It’s no surprise that COVID-19 took its toll on businesses and organizations of every shape and hue, forcing an unprecedented number of organizations and programs to close. During the pandemic, 17%, or more than 110,000 restaurants in the United States closed, of which most had been in business, on average, for 16 years, and 16% had been open for at least 30 years (see More Than 110,000 Eating And Drinking Establishments Closed In 2020). More than 12,200 retail stores downed their shutters for good—compared to 10,000 store closings in 2019—as the pandemic sent many businesses that were already struggling over the edge (see A Record 12,200 U.S. Stores Closed In 2020 As E-Commerce, Pandemic Changed Retail Forever). Overall, 200,000 more businesses than usual closed—and the closures in recent years have been about 600,000 establishments (see Covid-19’s Toll On U.S. Business? 200,000 Extra Closures In Pandemic’s First Year).

Of the 300,000 nonprofits in the nation, a study estimates that in a worst-case scenario, 38% (more than 119,000 entities) could close their doors in the next two years (see 1 In 3 Nonprofits In Danger Of Closing Due To Pandemic: Study). And 58% of non-profits reported closing at least one program in 2020 (see Persevering Through Crisis: The State Of Nonprofits). During the same year, 47+ hospitals closed or filed for bankruptcy in 2020 (see 47 Hospitals Closed, Filed For Bankruptcy This Year).

Right now, closures of service lines and program locations are a “necessary evil” of keeping organizations financially sustainable. But every executive will tell you it’s a difficult decision—changing lives of employees and consumers and altering the service delivery system in communities. The question is how to approach the decisions around your service line portfolio. And, if you decide a service line or program location needs to be closed, what is the best way to proceed? We learned best practices around this difficult issue from two executives who have made those tough choices—Peggy Terhune, Ph.D., MBA, OT/L, President and Chief Executive Officer at Monarch and Howard Snyder, Director Of Business Development at Active Day. In their session, Making The Tough Decisions: Knowing When & How To Close A Service Line at last week’s 2021 OPEN MINDS Strategy & Innovation Institute, they shared their process along with advice for their colleagues.

Monarch is an $89 million non-profit in North Carolina serving 30,000 consumers through 32 behavioral health locations and 96 long-term services and supports locations, including 19 day programs for consumers with intellectual and developmental disabilities (I/DD). Active Day is a private investor-backed entity with just over 100 adult day centers and home care services in 10 states, serving more than 8,000 seniors as well as consumers with I/DD. The executives from both organizations shared ‘lessons learned’ based on their experience in closing day programs – why to close a program, how to evaluate the options, and how to implement those decisions.

What drives the decisions to close a service line? Decisions to close a service line or program location should always be made in the context of an organization’s overall service line portfolio. Some of the drivers of a shifting portfolio include changes in service demand, reduced reimbursement rates, changing regulatory or licensure requirements, more competition, higher operating costs, or the inability of the organization to provide financial support if the service line is not breaking even.

Regulatory changes and funding cuts have been Monarch’s key reasons for deciding to close programs, according to Dr. Terhune. In her four decades in the field, she has led day programs for consumers with I/DD through many iterations—from sheltered workshops to community volunteering to micro enterprises to small group activities in the community. During COVID, the day programs transitioned to one-on-one activities with consumers in their homes and virtually. About two years ago, the Centers for Medicare and Medicaid (CMS) said that day programs are congregate care and so Medicaid funding would eventually be phased out. In addition, many consumers did not come back to day programs that reopened after the pandemic. Dr. Terhune said, “The decision was made partly because of CMS, partly because of finances. But primarily because it made sense for the people we support. I’ll never forget one of the people I met who said to me, ‘Peggy, I don’t want programs, I just want to have a life.’…”

She continued, “I’m always trying to be ahead of the game, I don’t want someone to come to me and say, ‘close your day programs’ and try to figure it out then. Based on the CMS mandate, we realized that we are going to have to close every single congregate day program within the next couple of years. So that’s what we’ve set out to do over a period of time and COVID was our unexpected trial run for how to transition.”

Economic issues have been a big driver for program closure considerations at Active Day. Mr. Snyder spoke about the threat of rate cuts—in New Jersey for example, managed care organizations were proposing a 25% rate cut for day programs. Rate fluctuations are not uncommon. But when things are going well, there is a tendency to become complacent about portfolio management. He observed that when an organization is growing, everybody likes to support a winner to open up a new center or find a new business line. He said, “Executives tend to work on things that are fun and exciting—and our marginal performing business lines sit along the side. We’ve been a relatively strong-performing organization financially. And that has exacerbated the tendency to not deal with difficult units and locations. But putting it off to the side and backburnering it is not how you fix a troubled unit.”

Evaluating the options requires an objective rather than subjective process. When it comes to closing services, the decisionmaking challenge for most health and human service managers is to separate the rational from the emotional. Even when a service line or program is a clear loss leader and drain on resources, there is often a strong inclination to keep a program open simply because it has been around “forever” and core team members cannot conceive closing it. The best way to overcome this challenge is to have clear criteria and a consistent process for portfolio analysis.

Mr. Snyder explained, “If you think you can just have a straightforward conversation with the leadership team or board about closing a service line, know that you can get sidetracked very quickly. Challenges we faced on these lines led us to develop a set of objective criteria to evaluate each program and come to a conclusion without some of the beliefs and biases that we all bring to the table.” While there are many frameworks to apply objective criteria, Mr. Snyder advised that it’s best to keep it simple and do what works for your organization. At Active Day, a simple strengths-weaknesses-opportunities-threats (SWOT) analysis turned out to be the best approach as it was not intimidating and everyone could easily understand it. And it’s a best practice to regularly examine all business lines—not just those that are struggling—against the framework. The leadership team at Active Day reviews programs annually. In a typical year, 20 out of their 100+ programs might be “in the gray and require some extra tlc” to become solid performers, failing which tough decisions have to be made.

