Looking back after six years at BIDMC

A long post. I hope you enjoy it.

As I approach my sixth anniversary this week as CEO of BIDMC, I thought you would find it interesting to join me in reviewing two of my earliest communications with the staff of the hospital. When I arrived, the hospital was in dire financial straits, morale had plummeted, and there was an associated exodus of doctors, nurses, patients, and community support.

The Attorney General of Massachusetts, Tom Reilly, had watched the place deteriorate for many years and understandably had little confidence in its ability to survive as an academic medical center. Therefore, to ensure that the beds at the hospital would be available into the future for the good of the public, he was pressuring the Board of Trustees to sell the hospital to a for-profit hospital chain and end its life as an academic medical center. Tom and I had had a long-term mutually respectful and friendly relationship, and I had met with him the previous week and tried to persuade him to give me a short amount of time to turn things around. He agreed, saying, "Because you are personally willing to take this on, I am willing to give you a chance." (By the way, hearing that kind of sentiment from an AG is bit intimidating!) He placed strong and sensible demands on me and the Board to produce a plan, with strict financial milestones, and a commitment to regular reports on our progress.

The staff knew none of this last matter until I arrived and told them.

So the first email I sent was dated Monday, January 07, 2002 at 11:48 AM, roughly four hours after I started work, and was simply entitled "Message for BIDMC". Those of you who have been involved in business turn-arounds will find familiar elements from your own activities. For those of you who have not, this might provide an interesting vicarious experience.

I am honored and pleased to join Beth Israel Deaconess Medical Center as President and Chief Executive Officer, and I look forward to getting to know many of you personally. This is a wonderful institution, representing the best in academic medicine: exemplary patient care, extraordinary research, and fine teaching. However, the place is in serious trouble, and we are going to have to work very hard during the next few months if we are to secure our future as a non-profit academic medical center.

I promise to have an open administration, sharing with you as much information as possible to help you be part of solving the problems of the medical center. Here is where things stand, as of today. Over the last several years, during one of the greatest economic booms in American history, hundreds of millions of dollars of the BIDMC's assets have gone toward paying the operating losses of the hospital. This was money that ordinarily would have been used as the source of funds for new facilities and equipment, for expansion of programs, and as a cushion for hard economic times. For whatever set of reasons, there was a failure to act to stop this financial outflow. We now face our last chance to reverse this problem.

The CareGroup and BIDMC Boards have a fiduciary responsibility to preserve the assets of this charitable organization to serve the public good. The Attorney General of the Commonwealth has the authority and responsibility to review the Boards’ progress in doing so. Because of the current state of the hospital's finances and because of its curious inability to make decisions during the past several years, some observers believe that the best way to preserve those assets is to sell the BIDMC to a for-profit hospital. This would ensure that the beds currently serving the public would continue to do so. In addition, the proceeds of such a sale, after paying off all of the hospital’s debt, would be placed in a community foundation to support healthcare services and programs in the region.

The good news is that my appointment by the BIDMC and CareGroup Boards means that any plans to sell the hospital are, for the time being, off the table. Frankly, I would not have taken the job unless I received that commitment -- because I know we can succeed. My assignment over the next few months is to take steps that will convince the Boards that saving the BIDMC as a non-profit academic medical center is a wise decision. I will be offering a specific plan for doing that, and we will be held accountable to extremely rigorous milestones. If we fall behind -- either because of a lack of will or a lack of ability to implement changes -- the result will be clear.

What specifics steps will we take? I will announce these over the coming days and weeks. As you know, The Hunter Group [note: a management consulting firm] is soon to submit their recommendations to us. Having seen earlier drafts of these recommendations, I can tell you that many of them are sensible and well thought out and way overdue. I am less certain that other recommendations are relevant to us, but all of them will get a thorough review by the administrative and medical leadership of the hospital. In addition, all of you will get a chance to review them and send comments to me, as they will be posted on our website.

Our review will result in detailed implementation plans and milestones for completion. One clear recommendation will be a reduction of staff throughout the hospital. While the exact number is not yet clear, several hundred positions will be eliminated to bring our level of staffing down to what can be supported by our clinical volumes. Layoffs are distasteful, uncomfortable, and scary, but we will carry them out as humanely as possible and treat people with respect and dignity. The many people who remain will be part of a more efficient medical center, and one that will be able to continue to carry out our important mission.

