Not too long ago, Erlanger Health System in Chattanooga, Tenn., exemplified the perils of diversification. But it is gradually recovering from its missteps.
The public hospital, the largest in eastern Tennessee, owned HMOs and a behavioral health program that were losing money. It also owned real estate and had begun major construction projects for the hospital with no financing in place.
As David Copeland III, chairman of the board of trustees, recalls the situation, Erlanger was trying to be all things to all people.
Not so anymore.
A $37 million operational loss and a net loss of $31 million in fiscal 1998 provided a powerful reality check, prompting the resignation of the system's chief executive officer when the bad financial news hit in May 1998.
This year, Erlanger posted a $7.9 million profit on operating revenues of $309 million.
Behind the turnaround lies a major shift in the system's focus and philosophy, says Erlanger's current CEO, Dennis Pettigrew.
Pettigrew came to the system as chief financial officer in October 1997, later adding chief operating officer to his job description. When his predecessor resigned, he became interim CEO, and last October filled the post permanently.
Since its financial debacle last year, Erlanger has left the behavioral health business, which was losing more than $500,000 per month, and divested its two commercial HMOs. The system also underwent a rigorous analysis of its core strengths, which were its teaching programs, community health programs and certain medical specialties, such as a children's hospital and trauma, oncology and cardiology services.
"We have moved out of what I would call the buzzword of a fully integrated health system," Pettigrew says.
"We're not going to be real fancy, but we're going to work real hard," he says.
The need for hard work required the system to change its philosophy about personnel. "We are looking at people who can take what we have and make it the best it can be. To do that, everybody has to carry their own weight," he says. "(Our attitude is), if that's not what you want to do with your life, please go somewhere else."
For example, employees had complained about the hospital's housekeeping but didn't help with the problem, he says.
"People were . . . looking at the wastebasket that was overflowing (and) paper on the floor and complaining," he recalls. "You may need to complain, but don't look at the piece of paper and not pick it up."
Pettigrew says his system's turnaround is even more significant because it comes when profits are declining at many hospitals nationwide.
Erlanger's managed-care plans, which had about 18,000 enrollees, had lost upward of $5 million in each of the past two years.
"We were losing on the ownership side, and we were losing on the provider side," Pettigrew says. "I made the decision that that was a conflict and we needed to be a provider. And that's what we are."
Erlanger's financial plight was complicated by poor implementation of a major restructuring in 1997. The restructuring was intended to reduce $36 million in expenditures, but it backfired (July 6, 1998, p. 22).
During Erlanger's conversion to a new system, computer glitches caused the hospital to provide $10 million in services without proper patient precertification. In addition, overgenerous severance packages led to a shortage of qualified employees and slowed patient service.
During the restructuring, about 1,000 employees left the system-many more than the system had anticipated. They left primarily because of the generous severance packages, which cost the system about $12 million, Pettigrew says.
"Paying the $12 million was OK, but a lot of the people who left were very important middle managers," he says.
The squeeze was felt acutely in the medical records department, where about half the staff left. That led to major problems in processing medical records, which led to delinquent charts, inadequate coding, skyrocketing receivables and a squeeze on cash flow.
Now, including contract workers, the system employs about 3,000 people and this year may add clinical staff for the first time in several years.
Restructuring was not Erlanger's only problem, though. About 20% of its business comes from TennCare, Tennessee's troubled Medicaid program. The system receives only about 46 cents from the state for every dollar it spends on treating these patients, Pettigrew says. The only recourse has been to train staff to become more efficient, making the best use of available state dollars.
Pettigrew also had to find permanent financing for a $50 million construction project that has added 300,000 square feet of physician offices and a new entrance to the main hospital.
The expansion clearly was needed: Many physicians had left Erlanger because of frustration and a lack of office space, Copeland says.
Pettigrew says he leveraged his contacts to get Lehman Brothers, New York, to underwrite the bonds and MBIA Insurance Corp., Newtown Square, Pa., to insure them for the project. That enabled Erlanger to issue $70 million in insured bonds, a task many had feared the system could not tackle.
During Erlanger's recovery, its board of trustees has closely monitored all policy changes.
Copeland, who came to the system in late 1997, says his job has been to instill a sense that Erlanger should "operate like a business but not for business purposes."
A former ranking Republican in the Tennessee Legislature, Copeland says his experience on the House Finance and Ways and Means committees and in running his own businesses has given him ideas for improving the hospital.
In appointing a new CEO, for example, the board modified the compensation and severance package for the chief executive.
Pettigrew's predecessor, Skip Reeder, had a severance agreement of about $25,000 per month in compensation for two years after his resignation. But Pettigrew's negotiated severance agreement is more modest, Copeland says.
About one-third of Pettigrew's compensation is "pay for performance," meaning it must be earned by meeting certain targets the board establishes yearly.
"I don't know how many hospitals are doing it, but I thought it was imperative that we try," Copeland says. "One of the things I believe all hospitals are going to need to confront is that compensation has gotten out of hand."
Pettigrew's base salary is significantly lower than his predecessor's, but if Erlanger does well and he meets targets set by the board of trustees, he will make more than Reeder did.
The previous CEO had a base salary of $320,000. Pettigrew's base is $275,000, but if he meets the board's targets, he can add 25% of that amount to his compensation, bringing his total to about $344,000. He is not eligible for a raise under his contract, however.
"Their concept is, if you work hard you should be rewarded if you're successful," he says. "If you don't work hard or are not successful, then you're probably not going to be here."
