Hospitals around the country are facing mounting financial pressures, including reduced revenues from government and commercial payers and decreasing admissions. What effect will they have on Penn Medicine? At the most recent ‘Meal with An Administrator,’ HUP executive director Garry Scheib provided a point-by-point explanation of the changing health-care market and what we’re doing to keep the Health System strong.
The Current Environment
Sequestration –- the across-the-board Federal reduction enacted in March -– automatically cut health-care spending by two percent. For UPHS, Scheib said, that equaled $23 million in reduced annual revenue and $20 million in research funding from the government. If adopted, the president’s recently proposed budget for FY14 would repeal sequestration, but it would also cut $400 billion to both Medicare and Medicaid over the next 10 years. In addition, Pennsylvania faces significant financial challenges, which Scheib said will lead to cuts in health care as well in the next few years.
Fiscal year 2013 does not end until June 30, but, based on the first eight months,Scheib said UPHS will not reach its budgeted target. One of the main reasons for this shortfall is reduced admissions, primarily from ‘observation status’ patients. According to current coding, these patients are too sick to go home but not sick enough to be admitted. Previously they would be admitted for one night but now “the same patient stays about the same amount of time [up to 23 hours] and receives the same care but we’re paid an average of 20 percent instead of 100 percent for a one-day admission,” he said. “That represents about 50 percent of the decline in admissions.”
An increase in services delivered on an outpatient basis has also decreased admissions, as has the current economic climate, in which people are putting off elective surgeries. UPHS has seen admissions drop 3.8 percent over the past three years but it’s not alone. All of the other large hospitals in the region have experienced decreases in admissions, with the average decline of 7 percent over the past three years.
Taking Advantage of Opportunities
“The good news is that we have a strong balance sheet and a strong market position,” Scheib said, “but we need to keep making investments to help guarantee our future.”
This is especially true in our outpatient services. The Perelman Center for Advanced Medicine is an excellent example of this successful strategy. “The Perelman Center has exceeded expectations, with tremendous growth that, up to this year, has more than offset the decline in inpatient revenue,” he said. “As a result of this growth, we’ve added almost 500 jobs in the last few years.”
The success with the Perelman Center has led the Health System to construct similar centers to house outpatient services from Pennsylvania Hospital and Penn Presbyterian. The expansion currently under way at the South Pavilion of the Perelman Center will allow even more outpatient services to move out of both HUP and Penn Tower.
Shifting ambulatory services out of the hospitals not only generates more patient activity, it also allows inpatient services to expand. “We’re in high demand to receive transfer patients but we don’t always have available beds.” Moving outpatient activities into the ambulatory centers will open space at all three hospitals. In addition, moving trauma services to PPMC in early 2015 will open between 40 and 50 beds at HUP.
Long term, there are plans (not yet Board-approved) to tear down both Penn Tower and its garage and put up a new patient tower with underground parking. It will provide several hundred beds to further expand our inpatient services.
Cutting Operating Costs
With the continued downward pressure on revenue, increasing patient activity alone will not counter balance the decreasing reimbursements, Scheib said. “We need to continually look for ways to cut costs.”
The Health System needs to maintain at least a four percent margin just to keep reinvesting in facilities and staff. This means that, for every dollar we receive in revenues, we can spend no more than $.96 in expenses. It doesn’t sound like much but, in a $3.5 billion organization, annual revenue must outpace expenses by at least $140 million.
The Health System’s projected operating margin for FY13 is $140 million. To maintain that operating margin in FY14, $50 million must be cut from operating costs. Right now, Penn Medicine leaders are examining ways to cut from nonpayroll areas -– such as getting better prices from vendors and working with physicians to reduce variations in care, which would allow us to get better prices on clinical supplies. In addition, “chairs of clinical departments are looking for ways to increase clinical time in their practices.”
When one employee asked about future job cuts, Scheib said, “While I can never say never, our goal is to minimize job loss.” Penn Medicine is one of the only health systems in our market that has not had layoffs since the economy started a downward turn in 2008.
Last year, The Big Idea tournament brought in thousands of ideas to improve the patient experience. Soon, Penn Medicine will be asking employees for their ideas to reduce costs. There is also a new dedicated website, Securing Our Future, which provides information about the impact of health-care reform on Penn Medicine and the actions we are taking as well as an interactive Q&A with Penn Medicine leaders.
“We must create a new ‘normal,’ finding ways to provide the same -– or improved -- quality care with less money,” Scheib said. “But our financial strength and strong market position will allow us to meet these challenges and take advantage of the opportunities they present.”