Donald C. Labourr: Patients or Profits?

Donald C. Labourr graduated from the University of Vermont in 1975 with a B.S. in physical therapy. He completed requirements for certification in athletic training at the University of Virginia, and was the assistant athletic trainer for the University of Washington from 1975-1978. Don started the Sports Medicine Clinic at the Virginia Mason Medical Center in Seattle and worked there until 1994 when he entered the corporate world. Don spent seven years as a vice president of operations for three national health care companies before leaving to open his own business. He is now President of OrthoSport Physical Therapy in Lynnwood, WA.

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Patients or Profits?

Ethix: As a vice president of a health care company, how much time did you give to thinking about health care, compared with business issues and the bottom line?

Donald Labourr: Too much! Or so my bosses said. In the companies I worked for, a vice president’s job was to increase the company stock price, with little regard for the quality of the product being delivered. The pressure to meet monthly financial goals and end-of-quarter earnings was relentless. Most of my peers were motivated to do this and were highly rewarded when successful. As a once highly regarded clinician, I could not ignore the product and had too much respect for the treating clinicians to ignore their needs. I also believed that ultimately delivering a good product was the way to success and that short-term financial profit without quality would destroy us. It was a constant frustration for me. I knew sooner or later I would have to make a decision to become rich and guilt ridden or to keep my values and leave. For many years I was considered a real renegade and even referred to as a “tree-hugger” by senior management.

How can a company stay in business if their beliefs are contrary to what customers want from the product?

I don’t know of many large physical therapy companies that have survived more than a couple years. Let’s go back to the beginning; it started with managed care, which did two things. It cut the profits of health care providers. It also threatened to establish very tight preferred-provider organizations. So the local guy running his business is going to get paid perhaps a half of what he was paid before, per patient. Plus he is threatened with being locked out of contracts because the payers wanted one point of administration that would deal with a hundred physical therapy centers. So large physical therapy companies would provide payers with service for a discounted amount of money, with a single point of administration, and physical therapy clinics every place their client base was. In return the companies got an exclusive arrangement, thus more volume.

That cut out many of the little places. So out of fear, they sold to big companies. We did 85 acquisitions in the two years that I was with HealthSouth, just in the states of Washington, Alaska, and Oregon. HealthSouth went from a small number of facilities to almost 2000 facilities across the country, much of it driven by the fear that they would put the small guy out of business. Many other health care companies developed during this time for that reason. During the heyday, companies would offer huge amounts of money to buy out small strategic clinics, buying their practice for as much as seven or eight times earnings. Usually four times is what a business of this type is worth. For a young guy running a clinic, it’s hard to resist when somebody comes in and offers you two million dollars for your practice, cash up front, no non-compete. Of course the company then had to get their money back and more. As these companies built up their networks they would compete aggressively for business. HealthSouth said, “We’re going to drive the rate down so low, we’re going to knock all these other people out of business. Once we’ve knocked them out of business, then we can start to increase our price again because we will control the market.”

But managed care didn’t develop the way most thought. There were a lot of complaints from patients and physicians. People wanted to be able to choose their own provider. These contracts developed but then they fell apart. And it went back to the open system it is today.

How did you get involved?

I started the Virginia Mason Sports Medicine Clinic. I knew a lot of people in the business and was pretty well known. After twelve years at Virginia Mason, I was approached by Caremark, a division of Baxter Medical. Physical therapy wasn’t a part of their business at all, but they saw that it was generating a pretty good profit margin, so they decided they’d take it on as a “product line.” They started buying up clinics and they came out to Washington, one of the first states to adopt managed care. I had a great job but I was looking for some new challenge, and I saw managed care coming and what could be put together on a quality basis. And so I went with them and helped them build up to 25 clinics in a very short time.

And how did you feel about that work that you were doing then?

From the very beginning I saw the problems. I saw small businesses that were well-run being taken over by a company back East that didn’t know anything about life in the Northwest, adding on levels of administrative work. They were doubling the amount of work that had to be done in the clinics in the billing processes, the collection processes, and the general paperwork. In order to support that, productivity had to go up. Remember they also bought these for well over market.

They had to make their money back, so they cut other costs and increased productivity requirements. At the end of a year it was sold to HealthSouth.

So you got to HealthSouth by getting acquired?

Yes. I became vice president of the Northwest states for HealthSouth: Alaska, Washington, Oregon, and Idaho. I was running every aspect of operations.

Identifying the Conflict

And when did you go from thinking this was a fun job to a conflicted feeling about it?

The pressure to meet monthly financial goals and end-of-quarter earnings was relentless.

It was fun because all of the sudden I was holding a high-level position in a big company. I was flying all over, building a network of clinics, and meeting a lot of different people. But very soon the conflicts started. The first major problems arose in HealthSouth. They clearly felt physical therapy was a commodity that would be sold at the lowest price. They had a system that they believed could get their product down to the lowest price. This included everything from staffing levels, productivity levels, salaries, and types of equipment, to carpet, paint, etc. They felt they could duplicate this system everywhere in the country, just as a McDonald’s does. This might be true if you are selling hamburgers but health care is very locally driven.

