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Strong Medicine: Health System
Cuts 1,700 After Record Deficit
focus has been on making the changes that we must make within the institution
to be successfulwhatever the marketplace is," Dr. William N.
Kelley, chief executive officer of the University of Pennsylvania Health
System and dean of the Medical School, was saying. "While there are
all kinds of external factors that have made matters difficultand
when they didnt exist, we were going great we cant control
the external world. But we can control our own organization. So we have
got to do what it takes, with things we can control, to make sure that
were functioning within the revenues that we have available."
Kelley made those
remarks several weeks after the Health System, reeling from a $198 million
operating loss in fiscal 1999, began eliminating 1,700 positions from
its workforce. By late November it had already cut some 1,300 positions,
and had drawn up plans to make the other 400 cuts by June 30, the end
of the current fiscal year. Combined with the 1,100 positions eliminated
this past May ["Gazetteer," July/Aug], a total of 2,800 positionsapproximately
20 percent of the Health Systems workforcewill have been eliminated
over a period of 14 months. The financial-recovery plan is designed to
save approximately $250 million over the next three years.
"This is a
particularly painful and difficult measure that we must take as part of
our financial-recovery plan," said Kelley in a message to the Health
Systems members. But, he predicted, "We will emerge from this
anxious time a stronger organization." He emphasized that the systems
main goals"to provide quality care; to educate the next generation
of physician leaders; and to advance the worlds body of knowledge
about health and human disease through cutting-edge research"would
The Health System
was established in 1993, and now has an operating budget of $1.9 billion.
Just five years ago, it recorded a $123 million profit, putting it in
a good position to expand and improve the infrastructure for quality.
By almost every yardstickpatient care (the Hospital of the University
of Pennsylvania has made U.S. News & World Reports "Honor
Roll" three years in a row and was ranked 10th in the nation last
year); research and grants (second in the nation); the reputation of its
School of Medicine (ranked third by U.S. News)that quality
did improve dramatically.
But by 1997, the
Health System was $16 million in the red, and in 1998 it posted an operating
loss of $91 million. This past year, Moodys Investor Service reported,
the Health System spent $150 million of its cash reserves over an eight-month
period, and was down to a relatively "modest" $406 million in
of the external factors Kelley alluded toincluding sharp cuts in
Medicare payments, delayed and denied payments from insurers, and a lack
of compensation from the state for indigent carethe Health Systems
"revenue per unit of service was plummeting faster than we could
[trim] the expenses per unit of service," Kelley noted in an interview.
(Another factor, in the view of some analysts, was the Health Systems
rapid expansion and competition for physicians with the now-bankrupt Allegheny
health system, though Kelley noted that it is "not possible to quantify"
that aspect.) As a result, he said: "We had to get to a new level
of aggressiveness to fix whatever we could fix within our control. We
knew that we had a $177 million problem we had to solve in this fiscal
year, and weve basically done that."
As Russell E. Palmer
Hon83, the former dean of the Wharton School who in July became
chairman of the Health Systems trustees and, more recently, of a
blue-ribbon task force appointed by the Universitys trustees to
assess the systems future, put it: "We do not have the option
of continuing to lose $200 million a year. We have to get our own house
in order and we have to operate in the environment that we are operating
in today on a profitable basis."
In addition to
the loss of jobs and the blow to its pride, the Health Systems economic
woes have led to lowered bond ratings for itself and for the University.
Since February 1998, Moodys has downgraded the Health Systems
rating three times, from Aa3 to A3, and Penns rating twice, from
Aa2 to A1. Both recently received "negative" outlooks, meaning
that Moodys believes it may have to lower their ratings again soon.
In October, Moodys stated that it "anticipates that the Universitys
operating performance will continue to be negatively affected by health-system
performance for the next several years and that as a result, financial-resource
growth will likely continue to lag that of peer institutions."