It’s also important to plan around outliers and COVID was obviously a big one. In June 2020, the Active Day team did a comprehensive review of all its centers, and they identified 21 locations whose long-term viability was at risk. The team performed a SWOT analysis and financial review on each of these locations, looking at pre-COVID performance and potential scenarios after reopening—if consumers came back at 25% 50% and 75%, of the pre-COVID census. They examined why the  programs were struggling or failing pre-COVID, whether they could recover, what resources were required for recovery, and what the margins would be like if the program recovered.

Be prepared to answer non-financial questions—such as what will happen to consumers and staff, and how the organization’s reputation will be affected—from the leadership team and board. And as Mr. Snyder said, “If you’re going to keep something operating, there’s significant costs to supporting a money-losing service line or location. If it’s related to the other things that your service lines are providing, you may want to stay in that line of service and you need to look at things holistically. So while the service line you want to keep may be losing money, consider if other service lines are making enough to compensate for those losses so the net impact on the organization’s bottom line is not negative.”

Closing a service line entails a significant risk to the organization’s reputation, community goodwill, and staff trust. When Active Day decided to close a struggling center in Wabash Valley, Indiana, they heard concerns from stakeholders at their other Indiana locations. Mr. Snyder said, “They wanted to know what was wrong and whether we were going to close their center next. So it was very important that we were proactive and communicated to all staff members about what happened. But we also used it to set expectations that other programs need to be successful.”

Executing the decision to close requires time and effort. Once the decision is made to close a service line, it’s not a cakewalk. There are costs to plan for and consequences to manage. Communicating with consumers and families, staff, and payers has to be an intentional and structured exercise.

Don’t underestimate the “exit costs” Mr. Snyder cautioned. In the case of some location closures, for example, it was a challenge to figure out what to do when they were only six months into a five-year lease—pay a lump sum to exit the agreement or find someone to sublease the space. Dr. Terhune said they monitor leases well before they are up for renewal to align with their planning for the future of programs. And where feasible, they add a clause in the property lease that allows them to get out of the lease if they lose funding, which has been very helpful.

Dr. Terhune said that at Monarch, they are investing considerable thought into alternatives for consumers as day programs in their current form are phased out. They’ve been creative with virtual activities and are also getting ready to open a coffee shop in the community where consumers have expressed interest in working. Monarch also plans to offer small group activities so consumers can spend time with their friends, which they’ve said is really important to them.

Communication is critical. Dr. Terhune said you have to start with consumers and staff involved in the program that is closing and help them see where things are going. Then you have to inform funders and the community—explain the decision and be available to answer questions. Active Day has hosted town halls and invited community members to come in with questions about the program closure.

Managing payer relationships and engaging them early in the process is also critical. You have to update your website and collateral materials. Sometimes, when you’re providing a service to a Medicaid or waiver community, there is a notice period (usually 30 to 60 days) before you can exit a service line. So consider the requirements to keep the service operating until then. Mr. Snyder shared, “We’ve used retention bonuses for leaders and key employees to keep them on board. The other thing you need to think about is severance—not every organization has a severance policy in their handbook. The way you treat staff on the way out is going to be known by the rest of the organization. And don’t underestimate the management team time and effort required to manage the closure.”

The decisions, and the processes, to close a service line are never easy. But specialty provider organization executive teams must recognize that many current service lines will likely become obsolete at some point. And in a demanding environment that requires continuous market repositioning, the need to close a service line may not be driven by obsolescence alone. It may be that the service line is no longer a “fit” in the organization’s long-term strategic direction. As Mr. Snyder summed up, “If you’re investing resources and time to keep a struggling program going, you’re spending a lot of time and effort that could be spent on your successful service lines, and you’re diverting resources from units that could be growing faster, or from expansion or diversification that could be helping your organization.”

The discussion at last week’s session reminded me that closing services lines needs to be a deliberate and directed process. And it’s better not to wait until the next crisis—external or internal—forces the tough decisions.

For more on portfolio analysis and making tough decisions, check out these resources in The OPEN MINDS Circle Library:

• Portfolio Management Addresses The Big Issue: What We’ve Done In The Past Won’t Get Us Where We Need To Be
• Four Steps To Effective Service Line Analysis & Portfolio Management
• Pitfalls To Avoid When Changing Your Portfolio: The Bancroft Case Study
• Looking Beyond Financials To Make The Tough Decisions: The Active Day Case Study
• Balancing Mission & Margin: Portfolio Management Tips From Three CEOs
• Great Leaders Make Great Decisions, But How?
• Decisions! Decisions! Five Big Decisions Every Executive Team Needs To Make For The Next Normal
• At Hope Network, Growth Focus & Continuous Business Reviews Drive Executive Decisionmaking
• At Ohel, The Need To Balance Mission & Margin Drives Executive Decisionmaking
• At Catholic Family Center, CEO’s Corporate Background Leads To A Sustainability Focus In Executive Decisionmaking

And for even more, join us on July 21 for the free web briefing, Diversify Your Service Lines Or Bust: Your Path To Growth. Maria Warren, Senior Director of Clinical Consulting Services, McBee Associates and Neal Tilghman, MPA, General Manager, Integrated Care, Netsmart, will discuss what it takes to successfully expand your service offerings and increase your revenue stream from a people, process, and technology perspective.