Tennessee's largest public hospital will complete a plan to cut $50 million in costs from its budget before it begins talking about mergers or acquisitions again.
Unable to acquire two hospitals earlier this year, 534-bed Erlanger Medical Center in Chattanooga is developing plans to cut about 30% of the facility's expenses. As many as 450 full-time employees, or about 13% of its 3,400 total work force, could be part of those cuts.
"We're really re-engineering for managed care, and we have to cut costs to prepare for it," said Sylvester "Skip" Reeder, chief executive officer of Erlanger Health System, parent of the medical center.
Before the cuts are implemented March 1, Erlanger employees and physicians are developing work teams to implement strategies to reduce their own departments. There will be 100 teams, which will come up with their own plans to cut costs. "We're leaving it up to the employees," Reeder said.
For his part, Reeder said he cut $3 million from his administrative budget by eliminating "between 45 and 50" of the hospital's 180 department heads.
After the hospital's expenses are reduced, Erlanger should be more competitive to compete for managed-care contracts, but Reeder said the hospital will have to partner with other facilities to develop economies of scale.
"A natural evolutionary step will then be to look at merger of entities," he said.
Until the decision to lay off workers, Reeder said attempts to merge or acquire other hospitals had been "defensive," because investor-owned companies have been gobbling up Tennessee hospitals.
Earlier attempts this year to merge with or acquire other hospitals have been unsuccessful. The Bradley County (Tenn.) Commission rejected a $90 million purchase offer from Erlanger to buy county-owned 196-bed Bradley Memorial Hospital in Cleveland, Tenn. (Sept. 23, p. 42). In January, 296-bed Memorial Hospital, also in Chattanooga, turned down Erlanger's $154 million buyout offer.
Erlanger has been profitable, posting net income of $6.9 million on $253.9 million in 1995 revenues, according to HCIA, a Baltimore-based healthcare information company.
"These decisions aren't based on financials because we're doing well compared with other public hospitals around the country," Reeder said.
But managed-care plans, which account for 15% to 20% of hospital revenues in the Chattanooga market, are a growing force. Erlanger executives project managed-care penetration to triple in the next five years.
The hospital said recent managed-care contracts have reduced payments to Erlanger by $15 million annually. Those numbers don't include TennCare, the state's Medicaid managed-care program, which is paying hospitals 56% of their costs.
"We're engaging in this (cost cutting) to prepare ourselves for the new culture ahead," Reeder said.