Regular readers know that I believe in administrative, as well as clinical, transparency in our hospital. I have trouble understanding why this is unusual, but I know that it is. I just can't imagine trying to solve the problems of an organization and having a common sense of purpose and direction unless everybody is aware of what's going on.
Many of you followed our efforts of dealing with a budget shortfall earlier this year. I sent out the following email to the staff yesterday to offer a follow-up.
Back in March, I promised I would report back to you on budget and financial issues in June. Here we go:
First, here are the details of our progress in the current fiscal year. As a result of the steps we all took together, we expect to break even for this year. What could have been a $20 million loss has been eliminated. With your help, what could have been 600 layoffs was reduced to 70 layoffs. With your extra help, we were able to insulate our lower wage staff members from what could have been particularly bad news. BIDMC has received national acclaim for our approach to solving these budget problems, and our story has caused many organizations and institutions around the country to think of more humane ways to deal with the economic downturn.
When I asked for your help back in March, I was confident of the response. But I honestly did not understand the enthusiasm with which it would come. I knew that we viewed ourselves as a family here. But I did not fully understand the degree of affection and mutual commitment that underlays our hospital. We together lived through something very special, and I was especially honored to be your CEO during those weeks.
What now? I will talk about next year's budget, but first want to give an overview, at least as I see it. First, some "business school" type of background. I apologize if this is a bit dense and financially technical, but it will be helpful for you to understand the overall picture. I have also provided embedded links to my blog on some of the topics I mention, in case you want to delve into them further. Stick with me through this, please -- even if some of the terminology is new to you -- because I would really like you to understand the financial environment in which we carry out our important societal missions of patient care, research, and education.
As an academic medical center, we have been engaged in a successful business strategy that is composed of five elements: (1) create a broad referral network of trusting primary care doctors, specialists, and community hospitals; (2) emphasize those high level tertiary and quaternary specialties in which we excel, where we can gain market share, and which are highly reimbursed; (3) create a thriving environment for clinical care, research, and education that makes us attractive for the world’s leading clinicians and researchers; (4) negotiate favorable insurance reimbursement packages with insurance companies; and (5) pursue unrestricted philanthropy and gifts directed at clinical, research, and educational priorities.
We have had specific financial targets during this period. To renew and replace infrastructure in our buildings, to stay up to date with the latest clinical equipment, and to invest in our research enterprise, we should be prepared to make annual capital investments in the range of 130% of depreciation, or about $90 million per year. To generate this kind of cash, we need to earn a sustained operating margin of at least 4% supplemented by philanthropy directed specifically to capital purposes. In the years following the merger of the Deaconess and the BI, the hospital’s finances suffered, and capital investment did not meet this standard. Following the turn-around in 2002, we were able to earn a sufficient margin to start to make up for this shortfall, and by FY2008, we had substantially narrowed the gap on a cumulative basis.
There is nothing on the national or state political and economic scene to suggest that the coming years will offer good news for us and for other hospitals. Unless we act decisively, it is reasonable to expect a slow and steady deterioration in our capital position, our ability to compete, and ultimately our ability to carry out our mission in a manner that meets the standard of excellence we demand for ourselves. Putting aside the ups and downs of the economy, there are two major reimbursement factors that are likely to come into play. First, the rate of increase in reimbursements from both the government and private insurers will, at best, rise at the overall rate of consumer spending (not medical sector inflation). Academic medical centers like ours will especially see this. Second, there will be a tendency on the part of both types of insurers to move more to a capitated or bundled form of insurance that will require allocation of revenues and risk between the hospital and its affiliated doctors, but also between those two groups and other institutions in continuum of health care delivery (e.g., skilled nursing facilities and rehabilitation centers.) In others words, there will be something like an annual budget per person for health care, as opposed to the current fee-for-service type of pricing, where we get paid for each diagnosis and procedure and treatment we offer.
So, notwithstanding several years of success based on this business model, we need to recognize that the coming period will introduce new pressures on BIDMC. It is hard to envision exactly how we should respond to those changes. But we know, directionally, what we need to do:
1) We need to retain and enhance our focus of safety and quality and eliminating harm to patients. Beyond the obvious humanitarian reason for doing that, there is also a business imperative. We should anticipate that there will be greater public policy pursuit of quality and safety improvements, most likely characterized by failure to pay for certain procedures with adverse outcomes (e.g., “never” events and returns for follow-up surgery). There is also likely to be discounting of the capitated rates referred to above for failure to meet defined safety and quality metrics. These punitive steps add impetus to the existing business incentives for pursuing quality and safety improvement. Those incentives are expansion of market share from referring sources who value quality and safety and the dollar savings that accrue to the hospital by avoiding costs associated with patient harm.
2) We need to improve the way we organize work at the hospital to make it more efficient and less expensive. We have taken some baby steps in this direction with BIDMC SPIRIT. This program incorporates "Lean" type of thinking by encouraging people to call out problems in the work place, analyze those problems to their root cause, and invent solutions. If done right, this kind of continuous process improvement makes a safer and more pleasant workplace for our staff. When I started up SPIRIT, I told you that the design and approach of the program itself would change over time as we learned from it. Many of you joined in with enthusiasm and accomplished some great things, but then you felt that the effort had reach a plateau and sagged over time. Indeed it did because we recognized that we had not done sufficient training -- particularly of managers -- to give them the support they need to make it work. So stay tuned for more on that front.
3) We need to create stronger relationships with the insurers (especially Blue Cross, Harvard Pilgrim, and Tufts Health Plan) to ensure that our quality control and efficiency programs are recognized by them and rewarded in reimbursement methodologies.
4) We need to enhance and expand our clinical relationships with community hospitals and multi-specialty groups to provide a specific focus on quality and safety, to ensure that patients get the right type of care in the right place, but also to provide a dramatic improvement in the communication about patients' needs and the status of their care.
What does this mean this summer as we prepare our budget for FY2010? There are lots of moving parts. We will soon announce some new clinical affiliations in the community, and those will bring additional patients and revenue to BIDMC. But the reimbursement changes that are headed our way mean that we cannot just continue to spend money in the historical way to serve those patients. We need to organize our work differently to reduce overuse of testing and clinical procedures, some of which have been profitable in the past. We need, too, to be attentive to the levels of staff we need in various functional areas -- increasing some and diminishing others -- but doing so in a way that incorporates your suggestions for improving work flow and creating a safer environment. Because of financial pressures on the clinical side of the house, the margins that have traditionally supported research have shrunk, and so researchers too will have to meet more explicit financial targets. We will be gradually redesigning our education program so that efficiency, quality, and safety in clinical functions is more explicitly supported by our house staff, something that will also enhance the academic value of our training programs.
I recognize that these are just generalities at the moment, and you probably want to know, "What does this mean for me?" The nature of these global changes is that we all will see effects on our work lives, but they cannot be predicted exactly. Some people find that exciting, and some people find that scary. It will be a little of both. What I can promise you as we go through this is that we will do it together, with everybody sharing all the same information, with lots of opportunity for consultation and participation. The truly great organizations, like ours, are not afraid to face the future when we know we are doing it together.
Paul F. Levy
President and CEO