Dave Sedgwick

The Centers for Medicare & Medicaid Services’ shift to a prospective payment system in 1998 sent shock waves through the industry and claimed the financial lives of many prominent long-term care companies.

The current combination of recession, Medicare cuts, RUGS IV, MDS 3.0, state budget crises, QIS, RAC, and the unknowable final shape of healthcare reform have today’s leaders feeling déjà vu.

What do long-term care companies need in order to avoid last decade’s casualties? Here are a few very important things:


An organization’s culture—its structure and values—is the single most important factor for overcoming acute challenges and for transforming the industry one facility at a time. 

Centralization vs. decentralization

Speaking generally, there are two types of corporate structures: centralized and decentralized.  The most prevalent structure in long-term care is the centralized model. To be blunt, the primary need for a controlling, top-down, large corporate bureaucracy is to make up for incompetence at the facility level.

If this is not so, then why pay for all of those corporate puppeteers?

Imagine that your best regional and corporate nurse consultant led each and every facility in your company. Would you need the same amount of corporate overhead (divisionals, regionals, consultants, VPs, executive VPs, senior executive supreme VPs, etc.)?

Don’t get me wrong. I’m not saying that having better leaders at the facility means no support is needed. I’m also not saying there aren’t great administrators in traditional corporate settings. But I am saying that if you hope to attract a different breed of administrator and director of nursing, you have to cut the puppet strings—empowering the facility leaders to lead.

A decentralized model attracts the type of leader who is entrepreneurial and innovative, and has an ownership mentality. When the puppet strings are cut, facility leaders no longer say, “I have to check with corporate.” They own their problems and solutions. When major tests to a market or an industry happen, a decentralized organization has many creative partners attacking the problem in the trenches instead of a small handful of “know-it-alls” at corporate.

A decentralized model also attracts the type of support people who believe in the creativity and responsibility of local leaders and love to help them grow.

One of the main arguments against decentralization is that it is too risky—clinically and financially. The centralized mantra is “Thou shalt do things our way” in order to ensure “things” are done right. To avoid risk, decisions are made at the corporate level: vendor contracts, hiring, firing, compensation, policies, forms, etc.

The trade-off for operating that way, of course, is that you get a culture that attracts “employees” instead of “owners” and you promote the “all-stars” out of the facilities where our staff and residents need them most.

In order to mitigate the inherent risk of decentralization, a company must have deep-rooted shared values among its facility leaders.


Without a fanatical commitment to core values, a decentralized structure is too risky. But if a decentralized company hires, trains, and measures based on shared values, it has the potential to outperform its centralized competitors because it has infused top talent throughout the company and where it’s needed most.

Almost every company has a written culture statement (mission, values, motto, etc.) But, the difference between those that will be able to overcome major tests and those that won’t will be how real those values are to the facility leaders themselves. Too often, mission-type statements collect dust as decorations.

The structure will shape the true values and feel of a company more than anything. When shocks to the industry hit, our companies’ culture (structure & values) will be tested.

The testing of Johnson & Johnson

One of the prime examples of a decentralized company’s culture leading it through crisis is Johnson & Johnson. In their 1981 annual report, they state:

“Johnson & Johnson is not one company but many  . . . The largest has 6,300 employees; the smallest, at year-end had six. . . .

“Whatever their size or location, they share a commitment to meeting the special needs of a well-defined customer. In doing so, they create a wide variety of innovative ways to successfully run their businesses.

“We feel that the secret to liberating that productivity is decentralization— granting each company sufficient autonomy to conduct its business without unnecessary constraints.  In short, we believe decentralization = creativity = productivity.”1

Do we see companies in long-term care that are structured that way?  Rarely. But, therein lies the key to both attracting and retaining a different breed of facility leader. 

These statements by J&J were soon put to an extraordinary test.

In 1982, cyanide-laced Tylenol pills killed seven people in a few days in the Chicago area. J&J’s reaction was extraordinary. In spite of requests from officials to not recall the product, J&J called for a nationwide recall of 31 million bottles with a retail value of $100 million. Their market share went from 35% to 8%. One month later, they reintroduced capsules in a new, triple-sealed package, and within several years, Tylenol had reclaimed its top spot in the market.

Speaking in 1983 about that major crisis, James Burke, J&J CEO from 1976 to 1989, said the following:

“I do not think we could have done what we did with Tylenol if we hadn’t all gone through the process of challenging ourselves and committing ourselves to the [culture]. We had dozens of people making hundreds of decisions and all on the fly. And they had to make them as wisely as they knew how.

“And the reason they made them as well as they did is they knew what the set of beliefs that the institution they worked for were.  So they made them based on that set of beliefs and we made very, very few mistakes…. “2

Creating new cultures

What lessons can we learn from recent long-term care history and companies like J&J? In order to be prepared for the significant tests ahead, we need to have efficient, nimble, talented organizations fanatically committed to its core values.

Companies with centralized, top-down, bloated bureaucracies needing to justify their position and authority are slower to react to the shockwaves that will come.

Not only will a decentralized organization of many owners and partners come up with better ideas than a centralized few, but it also will be able to act quickly, like J&J.

Empowering the field and eliminating bloated bureaucracy is for many an impossible pill to swallow. Yet, if you were to ask the dozens of beaten companies from the late 1990s if they would try that medicine if given the chance, I bet they would.

1 Harvard Business School, Case Study: Johnson & Johnson (A): Philosophy & Culture, pg. 3

2 Video, Philosophy & Culture, A Question & Answer Session With Advanced Management Program Participants at Harvard University, December 1983

Dave Sedgwick is vice president of organizational development for The Ensign Group. His healthcare leadership blog can be found at http://worldclasscare.wordpress.com.