Nonetheless, most credit-worthy hospitals—those with relatively healthy operations and balance sheets—emerged from the recession with strong margins driven largely by aggressive cost-cutting that has only grown more entrenched.
Now hospitals may be looking to prepare for long-term austerity. “Before the last two years, cost reductions were responsive,” said Guy Sansone, a managing director with the restructuring consulting company Alvarez & Marsal who oversees its healthcare group.
Fairview said last month that the health system's poor first quarter and the threat of flat or declining state reimbursement prompted plans to cut 240 jobs this summer. Spokesman Ryan Davenport said changes to health policy and in the marketplace to slow health spending, including efforts at Fairview, have driven the system's push to curb its expenses as much as its $3.4 million operating loss during the first three months of the year.
The system's bottom line has also been affected by reduced demand for services and costs from investment in information technology and development of its pediatric services at the University of Minnesota, he said.
Patients admitted to Fairview hospitals declined roughly 5% during the first quarter of 2011 from a year ago. Operating revenue increased about 5% and expenses rose 10% during the same period.
In Wisconsin, Columbia St. Mary's blamed the weak economy and too much hospital capacity for recently announced layoffs. “As a result, we are restructuring to establish greater alignment with our future strategies and adjusting our operations and staffing levels to reflect current patient volumes,” the Milwaukee-based system said in a statement. Officials declined an interview request.
Layoffs have affected small hospitals as well as large systems, though in the case of one California hospital, news the hospital's former chief executive received a $3.9 million payout, according to the Los Angeles Times, has fueled employee unrest and prompted a state audit.
Salinas (Calif.) Valley Memorial Hospital said last December that it would cut its payroll by 5% to 6% after voluntary buyouts “did not reduce costs enough,” according to a news release from the 269-bed hospital.
The National Union of Healthcare Workers held a one-day strike last week over the job cuts. “We walked out because the hospital has refused to bargain in good faith,” said Marilyn Benson, a part-time licensed vocational nurse who had worked for the hospital for 37 years and was laid off June 24. “We've been bargaining over the layoffs,” she said.
Data from the U.S. Bureau of Labor Statistics show that hospitals did not see overall employment drop during the recession, but hiring did slow in 2009 and last year, though it appears stronger for the first five months of this year. Meanwhile, 3,357 hospital workers lost their jobs in mass layoffs in the first five months of 2011, based on filings for unemployment benefits. That's fewer than the figure for the same period in 2010 (5,340) and 2009 (5,459) but well ahead of 2008 (2,356). It's uncertain how many hospitals can continue to lower expenses without layoffs as revenue continues to slow.
Lisa Martin, a senior vice president at Moody's Investors Service, said health systems responded with quick, ready expense cuts during the worst of the recession, including layoffs. More recent expense reductions have targeted eliminating overhead among larger systems where greater coordination could yield savings. But further cost controls will require more fundamental changes to operations, which are more difficult to achieve, she said.
That has been the case at 76-hospital Ascension Health, the nation's largest not-for-profit health system.
In 2009, the St. Louis-based health system launched an effort to centralize data and improve overhead. The Symphony initiative, which is scheduled to end in 2015 at a cost of $840 million, is ultimately expected to reduce costs, in part by eliminating 404 full-time finance positions, another 214 jobs in human resources, 179 in supply-chain services and 74 in information technology.
Robert Henkel, president of healthcare operations and chief operating officer at Ascension Health, said in a written statement that among the reasons behind the initiative “the most important reason for Symphony's implementation is that it will provide timely access to a wide array of critical information that will help inform Ascension Health's operational and clinical decisions and help sustain our ministry.”
Some health systems have moved to operate as though all insurers would pay the same as Medicare, which typically pays less than commercial health plans. In California, two major health systems have unveiled significant expense cuts under plans to earn profitable margins on Medicare payments.
In February, Sutter Health said in a letter to employees that it would squeeze $700 million from its budget by 2014. “Under federal healthcare reform, the government will provide health coverage to 32 million uninsured Americans,” wrote Patrick Fry, the health system's CEO. “The government will help cover these new costs by paying healthcare providers less.”
Based in Sacramento, the 23-hospital health system closed its books in December with operating revenue of $9.11 billion and operating expenses of $8.43 billion, leaving Sutter with operating income of about $685 million.
Sutter revenue during the next decade will drop by $2 billion under the government's plans to slow Medicare spending, Bill Gleeson, a system spokesman, said in an e-mail. State budget distress could further reduce revenue, he continued. “California is also in the midst of its own fiscal crisis, and state-level reductions loom as real possibilities.”
California erased more than half of a $25.4 billion budget deficit this year with measures that would require copayments for Medicaid patients and cut provider pay from the safety net insurer, should federal officials approve the changes. But the state must reduce spending by another $9.6 billion for the fiscal year that begins July 1.
Gleeson said the system hired a consulting firm and has concentrated its cost-cutting efforts so far on human resources, information services, finance and other support service.
“It's too early to speculate on changes that will occur as a result of the assessment,” he said, “but there are definitely opportunities for us to run a tighter ship and reduce support service costs.”
Savings come on top of other recent efforts that have lowered Sutter spending, he said, including $43 million over three years from improved infection control and another $43.7 million last year from more coordinated supply contracts.
Catholic Healthcare West, based in San Francisco, has plans to cut $200 million from its operations within two years, the system's chief financial officer said this year. Michael Blaszyk, also the system's executive vice president and chief corporate officer, said during an investor conference in New York that the health system's executives believe future provider payments won't increase as they have in the past.
The system owns 38 hospitals in Arizona, California and Nevada and finished fiscal 2010 last June with $9.43 billion in operating revenue and $9.35 billion in expenses and reported operating income of about $83 million.
In Arizona, Banner Health said it could lose up to $140 million in revenue annually from the state, which has approved more than $500 million in Medicaid reductions that will reduce provider payments and freeze coverage for adults without children. Dennis Dahlen, Banner Health's senior vice president and CFO, recently told the health system's investors that executives will “plan for the worst and work for the best.”
The system plans to eliminate $80 million from expenses, including $25 million by eliminating merit increases. In an interview, Dahlen called the freeze on merit wage hikes a difficult decision but one the system also adopted to manage costs in 2009.
More than a year ago, Banner also began a three-year push to operate as though all insurers would pay the same as Medicare, Dahlen said.
For Banner to hold onto its profit margin under such circumstances, the system must lower expenses. The system's 23 hospitals now more closely monitor the ratio of patients to employees so managers can adjust staff according to demand. More employees may work at more than one location to allow more scheduling flexibility, he said. To reduce overtime, other measures have sought to ensure employees do not begin work ahead of their shift or stay later than scheduled, he said.
Dahlen said he does not believe the system will be forced to shed employees. “Layoffs would have to be a last resort” in response to a significant drop in how much hospitals are paid.
Lower expenses will allow Banner to remain in the black after an expected flood of uninsured gain health benefits in 2014 that won't pay hospitals as well as commercial insurers. “We will be paid less for more,” said Dahlen, who said squeezing hospital expenses to break even on the rate paid by Medicare may not be enough. “We may have to do more than that,” he said.