Case Study

Rising costs; stagnant revenues; hostile competition; internal dissension. The CEO’s task: balance short-term cuts with long-term vision. Bruce Matthews, Ritter Hospital’s new CEO, rubbed his eyes and looked again at the 2018 budget worksheet. The more he played with the figures, the more pessimistic he became. Ritter’s financial health was not good; it suffered from rising costs, static revenue, and declining quality of care. When the board hired Matthews six months ago, the mandate had been clear: improve the quality of care and set the financial house in order. Matthews had less than a week to finalize his $70 million budget for approval by the hospital’s board. As he considered his choices, one issue, the future of six off-site clinics, commanded special attention. Matthews’s predecessor had set up the clinics five years earlier to provide primary health care to residents of Marksville’s poorer neighborhoods; they were generally considered a model of community-based care. But while providing a valuable service for the city’s poor, the clinics also diverted funds away from Ritter’s in-house services, many of which were underfunded. As he worked on the budget, Matthews’s thoughts drifted back to his first visit to the Lorris housing project in early March, just two weeks into his tenure as CEO. The clinic was not much to look at. A small graffiti-covered sign in the courtyard pointed the way to the basement entrance of an aging six-story apartment building. Matthews pulled open the heavy metal door and entered the small waiting room. Two of the seven chairs were occupied. In one, a pregnant teenage girl listened to a Walkman and tapped her foot. In the other, a man in his mid-thirties sat with his eyes closed, resting his head against the wall. Matthews had come alone and unannounced. He wanted to see the clinic without the fanfare of an official visit and to meet Dr. Renee Howard, who had been the clinic’s family practitioner since 2005. The meeting had to be brief, Howard apologized, because the nurse had not yet arrived, and she had patients to see. As they marched down to her office, she filled Matthews in on the waiting patients: the girl was 14 years old, in for a routine prenatal checkup, and the man, a crack addict recently diagnosed as HIV positive, was in for a follow-up visit and blood tests. On his hurried tour, Matthews noted the dilapidated condition of the cramped facility. The paint was peeling everywhere, and in one examining room, he had to step around a bucket strategically placed to catch a drip from a leaking overhead pipe. After 15 years as a university hospital administrator, Matthews felt unprepared for this kind of medicine. The conditions were appalling, he told Howard, and were contrary to the image of the high-quality medical care he wanted Ritter to project. When he asked her how she put up with it, Howard just stared at him. “What are my options?” she finally asked. Matthews looked again at the clinic figures from last year: collectively they cost $5.1 million to operate, at a loss of $256,000. What Ritter needed, Matthews told himself, were fewer services that sapped resources and more revenue-generating services, or at least services that would make the hospital more competitive. The clinics were most definitely a drain. Of course, there were many “competitive” projects in search of funding. Ritter needed to expand its neonatal ward; the chief of surgery wanted another operating theater; the chief of radiology was demanding an MRI unit; the business office wanted to upgrade its computer system; and the emergency department desperately needed another full-time physician. And that was just scratching the surface. Without some of these investments, Ritter’s ability to attract paying patients and top-grade doctors would deteriorate. As it was, the hospital’s location on the poorer, east side of Marksville was a strike against it. Ritter had a high percentage of Medicaid patients, but the payments were never enough to cover costs. The result was an ever-rising annual operating loss. Matthews was constantly reminded of the hospital’s uncompetitive position by his chief of surgery, Dr. Winston Lee. “If Ritter wants more paying patients — and, for that matter, good department chiefs — it at least has to keep up with St. Mary’s,” Lee had warned Matthews a few days ago. Lee complained that St. Mary’s, the only other acute-care hospital in Marksville, had both superior facilities and better technology. Its financial condition was better than Ritter’s, in part because it was located on the west side of the city, in a more affluent neighborhood. St. Mary’s had also been more savvy in its business ventures: it owned a 50% share in an MRI unit operated by a private medical practice. The unit was reportedly generating revenue, and St. Mary’s had plans for other such investments, Lee had said. While Matthews agreed that Ritter needed more high-technology services, he was also concerned about duplication of services; the population of the greater Marksville area, including suburban and rural residents, was about 700,000. But when he questioned Richard Cummings, St. Mary’s CEO, about the possibility of joint ventures, he received a very cold response. “Competition is the only way to survive,” Cummings had said. Cummings’s actions were consistent with his words. Two months ago, St. Mary’s allegedly had offered financial incentives to some of Marksville’s physicians in exchange for patient referrals. While the rumor had never been substantiated, it had left, a bad taste in Matthews’s mouth. Matthews knew he could either borrow or cut costs. But the hospital’s ability to borrow was limited due to an already high debt burden. His only real alternative, therefore, was to cut costs. Matthews dug out the list of possible cuts from the pile of papers on his desk. At the top of the page was the heading “internal cuts,” and halfway down was the heading “external cuts.” Each item had a dollar value next to it representing the estimated annual savings. Matthews reasoned that the internal cuts would help Ritter become a leaner organization. With 1,400 full-time equivalent employees and 350 beds, there was room for some cost cutting. Matthews’s previous hospital had 400 beds and only 1,300 FTE employees. But Matthews recognized that cutting personnel could affect Ritter’s quality of care. As it was, patient perception of Ritter’s quality had been slipping during the last few years, according to the monthly public relations office survey. And quality was an issue that the board was particularly sensitive to these days. Eliminating the clinics, on the other hand, would not compromise Ritter’s internal operations. Everyone knew the clinics would never generate a profit for Ritter. In fact, the annual loss was expected to continue to climb. Part of the reason was rising costs, but another factor was the city of Marksville’s ballooning budget deficit. The city contributed $200,000 