I have not taken this job to be part of a failure. I have taken it because I believe in you, your commitment, and your ability to succeed through this period of adversity. I am looking forward to showing the world what we can accomplish together.
Sincerely,
Paul Levy

A month later, after some very intense work, we put together the Recovery Plan. Here is the introduction to the document which was posted on the hospital's website.

Recovery Plan for the Beth Israel Deaconess Medical Center
February 1 , 2002
To: The Executive and Finance Committees of the Board of Trustees of the Beth Israel
Deaconess Medical Center
From: Paul F. Levy, President and Chief Executive Officer

Over the past several years, the BIDMC has run large, persistent deficits. The medical center has now reached the point where strong, effective, and immediate action is required to reverse this trend. The alternative to these steps will be a noticeable diminution in the quality of care offered by the hospital and a depletion of the assets that are held in the public’s trust. Neither of these results is acceptable.

This plan is a result of a concerted effort on the part of the medical and administrative staff over the past several weeks. It represents a level of teamwork and commitment that is extraordinary and unique in the history of this institution. It is designed to provide immediate financial relief, leading to long-term financial health. However, a financial plan for a hospital like the BIDMC must represent more than a simple reduction in expenses: The trademark of this hospital is its reputation for a warm, caring environment within which patients and their families receive the finest in medical care. Our record on patient satisfaction is extraordinary. If the BIDMC fails to maintain this mission, it will fail. Accordingly, where a decision to implement an activity with potential short-term financial gain conflicts with patient care, we have chosen to err on the side of maintaining patient care. Such choices do not undermine the financial recovery plan: They enhance it.

The healthcare market in Boston is highly competitive, and some have asked whether it is necessary for the BIDMC to exist as an academic medical center. These observers state that the key attribute of the BIDMC is the number of beds it has in service to the public, and that preservation of these beds should be the major goal facing the community. We reject this premise. While retention of beds is an important public health goal, the existence and enhancement of the BIDMC’s role as an academic medical center is also of vital importance to the Boston area medical community and beyond.

Academic medical centers, in general, are regional and national treasures that provide the public with more than high quality health care. They are the cauldrons of innovation in medicine, places in which research flows seamlessly from bench to bedside and back. Physician scientists observe symptoms and trends in patient care, carry hypotheses about the origin and treatment of disease to the laboratory for analysis and testing, and then transport laboratory results back to the clinic. The BIDMC is a national leader in biomedical research. That status is a result of peer reviews of BIDMC research proposals carried out by medical research scientists throughout the country. Scientists at the BIDMC conduct millions of dollars in research funded by the NIH and by foundations like the American Cancer Society, the American Heart Association, and the American Diabetes Association, reflecting the confidence of these organizations in the quality of science carried out here. In total, the BIDMC carried out $140 million in research last year, of which most supported the direct costs of the research and $34 million went to support indirect costs. Many of our scientists are the international leaders in their respective fields and play key roles in setting national research priorities through their roles in study sections and advisory boards. There are direct results from this research in place now throughout the world. Our research enterprise generates new intellectual property on a continuous basis, and this produces sponsored research programs funded by pharmaceutical companies, as well as start-up companies based on our technologies in which the medical center participates. Patients benefit from this research agenda directly when such research is applied but also by the fact that the existence of this effort encourages the very best doctors to practice at the BIDMC.

Academic medical centers are also the training ground for future physicians. As in the case of research, the interplay between education and patient care is extraordinarily important. The opportunity to work with and train an outstanding group of medical students and residents is a major attraction that draws the highest quality staff physicians to a world-class medical center such as BIDMC. Practicing physicians will also tell you that their involvement in training medical students and residents requires those physicians to maintain their professional edge, keeping current with the latest advances in clinical care. Trainees at all levels will report that their experience in the halls of the hospital is critical to their education as doctors. This phenomenon has been recognized by the federal government by its funding of medical residents through the Medicare program. At Beth Israel Deaconess, we receive approximately $53 million annually for graduate medical education (the training of residents and subspecialty fellows).

The BIDMC is a leader in medical education at all levels. Our physicians provide approximately one-third of the clinical instruction of Harvard Medical School students, offering training in the following fields: internal medicine, surgery, obstetrics and gynecology, neurology, psychiatry, orthopedics, radiology, pathology, anesthesiology, emergency medicine, dermatology, radiation oncology, and neonatology. At the residency level, the BIDMC offers training in all of the above fields to an annual incoming residency class of approximately 125 men and women (for a total complement of approximately 450 residents over their several years of training). An additional 160 physicians receive more advanced subspecialty training in a wide variety of disciplines.

