By Jarek Czechowicz
Rising costs, the medicare debate and a recent scare on the quality of pharmaceuticals make it a difficult time to be managing a hospital.
Loyala is a hospital on 75 hectares of land. It has 540 beds, 3700 square metres of medical offices and close to 360,000 outpatient visits a year. Despite a $27 million government bail-out, the hospital is expected to have a deficit of $30 million by the end of the next financial year. Management has achieved $12 million of budget cuts through a combination of staff lay-offs and salary cuts but the hospital is still incurring operating loses of more than $1.8 million a month.
Until recently Loyala was paying its physicians 18% more than the national average income of a general practitioner and its retirement benefit was 17% higher than that of a general practitioner. Thirty-four salaried employees were earning between $165,000 and $247,000, costing Loyala more than $5.7 million a year.
Loyala’s CEO, Don Hadden, is heard saying: “We found ourselves overstaffed after demand for medical services began to subside. At the time the hospital had to attract the best nurses and doctors with appropriate remuneration but we simply can’t justify high salaries under current market conditions.”
In addition to the budget cuts Loyala has disencumbered itself of some costly projects. Cost-containment measures include the temporary closure of its IVF and HIV units and the sale of the first three of its short-lived community clinics.
The community clinics were intended to cater mainly to the poorest in society – charging fees on a sliding scale linked to total family income – allowing the hospital to attract wealthier patients. Although the experimental fee system is still welcome, the implied segregation of wealthy and poor patients has been met with strong criticism as socially insensitive, irresponsible and not in keeping with Loyala’s established values.
Loyala’s recent attempts to attract managed health-care companies have also been condemned by many in the community. One newspaper editor wrote: “The financial formulas of managed health care take into account insurance expenses but they don’t take into account the value of human life when measuring the cost-effectiveness of treatment. In that context a quick death could be more cost effective than long-term treatment when weighed against the cost of insurance premiums.”
In 2002 alone the hospital lost $13 million in billing oversights. Management places the blame on IT and the computer system. The IT department blames management for the lack of IT and related support staff. In an effort to solve some of the billing problems the hospital administration is replacing its outdated computers.
Barry Baytes, the new IT chief, looks at the ceiling and says: “This system has been loosely networked to a couple of mini-computers and an ineffi- ciently configured array of PCs. They’ve got so much data duplication and so many corrupted files that we might have to spend the next year or two checking everything manually.”
One of the technicians installing the new computer system says: “What exactly do they mean by billing oversights?” Baytes replies: “Someone didn’t send out $13 million of bills. But I wouldn’t blame the computers – I never have and I never will.”
Loyala’s deficit is also attributed to factors beyond the control of management. One important element is an increase in patients presenting with unexpected side effects from their medication. This problem is eventually traced back to defective pharmaceuticals.
In the previous year TRI Pharmaceuticals had been at the centre of a two-year investigation and was eventually shut down for producing defective vitamin supplements and other medications. The true extent of the problem had not been revealed by authorities for fear of public panic, loss of faith in the pharmaceutical and medical industries, and class actions.
Loyala staff are first to discover that more TRI products have found their way into the system. There’s no credit and positive publicity for the discovery, and the timing could not be worse for Loyala. Overworked staff struggle to cope with patients presenting for examination. The only other positive news is that the hospital’s Integrative Medicine unit and two complementary therapy clinics are showing a strong rise in profit.
With all the media interest in Loyala Dr Leslie Muller, director of staff physicians, has become a reluctant media personality making regular appearances on popular radio and television talk shows. He assures the media and the local population that patient care has not been affected by the hospital’s management problems.
During one TV appearance Muller announces that Loyala is planning a program of public participation in which the community and stakeholder groups will be able to express their concerns and provide feedback to the hospital and local government.
Joel Jeffries, the interviewer and a well-known investigative reporter says: “Some critical observers have told me that this program of public participation is being driven mainly by economic interests and will be used as a vehicle to promote the inevitable corporatisation of the hospital. Is this a sophisticated PR program?” Jeffries is the type of media journalist who likes to take the opposing view, any opposing view.
An audience member calls out: “It looks like another example of corporate greed.” Pleased with the outburst, Jeffries says: “Corporations are neither greedy nor generous, in fact they have no human qualities. That’s the whole problem.”
Muller feeling, somewhat annoyed with the interviewer and looking forward to returning to work, says: “I’m not here to talk about corporatisation, my mission is to help restore public confidence in the care that they can expect to receive at our hospital.”
Back at the hospital Muller is called to attend a meeting with auditors who are undertaking a review of administrative, financial and other operational practices. Arriving early he joins a conversation with Barry Baytes and one of the auditors, Brad Robertson.
Bates is saying: “… cleverness is the ability to function well within a set program. Intelligence is the ability to leave the program, observe it, make changes, and re-enter when required. Anyone who claims to have authority but can’t make a change for the common good lacks not cleverness or power but the ability to step outside of the program. They can’t really see that a change for the better is needed, and that a change can be made. Call it the ability to ‘step out of the box’, as a box doesn’t go anywhere. Anyway, they repeat entrenched personal and organisational habits only to awaken to lost opportunities. Then they find themselves listening to the rhetoric of change.”
Robertson says: “Change the situation, accept the situation, or remove yourself from the situation. They’re the three most basic management options we have in relation to external conditions. I’ll take the third option at this point because I’ve got to prepare for this meeting.”
They all laugh as he and Muller walk towards the conference room where the tone is somewhat darker.
Hadden starts the meeting by saying: “Our critics claim that management could have prevented many of the rises in expenses and staffing costs by being more aware of certain warning signs, such as the slowing of the economy and the growth of malpractice claims. I’m the first to admit that we’ve sailed the ship too close to the reef a few times but our core problems at this time are due to market conditions. Some events were entirely unpredictable.”
