Hospital, heal thyself. Two disparate healthcare systems thousands of miles apart went from losing millions to making millions in one year without turning to Medicare or Medicaid for help.
Rather than whining about the ill effects of the Balanced Budget Act of 1997, the University of Pennsylvania Health System, Philadelphia, and Centura Health, Englewood, Colo., fixed things on their own, getting out of some money-draining ancillary businesses and restructuring how they perform their core operations.
Their dramatic success stories may make it tougher for other struggling hospitals and hospital systems to pin their woes on government insurance programs, particularly if two consecutive years of budget law relief don't pull them out of their slump.
"I just think some institutions were asleep at the wheel," said Jerry Katz, a healthcare consultant based in Plymouth Meeting, Pa. "In general, I think people are too quick to gloss over the fundamental change in healthcare and attribute the whole problem to (the budget law)."
Close the floodgates
In the case of four-hospital UPHS, after years of enviable profits, red ink rose to unprecedented levels beginning in 1997 before the floodgates were closed during the first quarter of the fiscal year that began July 1, 2000.
Patient volumes at the prestigious academic medical center were never the problem, even though it's struggling in a notoriously overbedded, highly competitive market. In 1998, the system simply found itself knee-deep in money-losing physician practices, two ill-conceived risk-sharing contracts and the burdensome and politically charged acquisition of 350-bed Pennsylvania Hospital, the nation's first hospital, also based in Philadelphia.
The system lost $91 million on operations on $1.5 billion in operating revenue that year, said Robert Martin, UPHS' chief operating officer and interim chief executive officer. Just when executives thought it couldn't get any worse, it did. In 1999, the system posted a net operating loss of $187 million on $1.6 billion in revenue.
"It was a world record for (the worst posting of an academic health system)," Martin said wryly. "I don't think anyone will ever come close to that."
Martin said he didn't always believe that record was untouchable. UPHS was projected to break it yet again with a $200 million loss in 2000. But wielding a large scalpel primarily aimed at a staff of about 14,000, the system in the wink of an eye began slashing.
"In my travels, I've learned a few things about turnarounds. What you need to do, you do quickly," Martin said. "It's better to be fast and 80% right than slow and 100% right. Resistance will emerge during an elongated process and will lead to the undoing of the system."
Martin joined UPHS in August 1997 to run the physician practices, which had recently suffered a "whopping loss" of $40 million on $100 million in revenue, he said. He pared the loss to $10 million in 1999 by trimming as many as 60 from its stable of 250 doctors. This year, the physician practice is close to breaking even and next year will be "modestly profitable," Martin said.
Under William Kelly, M.D, dean of the University of Pennsylvania Medical School and CEO of UPHS, Martin became senior vice president and COO in 1999, charged with righting the health system.
But after its dismal operating performance, William Kelly, M.D., CEO of UPHS, was fired in February 2000 and was replaced by Peter Traber, M.D., in an interim capacity. When Traber resigned to take a job at GlaxoSmithKline last August, Martin was named interim CEO for the health system.
Launch layoffs, strike new deals
In his first action as operations chief, Martin eliminated 1,100 positions from a staff of about 14,000 in the spring of 1999; 450 people lost their jobs in the reduction. UPHS launched its second round of layoffs in November 2000, eliminating 1,700 positions. When the dust settled, staff had been downsized throughout all operations by 20%. The job reductions translate to annual savings of $140 million, according to Martin.
Managed-care contracts were renegotiated, saving about $15 million yearly. The health system got out of the risk-sharing business with Blue Bell, Pa.-based Aetna U.S. Healthcare in 1999 and terminated a similar contract with Independence Blue Cross in December. The contracts were costing the system $5 million per year, according to Martin. Also, by standardizing purchasing across what was once a fragmented supply chain, UPHS squeezed out another $15 million in annual savings, Martin said.
By the time the books closed on 2000, the system exceeded expectations, losing "only" $22 million on operations. For the first quarter of fiscal 2001, the system even managed to reap about $5.3 million in operating profits.
