Detroit Medical Center has notified its employees that it will cut at least 1 percent of its 12,400-member workforce to reduce expenses by about $17 million, Crain's has learned.
While DMC's cost-cutting was decided locally because of Medicaid and other state budget reductions for 2017, sources said DMC's parent organization, Dallas-based Tenet Healthcare Corp., is also moving to cut costs at many of its 80 hospitals in the U.S. to help pay health care fraud fines of $514 million and to shore up stock prices that have dipped 60 percent the past year.
DMC's layoffs are expected to total 60 employees and managers with another 40 unfilled positions eliminated, a DMC official said. Another 30 employees were reassigned to other positions.
"We regularly evaluate operations and staffing to enhance the quality of care and patient experience we provide," Conrad Mallett Jr., DMC's chief administration officer, said in a statement to Crain's. "DMC operates in the most efficient way possible so we can continue to invest in our facilities and community.
"Recently we made the decision to reduce approximately 1 percent of the DMC workforce. We minimized the number of affected employees by first eliminating open positions and realigning certain job functions, with careful attention to avoid affecting direct patient care."
Two physician sources told Crain's that the cost cutting at DMC and Tenet is expected to be more severe over time.
"DMC wants to save $20 million, but all Tenet hospitals have to cut top-level executives," a physician manager source at DMC said. "It's because of the (fraud) settlement and shareholders want better price per share. Revenue grows each year, but profit per share has not."
Another physician source on DMC medical staff said he has heard internal management talk that cuts are going to happen in departments that range from administration to janitorial to dietary.
"This is a smokescreen (initial layoffs) that will lead to management positions being eliminated that will pale in comparison in to all the other areas," the second doctor source said.
DMC officials refused further comment. Tenet officials in Dallas did not return a phone call seeking comment.
Sources also tell Crain's that DMC is making cost cuts despite it being Tenet's most profitable teaching hospital. This year, DMC's EBITDA (earnings before interest, taxes, depreciation and amortization) has been the highest in years, between $100 million to as high as $175 million, sources said. DMC officials refused comment.
Over the past year, Tenet's stock prices have dropped by more than half to $15.23 on Nov. 29 from $33.69 on Nov. 24, 2015. Tenet reported it finished the third quarter that ended Oct. 31 with a net loss of $9 million, an improvement from the $28 million net loss the company recorded in the same period of 2015.
Tenet has lost $3.6 billion in market cap the past year.
Besides improving its stock price, sources said Tenet is also attempting to recoup its losses from a recent $514 million settlement in a False Claims Act lawsuit by the U.S. Centers for Medicare and Medicaid Services. Tenet's four hospitals in Georgia allegedly developed a scheme to send pregnant women on Medicaid to their facilities for alleged kickbacks to doctors at its hospitals for maternity referrals.
In 2006, Tenet agreed to one of the largest fraud settlements in U.S. history by paying a $900 million fine for inflating hospital charges to Medicare and other federal payers. Tenet is also facing a $1.5 billion class action federal lawsuit in Texas over allegedly failing to protect patients and newborns from being exposed to tuberculosis at Providence Memorial in El Paso, Texas.
Vicki Bryan, senior analyst at New York-based Gimme Credit LLC, said Tenet has not announced across-the-board cost cutting, but that it makes sense based on the company's overall numbers that include low EBITDA numbers of 8 percent for the third quarter this year, the lowest of any investor-owned chain.
"It is about half of what HCA Holdings posted and even lower than Community Health Systems," Bryan said, noting two other major investor-owned chains. "Couple that with low profitability and that would justify significant cost cutting."
Tenet recently sold its Georgia hospitals and made $500 million on the sale, which could be used to help pay the federal fine, Bryan said.
"They are generating the lion's share of EBITDA growth from its ambulatory and (Conifer Health Solutions) group," she said. "Tenet should be looking for very significant cuts in costs at its hospitals."
Last month, Tenet announced it would sell its health plan business to raise revenue. DMC sold its health plan, Harbor Health Plan, for $16 million to Trusted Health Plans Inc., a Washington, D.C.-based Medicaid HMO, generating a $10 million profit, according to a filing with the Michigan Department of Insurance and Financial Services.
Last December, DMC also announced layoffs of about 1 percent of its workforce, which amounted to about 125 employees of its 12,500 workforce. In 2014, about 127 employees were laid off after DMC closed its DMC Surgery Hospital in Madison Heights and another 63 were laid off after it outsourced its linen services to an out-of-state vendor.
In 2011, Vanguard Health Systems acquired the cash-strapped DMC system. Less than two years later in 2013, Tenet acquired Vanguard.
"Detroit Medical Center to reduce workforce to cut $17 million in expenses" originally appeared in Crain's Detroit Business.