Can you give me an example of something that didn’t really work?

The biggest difference was the productivity levels. People in physical therapy were used to seeing 10 or 11 patients a day and the HealthSouth requirement was 16 a day. HealthSouth had it down to a science: “We will allow no more than $25 of salary cost per visit.” That includes receptionists, therapists, marketing people, everybody; all the salaries that could be charged against a customer visit would be limited to $25. Though nobody had looked at this kind of data before, the way clinics in my area were run it was probably $38 to $40 per visit. So you’re dropping your allotted salary costs by that much, which means you’ve got to get rid of a lot of employees, and the ones who are left have to see a lot more patients. The patient is getting less service, less time with a therapist, but the profits go up. Even with the therapist spending less time with the patient, they were “encouraged” to keep their billing levels high.

But at the same cost or more, because the dollars went somewhere else.

Yes. The cost of the operation went up because of the administrative overhead, and numerous other things within the company. For example, you had to buy equipment from one source. If I could get it for $100 and their source was going to sell it to me for $500, I had to buy the $500 one. Presumably somebody’s getting a kickback someplace—not to mention the costly hotels, flights, rental cars, expensive dinners.

But productivity issues were the biggest problem that I faced. As a therapist, I knew they could not see the number of patients they were being asked to see and still provide quality care. I had no argument with people needing to be more productive than they were before because managed care dictated such a low price. But what HealthSouth wanted was beyond reason, and I knew this as a practicing therapist. I was able to get people in my area to increase productivity, and they were okay with that, but they couldn’t go to the HealthSouth level and neither could I.

Our area continued to focus on being the best providers. I developed a mission statement that read: “We will deliver a quality product in a financially successful environment while providing rewarding jobs for our employees.” This meant that we understood the financial requirements, but we would not compromise quality and we wanted to keep and attract the best therapists. We knew that the doctors were not referring to a company but to their trusted therapist. This became our mission and everyone was getting on board and excited. The interesting thing was that even though we were not meeting HealthSouth’s productivity levels and salary cost goals, we were generating a higher profit margin than most other places in the country. This was because we were smart in other ways and also our reimbursement was higher. But our salary cost per visit was much higher than they wanted and our salaries were a little bit higher, and they demanded that we meet their numbers. So a very financially successful clinic would have to cut employees anyway and disrupt the whole clinic. This made a lot of people leave voluntarily.

When I argued that continuing to press the measures would cause our best people to leave, the response was, “Well you’ve got to press it because you could do better. You can generate more money for us.” And the good people left. HealthSouth didn’t care because they believed that they were going to control the market. Their philosophy was we want all the top people to leave, because they have high salaries. Bring in the young kids, and—they would use the term “churn ‘em and burn ‘em”—work ‘em hard until they leave; bring in a new batch. They believed physical therapy was a commodity and price is all that mattered.

For me it really came down to quality of care and the quality of life of the employees. Quality of care was being compromised, people were being forced to see too many patients in too short a time, and that was making the patients unhappy, the therapists unhappy, the doctors unhappy. And I knew that it was decreasing the quality of care.

Caught in the Middle

And being in the middle you could see both sides.

Right. You either bought into it and enjoyed it as you saw your salary and bonus going up, or you worried a lot about what was happening on the front lines.

So you were more concerned then about the practice that was ultimately counter to patients’ and doctors’ best interests?

Right, and the company’s best interests. Because I knew that if these people were leaving, we were going to fold. It could not sustain itself.

Are there any quality measures that would enable people to be objective about that, to say, “You’re just not meeting this level of quality”? Or did you have only financial measures?

Only financial measures. Quality is hard to measure. That’s the problem. There’s a formula for quality that was developed by someone else that we started looking at in our area: quality is a factor of the cost of the product, the outcome, and the patients’ satisfaction. In other words, you can deliver a great product, and have a great outcome, but if it costs too much, who’s going to buy it? You can also deliver a product that doesn’t cost much but if the customer is unhappy or the outcome is poor who is going to come back? You’ve got to keep your costs down and still deliver good service and have customer satisfaction. That’s the blend. In the race for meeting quarterly earnings this was all lost for short- term gain. HealthSouth had 85 clinics in my area when I left; there might be a dozen or so left today. If we had been allowed to run it with quality as our driving force, I believe we would still have those 85, and more, and we would be very profitable.

What were the key factors for you as you moved from excitement to plans to leave?

I opened up my office to anybody who wanted to talk about anything, and was inundated with complaining employees. Some complaints were not justified but the majority were. People felt like they were being abused, working too hard with no rewards. They knew the money and bonuses the guys at the top were making; they were doing the work and getting nothing. People were angry about what they’d been told when they sold their business versus the reality. How could I work in an environment like that?