"I can see
how they would come to that conclusion, because things have been consistently
getting worse," said Palmer. "But it is my belief that there
is going to be a major turnaround operationally in the health-care system
Kelley was equally
optimistic. "We think that theres a hell of a good shot at
being better than break-even this year, and for sure next year,"
he said. "The first quarter [of fiscal 2000] were in the black;
our activity is up 71/2 percent to date this year over last
year; and last year it was up 71/2 percent over the year
had a dramatic growth in volume," he added, "and thank goodness,
because if we were having to do what were doing with reduced volume
in activity, wed have an impossible problem. Were seeing five
times more patients than we saw in 1994. And we cant teach without
patients; we cant do research without patientsso thats
critical to our mission."
out that there were "no reductions in faculty," although he
acknowledged that, because of the high demand, "if anything, we need
more." But, he added: "Were going to try to meet the demand
by increased productivity rather than increased numbers. Weve reduced
very few nurses that were involved directly in patient care," and
only where more nurses were involved than necessary. Most of the cuts,
he said, were in "management, senior management, other overhead areas
and so on." Of the first 1,100 positions eliminated in the first
week of November, about 515 came in the form of layoffs; the rest were
already vacant, due to retirements and other departures.
The largest cut
came at the Hospital of the University of Pennsylvania, which eliminated
some 350 positions, including 160 through layoffs. Of the three other
hospitals in the Health System, Pennsylvania Hospital eliminated 225 positions,
135 of them through layoffs; Presbyterian Medical Center eliminated 213
positions, 128 through layoffs; and Phoenixville Hospital eliminated 16,
10 through layoffs. Seventy-two Health System administrators were laid
off, and another 42 positions were eliminated; 10 employees and three
vacant positions from the Penn Care at Home network were cut, as were
an estimated 150 clinical-practice positions. And over the next six months,
some 400 positions in the Health Systems primary-care physician
network and multi-specialty facility in Radnor, Pa. will be eliminated.
cuts, said Kelley, will all be "in the overhead area, not involving
those directly involved in patient care," and many will be made through
hate to see people get fired," said Kelley. "For me thats
the hardest part. Many of these people have worked here for many years."
He added that a "fair and responsible decision-making process"
was used to determine the layoffs, and said that the Health System is
"committed to helping affected employees through the transition process."
In the end, said
Kelley, "were going to be a better academic health system than
we were. Im sure well make some mistakes, and well do
some things not so good, in which case we need to discover those and get
them fixedvery fast. We must make sure that we maintain the quality
that we have. We probably cant continuously improve it at the rate
we were, but hopefully, were making sure we maintain the baseline
quality. Then, when we can afford to do more, we can gear back up and
do it when we have the resources available."
plan bears the imprint of the Hunter Group, a Florida-based consulting
firm made up of senior health-care executives and clinicians, which was
hired by the Health System in July. Although its final report is not out
yet, the Hunter Group has been releasing its individual recommendations
as they are completed.
"I think they
had some really good ideas and some good advice," Kelley said. "We
were able to reduce the numbers of employees better than we could have
without themeasily. Theyve had a lot of experience with places
like this; they know what the data is nationally; they know what works
and what doesnt work; theyve seen best practices around the
country. So they can tell us, Weve seen best practices where
you can do things this way, so wed recommend you do it that way.
"And as Ive
told the faculty on many occasions, We expect to be the best at
everything we do. When you look, however, at our efficiencies and productivities,
were about at the median. Well, we wouldnt accept being at
the median in anything else, so were not going to accept being at
the median in terms of productivity or efficiency or anything like that,
either. Were going to get our costs down below those of comparable
institutions and be one of the best-value institutions in the country."