Does the BIDMC need to exist and carry out these functions, or should it devolve into a community hospital, offering a range of medical specialties to the public? This is a plan that has been put forth by some observers. We think it is shortsighted. While it could be argued that the BIDMC’s scientists and teachers could go elsewhere, such an argument leads to a reductio ad absurdum result. The same could be said for every academic medical center. How are we to choose which organization should live or die?

We are realistic enough to know that, in today’s environment, the answer will be guided by the underlying finances of the institution. Unless the BIDMC is able to maintain its clinical programs in a manner consistent with fiscal responsibility, it will not be able to generate sufficient support to remain as an academic medical center. This plan is a blueprint that will support that result. The issue for the BIDMC is not so much whether it should remain an academic medical center: Rather, we will need to decide what mix of clinical care, research, and teaching can be supported. To date, the financial systems and institutional structures of the BIDMC have foreclosed making those decisions. As a result of changes we will make, those choices will be apparent, and decisions will be made about the programmatic priorities for the hospital.

The recovery plan is guided in great measure by the recommendations of The Hunter Group ("THG"). The report prepared by THG has been made available to every employee in the medical center, and we have received hundreds of suggestions and comments regarding the implementation of the measures contained therein. Every one of these suggestions has been considered by senior management. There is much that is good in THG report. It sharpens the focus of our efforts, offering a range of specific financial targets we must achieve. Many of the recommendations of THG are correct, and in fact reinforce those of previous consulting firms. We embrace those recommendations wholeheartedly and have already started implementing many of them. Other THG recommendations are correct insofar as their purpose and goal, but need modification with regard to implementation. In this proposed recovery plan, we commit to achieving the financial results of such measures set forth by THG, but we promulgate a more realistic plan for achieving them. A small number of THG recommendations are unsupported and impractical and have been dismissed. Finally, we offer a set of our own recommendations that were not proposed by THG.

Our recovery plan has a clear financial target. Progress towards that target will be presented to the Board, and it is measurable at every step along the way. We have considered THG’s recommendation that our approach should be to reach a goal of a 3% margin on clinical care within the next two-and-a-half years. This is not realistic given our plan to maintain high quality patient care and, if achieved, would place the BIDMC in a range of performance seldom achieved by academic medical centers. It also would place an undue strain on an institution that will already face massive organizational challenges.

Inherent in our target is a need to stem the "run rate", the degree to which hospital operations are depleting the unrestricted assets of the corporation. We must and will demonstrate a dramatic reduction in the run rate throughout the remaining months of fiscal year 2002. Clear targets for fiscal year 2003 and 2004 are also presented, leading to a break-even result in fiscal year 2004. In the interim, we believe it is appropriate to budget a certain level of operational support from the endowment for three purposes: to compensate for the institution’s past lethargy in making operational improvements; to support the level of research and teaching that are critical to the overall success of this academic medical center; and to serve as a venture fund to finance strategic initiatives that will bring longer term revenue enhancement and quality improvement in this hospital.

On the revenue side of the ledger, we project no increase in patient volumes for fiscal year 2002, but we do commit to a modest increase in such volumes in 2003 and 2004. This contrasts with THG report, which has no expectations of such revenue growth. This commitment is offered by the chiefs and the medical staff directly. It reflects the substantial financial investment being made to recruit a number of the excellent surgeons to this hospital. It relies, too, on increasing physician productivity, particularly with regard to ambulatory care. Finally, it rests in great measure on enhancing relationships with referring physicians throughout the Boston area. The physicians are directly accountable for the success of this recovery plan, and they are willing and ready to stand by that commitment.

Also, on the revenue side, we show income from the rental of real estate. This measure reflects the surfeit of space in the medical center, relative to the size of its clinical and academic functions. That the amount included in our rental projections is achievable reflects inquiries and commitments made during the last several weeks, as well as our own estimate of future tenancies. In choosing to rent space, we will limit ourselves to tenants which have a strategic synergy with the medical center -- organizations which conduct medical research and clinical care that is consistent with our mission and with which we are likely to want to maintain a close relationship over the coming years.