Now again, the HealthSouth philosophy was, “Big deal. They don’t like it, get rid of them. Get new people in.” But I recognized that if we get rid of them, there goes our referral base, there goes our business. Why not give somebody an extra dollar increase, create a workforce that loves the company, that wants to work for you, and feels that everything is fair. This will create a great business. But if you treat people poorly, they’re going to fight back or they’re going to leave.

And if they don’t leave their level of creativity will go down.

Therapists were complaining to patients, they were complaining to their doctors; they basically fought back against the system. Instead of trying to work it out, it was all or nothing. And HealthSouth ended up with nothing. I couldn’t buy into the HealthSouth thing. It’s not that I was this morally superior person; I just believed it was wrong, morally and financially. And more importantly I knew we could make it work in my area if they would just allow me to run it the way I wanted to. Even though I was a vice president, I felt like a puppet. I couldn’t give a simple raise to someone doing a great job, and was chewed out for even asking!

The Last Straw

What was the final straw for you?

I knew sooner or later I would have to make a decisions to become rich and guilt ridden or to keep my values and leave.

I was in Alaska with one of the senior vice presidents—one of the founders of the company—and we went to dinner with this orthopedic surgeon and his nurse. For two hours, the surgeon berated HealthSouth and this senior vice president, a very powerful guy. The senior vice-president had to get up and leave the table three or four times because he was getting beaten up so badly. Finally, he left the dinner for the last time; he never came back in. I found him sitting out in his car in the parking lot in zero degree weather. I suggested we stop at a bar and talk about what happened. Here was a senior executive who used to chew people to bits in a matter of minutes and he was totally unprepared for what had happened. So I made him an offer on the spot. I said, “I will bet you five thousand dollars out of my pocket right now that if you will let me run this business the way I want to run it, I will beat my profit numbers by 10 percent.” He shook my hand, said, “You got it,” and he walked out the door. I was feeling great. After a year and a half of fighting this battle and having everybody in the company think I’m a weirdo, I’ve got the flexibility I need. Word started to spread throughout my region that this is going to happen and everybody was pretty happy. Then about three months later this man was moved to a different division, and one of the guys underneath him said, “No way, you’re not doing that. You’re going to do it the HealthSouth way.” And I quit.

Right on the spot?

I just said, “I quit.” There was a meeting in Birmingham the next day and I called and said I’m not coming and left the office.

What did you do then?

I took a job as vice president with another health-care company that I thought was going to be different. But basically, it was the same — the same greed and overspending at the top, and lack of concern about the product underneath — and ultimately that failed too. The sad thing is that while HealthSouth and the other companies fell apart, many of the people who were in the system learned how much money could be made by running a business that way. So many went off and started up their own “HealthSouths.” The same people who badgered me about not seeing more than 10 to 11 patients a day are now seeing 20 to 30 patients a day in their own clinics.

A New Start

So now you have your own practice. Are you running it the way you want?

Yes. We have enough time to spend with the patient to deliver a good quality of care, the employees are happy, and we’re running a business with excellent margins right now.

Focus on making the best product possible and the profits will come.

Are you concerned about health care in this country?

Yes, and I don’t know what the solution is. There is a tremendous amount of money being made in health care, but by the wrong people. Health insurance rates keep going up and yet the doctors and other providers’ compensation keeps going down. Heads of insurance companies, senior members of big health care companies, hospital administrators, and nonproviders are making enormous salaries because they control health care. I never thought I would see hospital administrators making more than the doctors.

In all the budget-cutting meetings I was involved in, I never saw any of the high salaried executives considering pay cuts for themselves.

I once flew to Arizona for budget-cutting meetings with executives from around the country. Considering airfare, hotels, meals, rental cars, etc., the travel cost for each person must have been around $2000. About ten highly compensated people sat around a table for a day and a half trying to cut two to three hundred thousand dollars out of the budget. We were down to cutting $10 an hour receptionists and reducing other salaries by 50 cents or a dollar. At the end of the first day we had made little progress, and I made the suggestion that if each one of us at the table took at 10 percent pay cut we could all go home, create an easy budget, and probably make it up in bonuses. Almost every eye dropped to the floor to avoid making any contact with anyone else, and the idea was drowned in a few muffles and snickers.

How do you do things differently in your own clinic?

I still fall back on my same mission statement: “We will deliver a quality product in a financially successful environment while providing rewarding jobs for our employees.” My employees know the mission statement and the mission. As with almost all health care providers, they want to deliver quality and know how to do it. They also know we have to be financial successful and that means we need reasonable productivity levels. They expect to be treated well and share in the company’s success.

So you’re having more fun now than you were before.

Yes. It’s hard work to run a business in the medical world for a lot of reasons, but I’m in control of it. I know that we have a good clinic. Time and again I hear the people who work here saying it’s the best place they’ve ever worked. And patients say it’s the best place they have ever been. We actually have changed peoples’ lives. I want our patients to go back and tell the doctor, “I loved it there. They treated me really well, and I’m better.” That’s a good outcome. That’s how my business runs. Focus on making the best product possible and the profits will come.