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Dome - Q&A: Ron Werthman

October 2010

Q&A: Ron Werthman

Date: October 7, 2010


Ron Werthman

This discussion begins a series of articles looking at the financial health of Johns Hopkins Medicine. In future issues, we’ll examine various aspects of the organization, explaining plans and strategies to generate more income as well as cost-saving measures.

We asked Ron Werthman, chief financial officer for the Johns Hopkins Health System and The Johns Hopkins Hospital, about how his team is preparing for the opening of the new clinical buildings on the East Baltimore campus while also facing cutbacks in state and federal revenue.

The FY 2011 budgeted expenses for Hopkins Hospital tally approximately $1.645 billion. That includes a $26 million performance-improvement plan that can be achieved by either increasing revenues or trimming costs. The performance-improvement plan for FY 2012 is projected at $39 million.

Q. Many employees are concerned about how the economy, unemployment rate and changes in health care may affect their jobs. Do you anticipate layoffs down the road?

A. Not if we stick to our financial plan, which doesn’t contemplate having to go to major layoffs or furloughs. However, if we start missing financial targets, then, frankly, as an organization you don’t have a lot of choice. You have to maintain your balance sheet and maintain your financial ratios; otherwise the whole debt structure—which is approximately $1 billion for the entire health system—starts to collapse without a proper financial foundation.
I think history is the most important indicator of how we’ve behaved as an organization. We’ve been very, very careful to maintain a stable workforce. In the past, we didn’t resort to massive layoffs or furloughs.

Q. Some of the health care changes include cutbacks to physicians from Medicare and Medicaid, as well as diminished payments to the hospital resulting from health care reform. Does the initial projection of $39 million in cutbacks at the hospital for FY 2012 anticipate those reductions?

A. It does. Our 10-year forecast anticipates some of this negative impact. And we’ve planned on preparing ourselves for a steady diet of receiving annual adjustments to our hospital reimbursement rates from the state that are less than the rate of inflation. Those plans are in place and we are trying to manage them.

Q. Can you give us examples of those plans?

A. One solution is reducing recruitment through staff attrition, as opposed to mandated layoffs. Another is finding ways to reduce costs through increased productivity. For example, in the next year and a half, we’re slated to add full-time employees to the organization because of the opening of the new clinical buildings. Where we have a plan to add a new FTE, we will look at existing staff to see if anyone can fill those duties and responsibilities. And if we find someone, we will then need to understand how the work processes may need to change in order to increase our efficiency and effectiveness.

We have to recognize that some work will need to change in the new model of health care delivery and determine how to use our limited resources differently.

Q. Construction of the Sheik Zayed Tower and The Charlotte R. Bloomberg Children’s Center tower will ultimately add up to more than $1 billion, roughly twice what was originally anticipated. Has that hurt us financially?

A. This is probably one of the largest projects of its type in the country, if not the largest. The majority of the cost overruns were driven by inflation. The original budget called for a 3 percent rise in the cost of construction over 10 years. Instead, building inflation between 2003 and 2006 spiked to 8 percent annually, partly due to construction demands following Hurricane Katrina in 2005. Despite the cost over-runs, we’ve managed the situation without layoffs, something many other medical institutions with substantial building projects haven’t avoided.

We’re in good financial shape with the project at this point. More than half of the building will be supported through philanthropic and state support. The majority of those funds have been received.

We just sold the final bonds in June, $150 million of roughly $400 million, to help pay construction costs. We’ll be paying back that $400 million plus interest over 30 years.

Q. So, despite all of the financial challenges, our ability to sell bonds in the market is still good?

A. Yes. Our rating with Standard and Poor’s is A+ stable; with Fitch, it’s AA- stable; and with Moody’s, which upgraded us last June, we’re AA 3 stable.

I think our ratings reflect our performance over the past 20 years. During that time, we’ve either met or exceeded our financial targets. So, we have a long history of performing according to what we say we’re going to do.

Q. What are some of the difficulties of budgeting for opening of the new buildings?

A. Because we’re preparing to open the new buildings in FY 2012, we’re going to budget in phases. Next July, we will still be operating with the same situation we have today in FY 2011. We’ll generally have the same metrics and staffing patterns, etc. Then, in the fall, we’ll need to anticipate the costs of opening the new building and start gearing up for bringing in new staff. There will be new operating costs, such as more square footage to clean, because even though the space is more efficient, it’s also larger. So there are more equipment costs and maybe more costs with nurses and other clinical professionals.

Finally, once we open the buildings, there will be a stabilization period. So the volatility over what’s likely to happen for us in FY 2012 will present an enormous challenge.

Q. Is health care reform looming as one of our biggest financial challenges?

A. Yes. It requires us to think about how change will occur and to make sure that we participate as leaders in that change. We must rationalize care delivery models that improve quality and outcome and serve our mission, while also being productive.
One example is the sickle cell infusion program. The typical care model was that a patient would show up in the Emergency Department with an acute episode, be admitted, be discharged into outpatient care and require clinical management.

Then the Department of Medicine decided there had to be a better way. They’ve implemented an early-intervention strategy that provides patients with rapid access to infusion medications to treat severe pain. It means patients don’t end up in the ED and usually don’t have to be admitted into the hospital. It costs more on the front end, but less over the long term because you’re maintaining patients’ health status.

I think part of our institutional responsibility is to examine how we care for chronic conditions such as sickle cell, diabetes and congestive heart failure and then, when appropriate, educate folks from our community, nationally and internationally about the benefits of new care models.

Q. Do you anticipate that health care reform will create a need to change the mix of our patients?

A. It’s a great credit to Hopkins that we’ve never abandoned our mission to provide care to those patients who cannot afford it. Being mission-driven keeps us focused, and we take our community mission seriously. We’re not going to abandon that.
Health care reform will require us to find the right balance of patients, but also to focus on effective and efficient care management and treatment. For example, as we expand Priority Partners, our Medicaid managed care organization—and we’re the fastest growing MCO in the state right now—as legislation makes many more people eligible for the insurance program, we’ll be assuming a great financial risk. However, Priority Partners has care management programs in place that have helped it perform better, and if we continue to refine these kinds of care models, I feel that we can do it well and make it affordable. Priority Partners operates on such a slim margin, so we have to constantly watch and anticipate changes that might be occurring in the demographics of the population it serves.

Q. How have the recent deals with Suburban Hospital in Bethesda, Sibley Memorial Hospital in Washington, D.C., and All Children’s Hospital in St. Petersburg, Fla., affected us financially?

A. Of the three, Suburban is the only organization with which we’ve officially merged. Suburban, Sibley and All Children’s Hospital have very strong balance sheets. So in their own right, they’re financially very strong, fiscally very sound.

—Reported by Linell Smith

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