Asked if that could
affect quality, Kelley noted that high productivity "by definition"
includes high quality. "Quality is one of the variables thats
critical to it. So were talking productivity with the best possible
Health Systems deficits mounted despite its soaring reputation for
quality and record numbers of patients. During a recent panel discussion
sponsored by Penns Leonard Davis Institute of Health Economics,
U.S. Secretary of Health and Human Services Donna Shalala spoke bluntly
about the national conundrum of wanting top-quality health care at a budget
seem resolved to wanting the best health-care system on the cheap,"
said Shalala. "What weve gotten with managed care is not managed
health care but managed costs. What we need to think about is how to delivery
a quality system, one where health-care problems are avoided, where people
go get care before it is too late. We have got to move our system toward
But quality usually
costs money, and ratcheting it up can only be done when times are flush.
In the view of Dr. Mark V. Pauly, the Bendheim Professor and Chair of
the Department of Health Care Systems, Kelley and the Health System also
experienced some bad luck.
"At the time
the Health System was making aggressive steps to improve its reputation
and its relative standing and the quality and value of its academic programs,
the bad luck was that the external environment turned adverse," he
explained. That environment helped drive the Allegheny health system into
bankruptcy in 1998, but not before its aggressive expansion fueled a spate
of competitive bidding for physicians and facilities that probably exacerbated
the economic problems of Penns Health System. "Its the
health-care version of cutthroat competition," said Pauly. "It
only takes one fool to make everybody else look like idiots." The
Health System also stretched itself economically when it took over Pennsylvania
Hospital and Presbyterian Medical Center.
As a result, those
aggressive steps "turned out to be more harmful than if they had
been more timid or inert," said Pauly. "Bill Kelleys fundamental
ideal of doing something to improve the quality and reputation of the
Health System and assure us of a flow of patients, in another environment
would have paid off really well." Instead, those external factors
"pulled the rug out from under him."
been working out there with a lot of other people around the country to
get some of these external things fixed," said Kelley, "because
were in a tremendous crisis in American medicine today. A tremendous
crisis. Weve been the great contributors to progress and science
and health care in this world. And thats right from these academic
medical centers. Thats at riskand hopefully somebody will
figure that out some day."
Clearly, the nations
126 teaching hospitals have been pummeled by economic forces beyond their
control, and Penn is by no means the only one to have lost tens of millions
of dollars in recent years. One national culprit is the federal Balanced
Budget Act of 1997, which led to reductions in Medicare payments that
"will cumulatively reduce the Health Systems revenues by $175
million by 2002," according to a Health System statement. Medicare
is the single biggest payer to teaching hospitals, notes Medical Industry
Today, and "major urban areas where managed-care penetration
is high are feeling its effect the earliest." (In Philadelphia, the
magazine says, "the HMO penetration has reached 44 percent.")
In an interview
with University of Chicago Magazine, Dr. Ralph Muller, president
and CEO of the University of Chicago Health System and chair-elect of
the Association of American Medical Colleges, noted that between fiscal
1997 and fiscal 2001, the Balanced Budget Act targeted $43 billion worth
of cuts in Medicare payments to the nations teaching hospitals.
While that is fairly radical surgery in itself, Muller points out that
after only two years, the plan is "running at the rate of saving
nearly $65 billion by 2002," and will thus "over-achieve its
intended effect by almost 50 percent."
out Kelley, recently passed a bill rescinding some of the Medicare cuts
to academic medical centers that "will give us about $15 million
over four years." While he and others had been pushing for twice
that amount, he said, "its a lot better than zero."
There are also
a number of regional issues peculiar to the Philadelphia-area market,
where three-quarters of the regions 80 hospitals lost money last
year. One is that there are, for all intents and purposes, just two insurersAetna
U.S. Health Care and Independence Blue Cross, which together handle some
80 percent of the health-care market.
"If you have
two big payers," says Dr. David A. Asch GM87 WG89, executive
director of the Leonard Davis Institute at Penn, "theyre really
going to be able to call the shots to a large degree. And people do have
to toe their line, so to speak. If health systemsprovidersbanded
together to that degree, there would be accusations of monopoly power."