How can the Board best measure our progress in carrying out this plan? Of course, we will provide month-to-month figures on patient volume and financial performance. The advantage of such real-time data is that it offers the potential to track early indicators, but the disadvantage is that any given month’s figures can also cause misleading hope or discouragement. Obviously, it is only the trend over several months that is meaningful.

The difficulty of measuring the success of our program is inherent in the nature of this medical center. The preponderance of our costs are fixed, but the preponderance of our revenues are variable. Even a small shift in patient volumes can cause large swings in the month-to-month bottom line. This problem is aggravated by the fact that the hospital has and will invest large sums of money in the potential for future growth. We have large commitments to recruitments in surgery and anesthesia, for example. Likewise, our physical plant and equipment is sized for a larger patient volume than currently exits.

If we were in the manufacturing business, we would shed workers, close down divisions, and sell assets in the face of a downturn in volume – in essence, adjusting the fixed cost base to be commensurate with a reduction in revenue. Here, our investment commitments are not so variable or fungible. Our staff is our key resource. We cannot increase and decrease the numbers of doctors, nurses, and technical staff every quarter in response to volume changes. Neither can we buy and sell property and reconfigure operating rooms and other patients facilities every several months.

If we were financially healthy, we could deal with these variations by drawing on our "bank account" of unrestricted reserves, knowing that those reserves would be replenished in good times. Here, we have done this for a number of years but without replacing those funds, thus severely restricting the amount available for future use. As THG notes, time is running out if we intend to use those reserves in that manner for much longer. We are proposing a dramatic reduction in this practice, but, as noted above, some continued drawdown of these funds should be expected over the next two-and-a-half years as we pay off the investment costs needed to bring about a longer term level of sustainable patient volumes.

The major portion of this submission is our plan. In that section, we present our major initiatives in Quality of Patient Care; Revenue and Volume Growth; Expense Management; and Strategic Direction. We also provide a narrative comparison with THG’s recommendations in each area.

Our report also contains a series of charts presenting the financial summary for BIDMC that is our target for fiscal years 2002, 2003, 2004. We show projected overall financial results for each year, along with a month-by-month projection of the run rate during this period. These figures are presented alongside those offered by THG. Accompanying these figures is a summary of the performance monitoring tools and metrics that will be in place to measure our success in meeting these financial targets.

Finally, for ease of review, we present a chart in which we present each of the 200-plus THG recommendations and its projected effect in each of the three fiscal years. In the same chart, there is a narrative indicating the degree to which we accept the recommendation along with the financial target associated with our plan for each of the three fiscal years.

Before closing, I must address the concern that has been raised by THG and by other observers: Does the medical center have the ability and the will to carry out these recommendations? Many of the THG recommendations have been offered by previous consultants and yet were not carried out. Why is the situation different now?

Let us briefly review the reasons for the institution’s past failure. Recall that BIDMC had previously engaged Ernst and Young, Deloitte and Touche Consulting, and CSC as consultants to offer advice on achieving financial improvements. These firms independently developed many good ideas which significantly overlapped each other; so the turnaround plans did not fail because of a lack of ideas. While certain aspects of each plan may not have been totally achievable, the majority of the initiatives could have been accomplished.

One of the problems encountered was that the financial target that was established was too small. For example, the 1999 Genesis project stated the budget problem as $52 million per year. In the course of that effort, opportunities were identified totaling $95 million, of which management agreed to implement $75 million, of which about $59 million was actually achieved. However, the projected budget problem increased from $52 million to approximately $100 million during that period.

Another problem was that of unrealistic expectations. The 2000-2001 turnaround plan placed significant reliance on the establishment of a profitable partnership with a pharmaceutical or bio-tech company. The confidence expressed by senior management in this highly uncertain venture was not supported by evidence from outside the organization. In addition, knowledgeable people within the medical center who doubted its efficacy were treated as nay-sayers, and their voices were stilled or discounted.

A third problem was a failure to mesh broad views of how things would improve with the process of change within the organization. The plan developed in 2000 was announced before determining if certain key elements of its design could be accomplished. This conceptual "model" emerged as a "plan" before details could be developed, and the plan was immediately challenged at the detail level in a confrontational manner. Rather than a rational evaluation of the concepts, details were challenged: Decisions were then made in response to the confrontations. Senior management underestimated the reaction to the plan and was distracted by internal and external politics and publicity. As a result, it was difficult to address the very complex implementation and management issues inherent in the change process.

