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'Our cost structure is out of hand,' says Wellmont CEO

Sharon Hayes • Apr 29, 2009 at 12:00 AM

Health system lays off 40 more workers

KINGSPORT — Wellmont Health System must care for its ailing bottom line to meet the challenges of today and tomorrow, and that starts with a complete self-examination.

“The fact of the matter is — our cost structure is out of hand,” said Michael D. Snow, who was named interim CEO last year and got the job permanently in February.

“Some of this is just years of accumulation. If you don’t take a step back and evaluate, you just have this accumulation in cost structure that, frankly, we can’t continue to sustain.”

Hospitals across the nation are tightening their financial belts to deal with the ongoing recession. The economic downturn has led to an uptick in uninsured patients and charity cases at Wellmont. And the health system’s investment income took a nosedive when the stock market crashed.

For a health system that was “living off investment income instead of operations,” the news wasn’t good, Snow said in a meeting with reporters Wednesday.

“It’s a real change to make your operations self-funded,” he said.

Wellmont hired Deloitte Consulting in early March to help it evaluate operations and improve efficiency. Since then, the health system has been benchmarking itself to facilities of similar size to determine where it needs to cut spending.

Snow said the strategies are working.

“We’ve got to generate positive operating income, and we are right now,” he said.

“I think there’s been a widely held belief that health care is immune from economic conditions. But it’s not.”

Snow said about 60 percent of Wellmont’s revenue stream comes from government reimbursements for Medicare, Medicaid and TennCare. But Snow said those dollars may dry up as the government considers reforming the nation’s health care system. He said Wellmont was expecting cuts from between $8 million and $10 million next year in TennCare and Medicaid payments. And while the economic stimulus bill has delayed those cuts by a couple of years, “it’s still going to come,” Snow said.

He said the nation now spends 17 percent of its gross domestic product on health care. And that’s simply unsustainable, he said.

“So we’re taking steps to make sure we do things differently. We are compelled to do things differently,” Snow said. “These cuts are coming, and we have to prepare for them.”

One area of evaluation is its physical facilities. Wellmont operates hospitals across the region, some of which it acquired in the last few years.

Just recently, the health system announced it would divest one of those acquisitions — Jenkins Community Hospital in Jenkins, Ky. Since acquiring the hospital in 2007, Wellmont had recruited new physicians, installed updated equipment and renovated portions of the hospital. But it was unable to attract new patients. In the past year, the facility averaged just three inpatients per day.

As a result, Wellmont sold the facility’s real estate, equipment and fixed assets to Appalachian Regional Healthcare Inc.

Snow said Wellmont’s other recently acquired facilities, including Mountain View Regional Medical Center in Norton and Lee Regional Medical Center in Pennington Gap, have also posted declines in patient volumes versus an increase at Wellmont’s legacy hospitals such as Holston Valley Medical Center and Bristol Regional Medical Center.

Wellmont is also working to complete a massive expansion at Holston Valley Medical Center. Called “Project Platinum,” the $100 million plan included construction of an onsite power house for energy efficiency, emergency room expansion, new surgery area and intensive care unit, and a new hospital entrance from Stone Drive.

Snow said construction should be completed by early next year. But some plans, including the proposed “E” tower, have been placed on hold for now.

Meanwhile, Wellmont is dealing with audit irregularities, announcing in January that a number of erroneous accounting entries were made between 2006 and 2008. Snow said the health system plans to restate its financials for fiscal years 2006 and 2007. The updated numbers will be released this summer, as well as the 2008 numbers and the financial report for the first few months of this year.

In the meantime, Wellmont is having to pay higher interest charges because it didn’t submit its audit results by the bondholders’ deadline. Wellmont has about $440 million in outstanding bonds.

Snow said Wellmont is in contact with bondholders about changes in its system, and talks have been positive.

He said that if the health system had ignored operating trends and had not taken steps to shore up its finances, the bondholders could have “come in and taken over.”

“If we had not acted, that was the next step,” he said.

In January, Wellmont said that none of the accounting errors involved theft, personal gain or government contracts.

Dr. Richard Salluzzo had served as Wellmont’s chief executive officer and Chris Knight had served as chief financial officer during the time of the audit errors. Both left Wellmont last year.

As for the new CEO, Snow said he holds different beliefs than Salluzzo on various issues. On universal care, which Salluzzo advocated, Snow questions how the country will pay for such a plan.

“My guess is we can’t afford it,” he said.

And Salluzzo was one of the nation’s leading advocates of the safe hospitals initiative. Snow on the other hand said being a safe hospital is just one component of delivering quality health care.

“I want us to adopt national benchmarks. I don’t want to try to figure out what the national benchmarks are,” Snow said.

He said his main focus right now is to position Wellmont to survive its challenges.

Asked if more cutbacks are on the way, Snow said “perpetually.”

“We’re having to take measures to live within our means. We’re going to have to figure out how to do it better, faster, cheaper. We’re really going to have to examine ourselves,” Snow said.

“This is happening across the country. I don’t know anybody that’s not having to go through some form of re-evaluation.”

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