The bottom line, he says, is that insurance payments are "a day late
and a dollar short. Its sort of death by a thousand pinpricks from
companies, probably because the employers that pay them have focused virtually
entirely on cost, rarely have much interest in quality," notes Kelley.
"To get the quality improvement that were all trying to achieve
takes major investments in infrastructure up front. You cant make
those major investments if you dont have any money. And theyre
not willing to pay for that."
"I think we
should negotiate the best contracts we can," says Palmer. "And
I believe that we deserve more than the average because we are a very
high-quality provider. And it would be a shame if health care in this
country diminished in quality because someone out thereand Im
not looking at our two payers necessarilysaid, All we want
in the United States is average health care for low prices."
Kelley said that
the Health System is working to improve its billing process to meet the
"extremely high standards" imposed by the insurance companies,
and expressed hope that it would be better and more efficient as a result.
He also suggested that the insurers finally "seem to be working with
us to make things better."
in general, noted Asch, "care for the sickest people, and generally
engage in other socially worthwhile activities, both of which cost more
than average." Last year, the Health System claims, it provided $66
million in uncompensated care and some $40 million in under-compensated
care. Since Philadelphia no longer has a public hospital system, Asch
adds, "places like HUP are bearing a burden of indigent care that
other academic health systems in other cities dont have." And
while some states provide "substantial support" for indigent
care, "Pennsylvania provides virtually nothing."
"We have been
working hard with the health-care community in the state, along with the
business community in Philadelphia, to get support for a substantial portion
of the tobacco-settlement dollars in the state," said Kelley. "Thats
a $400 million pot of money annually that will be available for supporting
health care in the state, and there seems to be uniform agreementat
least in this business community and this health-care communitythat
that is the best possible use of half those dollars."
The total bill
for indigent care in the state is "about $700 million a year,"
he pointed out, "so $200 million isnt the total answer. But
it gets us started in that direction."
Asch also argues
that, on the whole (and apart from Penn), "there arent strong,
big employers in this area that are really focused on or interested in
health care." Unlike, say, Detroit, where the United Auto Workers
Union pressures employers to "pay top dollar" for high-quality
employee health care, employers in the Philadelphia area "are bottom-fishing"
and "paying the lowest prices, in general."
Finally, he says,
there is an "intensively competitive academic health-system environment,
in that there are probably more academic health-system beds per capita
here than anyplace else."
For consumers and
researchers and medical students, the advantages of linking health
systems to medical schools and universities are obvious. "We all
believe programmatically that there are important synergies to be gained
by linking them," Asch notes, "because the clinical programs
become the laboratoriesnot just for the research but for the educational
programs. The people who come to Penn for clinical care choose it in part
because they know that with the academic programs comes what they believe
to be a higher quality."
and his $1.2 million salary have taken a few hits in the press, he has
made it clear that he has no plans to step down. And according to Asch,
he has the support of the faculty as well as of the University administration:
that medical-school faculty, on the whole, are very strongly behind Bill
Kelleywhereas in the same set of circumstances you might imagine
that hed be an easy target for blame. Quite the contraryI
think people really are looking to him for continued leadership."
have really all pulled together," said Kelley. "This couldnt
have been done without every single faculty member and every faculty leader
and chair pulling together and saying, Lets get this done."
"As we look
at this entire situation," said Russell Palmer, "I would certainly
agree with those that say we have major turnaround to effect, and that
we have a lot of work ahead of us. But at the same time that were
looking at that, we should also look at the tremendous strides that we
have made as an academic medical institution. No one in the United States
has accomplished more academically in the last several years than the
University of Pennsylvania Health System under Bill Kelleys leadership.
And we should not lose sight of the many accomplishments that we should
be very proud of."
Mark Pauly offers
what he calls a "philosophical take" on the whole issue. "With
the movement to market in health care, you need some bankruptcies and
disasters to discipline [the players]. In that sense, it may be salutary.
I just wish it hadnt been here."
Having a health
system, he added, "is a much more risky business than universities
are used to."
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