were considering strategic divestment or service consolidation. However, the system leaders lacked a detailed analysis and comprehensive understanding of these facilities’ full financial and operational contributions.
Approach
The health system retained Stroudwater to conduct a comprehensive analysis of the rural affiliates’ operational performance, financial contribution, and strategic value to the overall system. Rather than evaluating the hospitals in isolation, the team focused on how they contributed to system-wide performance, including cash flow gains, downstream referrals, and service-specific opportunities that enhance the system’s strategic market position.Â
The analysis included a review of operational efficiency, cost report optimization, home office allocations, swing bed and other program opportunities, and contribution margins from referrals. Stroudwater’s team focused on evaluating omissions in the system’s historical evaluation of its rural affiliates’ performance—specifically regarding accretive contribution margin and unrecognized revenue opportunities.Â
Findings
Stroudwater identified $6 million in incremental operating cash flow improvement opportunities across the four hospitals—from improved home office cost-allocation methodologies and underutilized swing beds to misaligned staffing models. Additionally, the team identified $9 million in misidentified or overlooked contribution margin from the four rural affiliates. Combined, this $15M in improved operational performance and previously overlooked contribution margin benefits transformed the system’s understanding of the value of these rural affiliates. As a result of these findings, the system avoided strategic errors in performance evaluation and resource allocation, and accretive value to the system was preserved.Â
These findings not only reframed the conversation about the CAHs’ performance but also revealed that, when properly analyzed, these facilities were highly accretive to the system. The rural affiliates generated meaningful financial and strategic value, supported the broader continuum of care, and played a critical role in community access and system brand presence.Â
Outcome
The system abandoned its initial plans to reduce investment in the rural affiliates. Instead, it adopted a roadmap developed by Stroudwater to capture missed operational improvements and recognize accretive value in future decision-making. Leadership began integrating rural performance metrics into their strategic planning and restructured resource allocation to better support the rural network.
Impact
What began as a cost-cutting exercise transformed into a strategic reappraisal of rural value. The system not only preserved essential rural access points, but also improved financial performance and alignment across its network. This case underscores the importance of rural-specific expertise and rigorous financial analysis in uncovering the actual value of rural affiliates within health systems.
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