The turnaround at Englewood, Colo.-based Centura Health was no less dramatic. On an operating basis, the nine-hospital system lost $48.2 million in fiscal 1998, which ended June 30, 1998, and $53 million in fiscal 1999, but then posted an operating profit of $47.2 million in fiscal 2000.
Centura's woes were most visible in the loan guarantees it made for Precedent Health Center, a physician-owned hospital in central Denver. Precedent went belly up in July 1999, filing for bankruptcy just 14 months after opening and leaving Centura to cover as much as $17.5 million in outstanding loans (July 12, 1999, p. 22).
Get rid of what you don't need
Like the Penn system, Centura achieved its turnaround by aggressively selling money-losing businesses.
The 180-degree turn from an integration strategy to one focusing solely on providing healthcare was engineered by a new management team. Joseph Swedish joined Centura in January 1999 as president and CEO, and two months later, Jay Picerno came on as chief financial officer. Both men had been regional managers in Florida for Nashville-based HCA-The Healthcare Co. and also boasted prior experience with not-for-profit hospitals.
"We probably believed it was a three-year turnaround," Swedish said in a recent interview. "Obviously, we were (expecting) to see progress, but I think we shortened that (turnaround period) by about a year by our ability to execute our strategy very quickly."
That execution started with the sale of Centura's 120 physician practices, which had lost $25 million in 1999, Swedish said. Then in August 2000 Centura sold its Sloans Lake Health Plan (Aug. 28, 2000, p. 3). The insurance subsidiary included a 430,000-enrollee PPO, a 58,000-enrollee HMO and an auto managed-care business, which insures drivers for accident-related healthcare costs.
Take advantage of help
Along with the sales, quality initiatives and more realistic pricing, Centura has benefited from greater oversight from its two sponsors-Catholic Health Initiatives and PorterCare Adventist Health System, both based in Denver-said Martin Arrick, a healthcare analyst with Standard & Poor's.
The New York-based credit-rating agency has upgraded Centura's outstanding debt twice in recent months, and when a new Centura bond offering is reviewed this month, Arrick said, Centura's rating could be boosted again to A, or investment grade, from BB+.
Swedish and Picerno are confident Centura can switch from cutting the fat to expanding the system. Its improved financial condition will allow Centura to spend $65 million this fiscal year, which ends June 30, on expanding, maintaining and upgrading Centura's nine hospitals and its outpatient centers.
Centura also plans to enlarge two of its hospitals in Denver's suburbs-a $20 million expansion of 58-bed Avista Adventist Hospital, Louisville, and a $38 million expansion of 129-bed Littleton Adventist Hospital-and to add 24 beds to the bigger of its two hospitals in Colorado Springs, 300-bed Penrose Hospital. Centura also will build a new hospital and 180,000 square feet of medical offices in Douglas County, a fast-growing suburban area south of Denver.
The turnarounds by UPHS and Centura could make life a little tougher public relations-wise for other hospitals that are blaming Medicare and Medicaid for their problems.
For example, officials at 330-bed Bay Medical Center, Bay City, Mich., are devising a plan to plug up losses approaching $1 million per month. They squarely blame Medicaid, Medicare and managed care for their financial woes.
Hospitals may have to accept a new reality in healthcare, but they don't have to like it, said Kurt Miller, a hospital spokesman.
"We are no longer looking at efficiencies in services. We are looking at cutting off entire services and maintaining core services that make a hospital a hospital, and if that creates a financial turnaround, so be it, but it's not the same hospital system people are used to having," Miller said.
"If we have any faults, we were too altruistic in providing services that don't support themselves and didn't go to this type of cutting sooner."
Similarly, two-hospital Cape Fear Valley Health System, Fayetteville, N.C., said it may lay off as many as 250 employees of 4,100 in direct response to shrinking federal reimbursements. The system is trying to stem losses of $4.2 million on $341 million in net patient revenue last year.
"I think (the Balanced Budget Act) is to blame. The question is what are you going to do about it," said Clinton Weaver, a spokesman for the system. "You can have either a victim's mentality, and sit around and weep and gnash your teeth or you can do something to improve the situation, and that's what we are doing on a variety of fronts."
As to the future, "We'll deal with that when the time comes," Weaver said.