University of Pennsylvania Health System, Philadelphia, is planning major layoffs and service reductions to stem a rising tide of red ink.
Though details will not be final until later this month, when audited financial results for fiscal 1999 become available, the four-hospital system is bracing for big cuts to counter expected operating losses in excess of $150 million.
UPHS' swift and deep financial decline has been startling, even in Philadelphia's rocky hospital market. To its neighbors and academic medical centers across the country, UPHS' dire straits signal that award-winning clinical quality and national prominence are insufficient to ensure financial success.
For its fiscal 1999, ended June 30, UPHS expects to have lost at least $150 million on revenues of about $1.9 billion. UPHS lost $91 million on operations on total revenues of $1.8 billion in fiscal 1998.
In July, UPHS brought in the Hunter Group, turnaround consultants based in St. Petersburg, Fla., to slash costs fast (Aug. 16, p. 2).
In an e-mail sent to employees last week, William Kelley, M.D., chairman and chief executive officer at UPHS, minced no words as he braced them for the cost-cutting storm to come.
"The harsh reality . . . is that healthcare has changed dramatically in the last few years," he wrote. "Payments from virtually all sources are being reduced. To provide quality care, we must adapt."
Kelley informed employees that the Hunter Group has found that "for UPHS to remain financially viable," significant cost reductions are necessary and that "some very painful but necessary actions" are in the works.
In May, UPHS eliminated 1,100 positions, including 450 by layoff. Another round of layoffs seems certain.
"Among other things, we will likely need to undertake another significant systemwide workforce reduction," Kelley wrote.
He also promised that executives would take pay cuts and that management would be streamlined.
In addition, UPHS is also preparing to cut back on care delivery.
"It seems unavoidable . . . that we will be forced to scale back or eliminate certain services," Kelley wrote.
Late last week UPHS executives were expected to present their preliminary turnaround plans to an executive committee of the university trustees for approval.
Jerry Katz, a healthcare consultant in Plymouth Meeting, Pa., said massive cost-cutting will not right UPHS' financial ship. Draconian cuts could jeopardize services that would be important moneymakers over the long haul, he said.
UPHS said payments from almost all sources had declined. Lower Medicare payments under the Balanced Budget Act of 1997, reductions in graduate medical education funding and hardball tactics by local managed-care payers have buffeted all Philadelphia-area hospitals.
"In this town people are kind of depressed. It has been one flaming disaster after another," said Douglas Peters, president and CEO of Jefferson Health System in Radnor, Pa., a Philadelphia suburb.
Some health systems, however, have navigated the same financial shoals as UPHS without scraping bottom.
Peters said his system, for instance, expects to post an operating profit of about $19 million on operating revenues of about $1.9 billion for fiscal 1999. But Jefferson Health also has had to cut back. In June, the system laid off 125 people and eliminated 250 vacant positions at its flagship Thomas Jefferson University Hospitals, Philadelphia, as part of a $21 million cost-saving package.