Significantly, a sense of urgency in the medical center had not been established prior to the announcement of this or any previous plan. While BIDMC senior leaders understood the urgency, they overestimated how successful they had been in communicating that sense and establishing it more broadly in the hospital. In part, too, many physicians did not accept the urgency because of a belief that a merger with Partners Healthcare system could occur; that a break-up of CareGroup would solve the problems of the BIDMC; or that Harvard Medical School and Harvard University would act as saviors.

During this last effort, a clear vision for the BIDMC was not accepted. The result was a failure to develop a guiding coalition of key physicians, managers, and Board members, resulting in an inability to remove obstacles to a new vision. This led to a failure to put the needs of the organization ahead of the individual needs and desires of its many internal constituencies. Suggestions that really could have made a difference were not accepted.

Finally, the last turnaround plan had a strong dependence on increasing clinical volumes, especially of high level tertiary and quaternary care. However, the lack of confidence on the part of specialty physicians in the future of the hospital led to faculty turnover that increased the volume gap. Meanwhile, remaining physicians did not fundamentally alter their practice to spend more time on clinical activities.

How is the current situation different? First and foremost, there is now a clear understanding on the part of the medical and managerial staff that the "platform is burning." The decision by the CareGroup Board of Directors to consider seriously the sale of the hospital is now widely known and has provided strong motivation to all parties to work on solving the institution’s financial problems. The involvement of the Attorney General of the Commonwealth, given his statutory responsibility with regard to public charities, underscores the fact that the Board of Directors will be held accountable for its fiduciary responsibilities, lending even greater credibility to that potential threat.

Second, we have shared with the entire hospital the contents of the Hunter report. This independent analysis offers a sobering conclusion about the future of the medical center, absent effective action. It offers detailed proposals for action within every department. It provides us with the tools to establish a realistic financial target, based on appropriate estimates of inflation in personnel and supply costs. It also provides objective criteria by which corrective actions can be judged. Broad-based knowledge of these aspects is key to success, and the report has received over 100,000 hits on the company intranet, and there have been thousands downloads of all or a portion of it. This is an unprecedented distribution of a management consulting report in an academic medical center. (We will follow up with a similar distribution of this plan.)

Third, we have created an environment in which suggestions and contributions from the broad base of physicians and employees are welcomed, solicited, and evaluated. Even if all of these ideas are not adopted, the fact that we have asked is an important aspect of building a constituency for the final decisions. We have created a culture that will avoid failure because the needs of the organization are clearly considered along with the needs and desires of individuals. Suggestions that really can make a difference will be accepted.

This is not to say that the path is easy or straightforward. While the physician leadership and individual physicians care deeply about the future of the BIDMC and are actively engaged in this effort, the day-to-day decisions of those physicians will depend on the creation of institutional incentives (both between the hospital and HMFP and within HMFP) that clearly align the financial and operational incentives of individual faculty practices and the hospital. Likewise, nurses and technical workers on whom we rely so much for the care of patients will need to make adjustments in the way they carry out their work, while maintaining the overall quality of care. Administrative staff will have to focus on the fact that they are part of the overhead cost in an organization the core mission of which is to serve patients and families, and so they will need to be engaged in continuous improvement and searches for greater efficiency.

The foundation for these efforts, though, has been poured. The spirit of the hospital is strong, and the commitment of those working here is as intense as ever. In summary, we offer a financial plan that is real and achievable, but we recognize the tremendous effort that will be required to achieve it. The plan satisfies the fiduciary responsibilities of this Board of Trustees. First and foremost, it promises our patients and their families that the quality of care they receive at this hospital will meet the high standards they expect. Equally important, it ensures that the public’s trust with regard to the preservation and use of the institution’s charitable assets will be sustained, providing a prudent financial plan for the maintenance of those funds. I am pleased to present you with this plan on behalf of the physicians and nurses, and the technical, administrative, and support staff of this organization. We have confidence in this medical center, and we ask for your support in voting to approve this plan.
Sincerely,

Paul F. Levy
President and Chief Executive Officer

So that's how it all started. So far, so good, as a result of thousands of people both within the hospital and from the community with a shared set of values working together to support an incredibly worthwhile mission. Let's see what the coming years bring.