to the program and provided the space in the housing projects free of charge. But Matthews had heard from two city councilmen that funding would likely be cut in 2018. Less city money and a higher net loss for the clinic program would only add to the strain on Ritter’s internal services. Matthews had to weigh this strain against the political consequence of closing the clinics. He was very aware of the possible ramifications from his regular dealings with Clara Bryant, the recently appointed commissioner of Marksville’s health services. Bryant repeatedly argued that the clinics were an essential service for Marksville’s low-income residents. “You know how the mayor feels about the clinics,” Bryant had said at a recent breakfast meeting. “He was a strong supporter when they first opened. He fought hard in City Hall to get Ritter the funding. Closing the clinics would be a personal blow to him.” Matthews understood the significance of Bryant’s veiled threat. If he closed the clinics, he would lose an ally in the mayor’s office, which could jeopardize Ritter’s access to city funds in the future — or have even worse consequences. Matthews had heard through the City Hall rumor mill that Bryant had privately threatened to refer Ritter to Marksville’s chief counsel for a tax status review if he closed the clinics. He took this seriously; he knew of a handful of hospitals facing similar actions from their local governments. When Matthews tried to explain to Bryant that closing the clinics would improve Ritter’s financial condition, which, in turn, would lead to better quality of care for all patients, her response had been unsympathetic: “You don’t measure the community’s health on an income statement.” Bryant was not the only clinic supporter Matthews had to reckon with. Dr. Susan Russell, Ritter’s director of clinics, was equally vocal about the responsibility of the hospital to the community. In a recent senior staff meeting, Matthews sat stunned while Dr. Winston Lee, Ritter’s high-tech champion, exchanged barbs with Russell. Lee had argued that the off-site clinics competed against the weekly in-house clinics that Ritter offered under- and uninsured patients. He proposed closing the off-site clinics. The four in-house clinics — surgery, pediatrics, gynecology, and internal medicine — cost Ritter $450,000 a year in physician fees alone, Lee said. And because Medicaid was not adequately covering the costs of these services, the hospital lost about $100,000 a year from the in-house clinics. What’s more, in-house clinic visits were down 10% so far this year. A choice had to be made, Lee concluded, and the reasonable choice was to eliminate the off-site clinics and bolster services within the hospital’s four walls. “Instead of clinics, we should have a shuttle bus from the projects to the hospital,” he proposed. Russell’s reaction had been almost violent. “Most of the clinics’ patients wouldn’t come to the hospital even if there was a bus running every five minutes,” she snapped back. “I’m talking about pregnant teenage girls who need someone in their community they recognize and trust, not some nameless doctor in a big unfamiliar hospital.” Russell’s ideas about what a hospital should be were radical, Matthews thought. But he had to admit, they did have a certain logic. She espoused an entirely new way of delivering health care that involved the mobilization of many of Ritter’s services. “A hospital is not a building, it’s a service. And wherever the service is most needed, that is where the hospital should be,” she had said. In Ritter’s case, that meant funding more neighborhood clinics, not cutting back on them. Russell spoke of creating a network of neighborhood-based preventive health care centers for all East Marksville’s communities, including both the low-income housing projects and the pockets of middle-income neighborhoods. Besides improving health care, the network would act as an inpatient referral system for hospital services. Lee had rolled his eyes at the suggestion. But Matthews had not been so quick to dismiss Russell’s ideas. If a clinic network could tap the paying public and generate more inpatient business, it might be worth looking into, he thought. And, besides, St. Mary’s wasn’t doing anything like this. At the end of the staff meeting, Matthews asked Russell to give him some data on the performance of the clinics. He requested numbers of inpatient referrals, birth-weight data, and the number of patients seen per month by type of visit — routine, substance abuse, prenatal, pediatric, violence-related injury, HIV. Russell’s report had arrived the previous day, and Matthews was flipping through the results. He had hoped it would provide some answers; instead, it only raised more questions. The number of prenatal visits had been declining for 16 months. This was significant because prenatal care accounted for over 60% of the clinics’ business. But other types of visits were holding steady. In fact, substance abusers had been coming in record numbers since the clinics began participating in the mayor’s needle exchange program three months ago. Russell placed the blame for the prenatal decline squarely on the city. “Two years ago, Marksville cut funding for prenatal outreach and advocacy programs to low-income communities. Without supplementary outreach, pregnant women are less inclined to visit the clinics,” she wrote. The birth-weight data were inconclusive. There was no difference between birth weights for clinic patients and birth weights for nonclinic patients from similar backgrounds. In fact, average birth weights in 2016 were actually lower among clinic patients. Russell had concluded that the clinic program was too new to produce meaningful improvements. On the positive side, inpatient referrals from the clinics had risen in the last few years, but Russell’s comments about the reasons for the rise were speculative at best. HIV-related illnesses and violence-related injuries were a large part of the increase but so were early detection of ailments such as cataracts and cancer. Matthews made a note to ask for a follow-up study on this. He put the report down and stared out his window. Ritter had a responsibility to serve the uninsured. But it also had a responsibility to remain viable and self-sustaining. Which was the stronger force? It came down to finding the best way to provide high-quality care to the community and saving the hospital from financial difficulties. The consequences of his decision ranged from another year of status quo management to totally redefining the role of the hospital in the community. He had less than a week to decide. If you were part of a consulting group called in to advise this hospital about its strategy, what would you advise Matthews to cut, what should he keep and why? ALSO, what steps would you take to improve employee morale? Write an integrated essay giving detailed reasons for your answer based on the circumstances of the case.