1. Loyala has had a government bailout and is drastically cutting costs. What other options are available?
2. Universal health care is one of the hallmarks of a classless society, or at least a society that strives towards being classless. Is Loyala being forced to abandon its ideals?
3. During a period of crisis management some habitual behavior is changed as a result of the crisis. Can organisations manage gradual behavioral change so that some crises could be averted?
4. A popular senior management cliche is “the market failed our expectations”. Is it ever possible to determine what percentage of losses is attributable to mismanagement and what percentage to market conditions?
Proposed Solution #1
Judy Aitken, an AIM member, is deputy director of nursing at Cabrini Hospital in Melbourne. She has many years of experience in senior nursing management through times of critical shortages, restructuring and changes in skill mix and work practices.
Loyala must investigate all areas of expenditure. Savings have been made with staff lay-offs and salary cuts, but many efficiencies could be achieved. A complete review of staffing should be undertaken as a matter of urgency. Loyala has begun this initiative by engaging the auditors to review administrative, financial and other operational practices – the best way of determining areas of opportunity and significant expense.
With the closure of the HIV and IVF units and three community clinics, operating costs will be curbed. But what of the long-term effects on patients who would also use other hospital services? Loyala seems to have lost sight of its core business and mission.
Has the organisation examined its bed utilisation? One of the most difficult situations to manage is matching the more or less fixed resources of beds and staff against the unpredictable number of patients. Many hospitals have introduced resource roles in the management of beds. Daily conferences that include ward managers, staffing co-ordinators and medical staff should be held to determine how to meet big-picture needs.
Gradual changes can be made through extensive open communication, role modelling and coaching of those in leadership positions to convey the new reality and expected behavior to others. Loyala staff are to be commended for their part in the discovery of TRI pharmaceutical products in the system. Initiatives that might help in managing the extra patient numbers could be brochures in outpatient areas, and using media coverage to promote and publicise the hospital’s capacity to reassure patients and potential users of the steps taken on TRI medications.
This is an ideal situation to capitalise on and demonstrate that the hospital values public opinion, is listening, and is seen to be taking positive steps to win that support. Dr Muller has paved the way for increased consumer confidence by opening the hospital doors to the media and the public. Now is the time to rally support for the Loyala program and improve the relationship between the hospital and the community.
Loyala seems to have ignored warning signs – inflated salaries, overstaffing, ineffective IT systems and perhaps a lack of focus on the core business by senior staff without the strategic planning acumen to act when downturns occurred and costs escalated.
A team of committed leaders with expertise in financial resource management, administrative systems and business forecasting could be appointed to determine future directions in keeping with Loyala’s agreed and established values. A communication plan to inform all stakeholders, including the general public, of the hospital’s position and direction would be an excellent basis for making gradual changes among the staff, who seem to lack focus and direction.
More systems to determine trends and measure output and expenditure against budget must be put in place without delay. It is vital that they reflect key performance indicators to assist in the diagnosis, treatment and successful recovery from the critical condition Loyala is in. The hospital’s core values and mission must have the support of all employees.
Proposed Solution #2
Steven Asnicar, CEO of the Riverstone Group, had more than 15 years with award-winning organisations such as St Andrew’s Memorial Hospital as chief executive, the Australian Private Hospitals Association Board, Boral Limited and Origin Energy.
The first key issue facing Loyala is the reliance on paying well above the national average to attract and retain staff. It needs to offer something other than money. For example, most hospital employees are female, and the loss from staff taking a few years off to have a family is generally high. There is an opportunity to attract these staff as part of a part time/casual pool to regain the flexibility needed to upsize and downsize as required, and to bolster the workforce with quality and “right priced” staff.
Second, with $13 million identified as “missed billings”, the alarm bells should have been ringing months ago. The lack of general audits on systems, procedures and processes on a regular basis is a big concern. Such losses could have been prevented through having the right coding and billing audits in place.
Third, human resource planning, for which the cost of salaries is generally 65% of total turnover, is critical. Strong rostering and management systems need to be in place.
Fourth, management needs to understand where it makes and loses profit. This means looking at each of the specialty (market) segments, by revenue, cost and resource utilisation, and defining where the hospital should be operating. Staff and the community need to realign the organisation’s mission and abilities with the community’s expectations. No business can operate effectively as a charity. It’s a user-pays service at all levels.
The unfortunate truth is that a quick recovery or a quick death is more cost-effective in today’s “health fund” world. It’s not a case of abandoning ideals or the mission of the organisation, but the hallmarks of a class-driven society with different expectations of the health system.
A hospital must understand the changes in acuity, the average length of stays, the nursing hours per patient/day and many other indicators that point to a change in acuity and thus resource deployment. Additionally, the effect of new medical and surgical techniques and procedures has been significant in a number of ways.
The cardiac area is the best example. Ten years ago a general cardiac event usually ended in death or an open-heart procedure. If the patient survived there would be extended ICU care, a long stay in hospital and expensive pharmaceuticals – generally a very expensive event for the health fund. Now the same complaint can be solved or deferred through interventional techniques at one-third of the cost, a much shorter average length of stay and, generally, a much better outcome financially for all.
The thing no one thought about was the acuity factor. Those people who would have died 10 years ago are still in the system but are now much sicker than before. They will have a further three or four medical events over the next 10 years before an even more expensive final episode of care. The acuity factor, and consequently every facet of health care, has increased significantly over the last 10 years while, over the last five years, health fund contributions to hospitals have risen only minimally.
The cultural shift required to create a change process to save Loyala must be matched with strategies driven by management. The board and executives at Loyala failed to look at market changes and did not develop the internal systems to assist in forecasting. Managing resources and managing people appropriately leads to improved performance.