Many middle-class houses have closets larger than the office of Robert Ford, vice president of operations at Hermann Hospital. However, he explains that renovating and expanding his office would cost $35,000, an expense he views as unnecessary.
The hospital's chief financial officer and medical director use business cards on which they've scratched out phone numbers or titles and handwritten their own. To save money, they've decided not to order new ones.
The travel budget for this year was slashed $500,000, nearly a 50% cut from 1993. That likely prompted the hospital's quarterly in-house magazine to include these tongue-in-cheek new travel guidelines: "Meals: Certain grocery chains offer free samples of promotional items. Entire meals can be consumed in this manner. Travelers should also become familiar with indigenous roots, berries and other protein sources available at their destination."
The lighter side of cost-cutting is something many hospitals in worse financial straits couldn't afford. In fact, Hermann's incessant attention to cost details would be expected in a hospital that was struggling financially.
However, that's not the case. For the fiscal year ended Sept. 30, Hermann's net income was $51 million on revenues of $411 million.
Fiscal 1995 isn't projected to be quite as rosy, but it could still be strong. The hospital estimates a profit of $30.7 million on revenues of $405 million. Lower profits are expected because the hospital will receive less money from Medicaid disproportionate-share reimbursement and fewer Medicare dollars as more elderly have joined area HMOs.
"Hermann has developed a unique culture that rewards risk takers," said Ivo Nelson, a consultant with Insource Management Group, which is working with Hermann on its re-engineering project. "There's more of an entrepreneurial spirit in this hospital than any hospital I've been in." IMG is a Houston-based firm started by Compaq Computer founder Rod Canion. Mr. Canion left Compaq in a management shake-up in 1991.
Hermann is arguably in its second or third generation of cost-cutting, having advanced from near financial disaster in the late 1980s.
Changing image.In fact, just as the word "spiraling" has frequently accompanied healthcare costs, journalists often typed "scandal-ridden" before the name Hermann Hospital. Three years of losses and various trustee and management problems took their toll in fiscal 1989 when the hospital lost $29 million on operating revenues of $193 million. Just last month, Hermann settled another problem, paying a $1 million fine to the Internal Revenue Service for using questionable financial tactics to recruit physicians in 1990.
A 16-year veteran of Hermann, Lin C. Weeks remembers surviving six layoffs during the 1980s and knows the pitfalls of what she described as the "cleanest cut"-slashing jobs. Ms. Weeks, now vice president of operations, said she started to develop "survivor guilt. I could never figure out why I didn't get laid off when my friends did." Turf wars increased, she said, as everybody worried about his or her job and about how to please the boss.
Yet, Hermann executives came to realize that "80% of the costs we're going to cut aren't going to come from cutting people," she said.
Simply, Hermann had to change the way it operates.
Last summer, Hermann implemented a new "team budgeting" process. Each of the hospital's 80 department directors presented budgets to a team of eight or nine other department directors. Team members acted as a jury that ruled on and challenged how much the department can spend.
Then a group of various directors from the 10 teams made decisions on items that affected multiple departments, such as uniforms, travel and education. Patricia Riddlebarger, a member of the "super team," said the group was interested in saving jobs, summing up the mind-set as "What does it take to save an FTE (full-time equivalent)?"
Team budgeting "gets rid of that argument of who you work for depends on how much budget you get," added Chief Operating Officer Lynn Walts. That had another side-effect, she said: "It raised the trust level in the institution."
Hermann also set an FTE reduction target. Mr. Ford notes that in June Hermann was 151 FTEs under the target budget of 1,668. Although attrition accounted for some of the decrease, other changes were made. About nine months ago, phlebotomy, which was handled by 25 employees in the lab, was transferred to the nursing units.
Competitive market.Despite Hermann's fiscal health, the hospital has to keep costs down in a fiercely competitive market. David Page, Hermann's CEO of slightly more than a year, said the hospital sees a flat market in healthcare prices in Houston. In fact, "we're looking at some prices we can roll back," he said.
Hermann executives want to get prices low enough to assume capitated contracts. Five years ago, Hermann had 10 managed-care contracts. Now, it has more than 90, which account for about 40% of the hospital's revenues. However, most contracts pay Hermann a per-diem or discounted rate. Under those contracts, if Hermann manages utilization better by getting patients discharged sooner, it cuts its own reimbursement as well, Mr. Page said.
As payers reduce reimbursement and as Hermann signs capitated contracts, it must grapple with high physician costs. To prepare, the hospital is funding OneCare, a physician-governed healthcare organization, to contract with payers. OneCare has 13,000 enrollees, which include 8,000 Hermann employees and their dependents.
Terry K. Satterwhite, M.D., OneCare's chairman and Hermann's medical director, acknowledged that costs are a problem. In Houston, the going rate for capitated physician services is about $48 per enrollee per month, Dr. Satterwhite said. His group's costs are in the $60 range.
For now, Hermann absorbs the losses from OneCare. However, within two years, the effort is projected to start making money, Dr. Satterwhite said.