When Heyssel Played Hardball
Exactly 20 years ago, as municipal hospitals all over the country
were failing, Hopkins spearheaded the greatest rejuvination in the country
of a crumbling hospital.
Baltimore mayor William Donald Schaefer had a big problem—a financial albatross called Baltimore City Hospitals. It was 1982, and the facility was hemorrhaging money—a staggering $8 million a year—that it could never hope to stem with its mainly indigent patient base. What had started out two centuries earlier as an almshouse had become a costly urban dinosaur. Around the country, city-run hospitals like this—Philadelphia’s General Hospital and St. Louis’ City Hospital, to name two—were failing left and right.
Schaefer, in the throes of bringing about a major renaissance in Baltimore, was desperate to unload the place. He didn’t want it to close. He just wanted to get the city out of the hospital business. Ideally, he wanted Hopkins to buy it. But how do you dangle a money pit as bait? You can’t sidle up to Robert Heyssel, then-president of The Johns Hopkins Hospital, and whisper, “Hey, buddy—wanna buy a hospital?” In real estate terms, this would be the ultimate “handyman special” that a wary buyer would run—not walk—away from. So the city let it be known that it would entertain bids for City Hospitals from for-profit health care companies. Several, including the Hospital Corporation of America, were quick to nibble.
Heyssel, a shrewd businessman and savvy observer of health care nationwide, was watching closely. Foreseeing that the continued growth of HMOs inevitably would put the squeeze on nonprofit teaching hospitals, he was convinced Hopkins had to preempt a for-profit takeover of City Hospitals. He also saw that the facility had a number of compelling assets, particularly the Chesapeake Physicians Professional Association, one of the first faculty practice plans in the country. In 1980, the CPPA’s 131 physicians were pulling in $2.9 million yearly in research grants and more than $14 million in revenues. To make matters more cozy, all of these physicians had Hopkins faculty appointments and taught medical students as part of City Hospitals’ longstanding relationship with the School of Medicine.
Shortly before his death in 2001, Heyssel recalled those days. “Hopkins had a huge stake in the continuance of City Hospitals,” he said, noting that the region’s only burn unit was there, the National Institute of Aging’s major research institute was on the campus, and the federal government’s research program on drug abuse, then located in Kentucky, was rumored to be relocating there. A tall, blunt-spoken Missourian, Heyssel decided to cut prospective competitors off at the pass. And he had a secret weapon: a crack team of young administrators, led by Ron Peterson, who, unlike the city bureaucrats, knew how to run a hospital, make it work financially and determine if it made sense for Hopkins to take it over. And the timing was perfect. When Heyssel and Richard S. Ross, then-dean of the School of Medicine, asked the Hospital’s board of trustees to consider the purchase, the board had just created Broadway Medical Management Corporation, a subsidiary to own and operate joint ventures for the Hospital and University.
In August 1982, under a contract with the city, Peterson was named executive director of Baltimore City Hospitals. Right off the bat, his management group improved the hospital’s collection rate by installing a new billing system and retraining the accounts-receivable staff. They also added cost-control measures and incentives for the staff to measure its accomplishments. They were actually a bit too good for Heyssel’s liking: “Ron went out there, and within a year had cut the operating loss to $1 million,” Heyssel recalled. “I told him to stop, because I said, ‘Ron, you’re going to make it valuable to the city.’”
Within a year, the trustees of the University and Hospital unanimously voted to start negotiations to take over City Hospitals. Peterson (who today is president of the Johns Hopkins Hospital and Health System) recalls that Baltimore kept pushing for it to pay “major dollars” to acquire the 134-acre campus and buildings. Hopkins’ negotiators, meanwhile, didn’t want to pay anything in return for agreeing to maintain City Hospitals’ tradition of uncompensated care, and for undertaking a long-term financial commitment to turn it into a state-of-the-art facility.
In the end, Heyssel played hardball, and got a dream agreement. The city would pay Hopkins $5.4 million in eight installments over the next four years to help cover the $8.4 million urgently needed for improvements; Hopkins would loan the city the remaining $3 million to cover the maintenance costs; the city and Hopkins would split any profits from developing land on the hospital grounds over the next 20 years. And finally, Heyssel got his escape clause: If Hopkins couldn’t operate City Hospitals successfully after five years, it could give it back.
As it turned out, City Hospitals—renamed the Francis Scott Key Medical Center and then Johns Hopkins Bayview Medical Center—became profitable so quickly that The Johns Hopkins Hospital was able to cover its portion of the upgrade expenses through revenues generated there. Within a year, the deficits were nearly gone, and within two, the hospital was in the black.
Peterson “brought it what it had never had,” says Philip Zieve, then-head of Medicine, “a knowledge base necessary to run a modern hospital. Ron worked harder than any of his predecessors and paid attention to detail. The result was almost immediate success.”
Schaefer never got over the turnaround. “In the first year, they broke even. And I brought our people in, and my exact words were, ‘How the hell can they break even the first year when it cost us a million dollars every year?’ And they told me, ‘Well, you’re not too smart.’ The second year, they made a profit. And the third year, I knew we’d made a bad deal!”
Today Bayview, Hopkins’ “other medical campus,” bears little resemblance to the crumbling edifice the city unloaded just 20 years ago. The modern 700-bed hospital with its surrounding clinics and national programs sits in a 130-acre parklike setting replete with walking trails, a community park and a labyrinth. Almost no sign remains of Baltimore City Hospitals.