Tuesday, June 30, 2009

Summer Report to the BIDMC Staff

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


Anonymous said...

Now THAT'S what I call "running a hospital." Thanks.
More on your #2 later when I have had caffeine. (:


OCH said...

Paul Taylor is the CEO and general counsel for Ozarks Community Hospital. Ozarks Community Hospital is a small health system headquartered in Springfield, MO. He has written the OCH White Paper on Healthcare Reform which is being distributed nationwide. Copies of his position paper can be downloaded at http://www.ochonline.com/pdf/OCHReformWhitepaper2009.pdf. Discussion of healthcare issues featured in the white paper will follow on http://ochhealthcarereform.blogspot.com.

Anonymous said...

summer report fine, but no mention of any resumption of all the "give-back" sacrifices those of us on the frontlines made (salary freeze, 401-k freeze etc) That would have been appreciated.

Anonymous said...


Thank you for setting an example of transparency that current and future leaders of healthcare organizations should have been following for years (not to mention the rest of the country). Asking your staff to actively participate in finding and implementing solutions is heartening and sharing the financial difficulties in our current environment clearly shows your respect for them. I am learning from your hospital's experiences and example.

I wish your organization the best with your Lean Initiative. While it is certainly a positive move, anyone who has been involved with "Lean" will tell you that it is an initiative with a long-term commitment to culture change and is not for the faint of heart regardless of the impetus.

You are correct in that our healthcare future is both exciting and scary. We can do some great things in this field going forward, but we need to be careful stewards of the resources and the human beings in our care. Finding the most efficient use of those resources (in every sense of the word) while achieving and maintaining the high quality that we all want from our healthcare providers is a huge challenge. I look forward to following the journey that you and your staff are undertaking and I wish your organization the best in all your endeavors!

Karin S., California

Anonymous said...

Dear Anon 11:32,

I made very clear back in March that those would likely continue through the next fiscal year.

Anonymous said...

I understand the transparency and the upfront honesty. They are commendable.

But to the outsider reading between the lines, does this all equate to: We had a great start to the cost cutting, but we will need to cut further so what or who do we cut next??

Paul, We all understand that from the top down (except the shielded employees) everyone has made cuts and lost something, but even after cuts in the executive salaries, you are still left with a very liveable wage. Many of your collegues in the rank and file are just getting by and not much more.

Anonymous said...

And what conclusion do you draw from that? What would you propose to DO? It is very easy to make a statement about differences in pay grades and other such matters. Please be specific about what structural changes you would make in the hospital that would help insure that we don't need to reduce staffing and benefits. Please frame those suggestions given the environment in which we operate.

Anonymous said...

Paul - Regardless of quality outcomes, how in the world are your providers who have been living in a fee for service world for many years now going to survive when your best payors (BCBS, Tufts and HPHC) force you into a budgeted capitation? You have doctors surviving by generating MORE volume for MORE money as a mind set and then you are going to go into capitation? Yikes! No doubt insurers want to fix their costs by passing risk on to doctors and hospitals but there will be a lot of providers that lose their shirt in this type of arrangement.

76 Degrees in San Diego said...

Boy, when you stick your head above the crowd, "watch out for the tomatoes!"(-my HS counsellor)

Back to your observation: "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." ....it boils down to this: "Do the right thing." That is why the practice of medicine is a profession. Every day, we do things that may not be profitable to us personally, but we do them because they are the right things to do. We deal with humans and uncertainty all the time. None of us are omniscient. We need each other's help to do the best for people. We are in this together.

Anonymous said...

Regarding your #2 item and Lean, I agree with Karin S (anon 1239). It is precisely at the plateau point when perseverance of upper management becomes most important, because that is when all those managers are asking, "are they really going to stick with this, or is this going to fade out like usual?" And, human nature being what it is, perhaps there is a small hope it will fade out so that things can go back to the way they always were.
I have not been formally trained in Lean, but I imagine that it has some sort of principle of continuous training. And, as Andrew commented on another post, there has to be a relentless commitment on the part of upper management (I am thinking of the VP level) so that the managers feel empowered, encouraged, and/or kicked in the pants to continue.
I am sure you already know all this, of course, but I am finding it not surprising from my experience that it is at the manager level where things have hit a plateau....


Anonymous said...

It saddens me to think that as an academic medical center your successful business strategy is necessarliy aimed at financial survival and growth, and doesn't mention the health care needs of the population. I understand the reasons for this. Medical centers are compelled to develop it, teach it, and do it, but only if it is financially viable. Here, BIDMC is no worse than any other medical center, perhaps better than some, but the current model of medical care in this country with its business competitive structure is a recipe for the failure of a social system. I would argue that it has already failed to care for many in our population who have unmet medical needs. It is time for the nation to decide if medical care is to be available to those who really need it, or only to those who can afford it. I hope the decision has not already been made.

I offer these comments as an experienced emergency physician who currently works in an teaching hospital and who sees first-hand and daily the difficulty many people have accessing the benefits of a business-oriented medical system.

Anonymous said...

Even hospitals in those countries that have national health systems have to deal with the business aspects of their organizations. Indeed, I have met managers of hospitals in several countries who actually feel the financial pressures more than we do. So the construct you suggest is, I believe, off target.

We do not have unmet medical needs in this country because hospitals have to face business realities. We have them because we have not provided adequate access to care to a large part of the population. As I have noted in earlier comments, providing access should be job one for the US. At the same time, we have to figure out how to pay for that.

Anonymous said...

Dear nonlocal,

Persistent engagement by management, at all levels, is indeed a prerequisite to successful implementation of the Lean approach. You are right on target.

Anonymous said...

Concerning philanthropy, does the size of the Development staff correlate with the amount of dollars raised? Were there years in the recent past where even though you had reduced staff you still raised a significant amount of money? My point is, with individual giving, bequests and the like predicting future donations is like predicting the weather in New England. It is NOT a science, even though some will disagree.

Anonymous said...

The simple fact that a CEO like this has such a wonderful communication policy, posts on public forums, solicits advice from others, and actually replies to people is simply amazing.

My guess, Paul, is that your legal team hates that you do this, but you deserve kudos.

I would welcome the opportunity to work for your organization in a heartbeat. (ironically, I am currently employed by one of those big-three insurers in MA).

Anonymous said...

Paul, as always your openness is inspiring, the level of interaction is impressive.

I'm glad you put safety and quality number 1 in terms of hospital strategy and goals. Using lean, embedding problem solving and prevention in every day work -- front line staff and supervisors/managers is the key. That's what will make your goal a reality. I applaud you for taking steps to offer more training - lean is challenging for managers, how to constructively handle and address ideas from staff members.

I hope you'll report on how that training is being done, as this is a big challenge for the rest of us implementing lean in our hospitals.

Anonymous said...

Anon 8:57,

Yes, there are general rules about dollars raised per development staff member, although those can be highly variable depending of the particular circumstance. We fall well within benchmarks on that front.

Anon 9:34,

No complaints from the legal team, but perhaps they know I wouldn't listen anyway. But seriously, there is nothing published here that does not already get distributed to 6000+ hospital staff members. Would be hard to keep that confidential anyway.

Anon 11:18,

Happy to share. You'll see lots more here about Lean training, but also in articles prepared by our doctors and nurses.