Circulation 34,475 • Volume 16, No. 1 • Spring 2001

Production Pressure: A Physician Administrator’s View

Frank D. Sottile, MD

The Balanced Budget Act (BBA) has had tremendous impact on the nation’s hospitals. The effect of removing billions of dollars from an industry raised on steady revenue increases was repeatedly highlighted by the American Hospital Association (AHA) in newspaper ads detailing multiple hospitals’ attempts to deal with the crisis. In many cases, decreased access to some vital service or elimination of some program vital to the community were highlighted. The result of the campaign was amendments to the original act that restored some modest funds back to the providers of healthcare. But the majority of the cuts remained, and the question that needs to be explored is: did these cuts impact the industry’s ability to deliver safe care? Has care been compromised, or have institutions simply responded with much needed cost-control measures and a reduction of waste? Are hospitals now primed to reap the benefits of increasing health insurance premiums and is the industry stronger than ever? According to some analysts, this may be the case and healthcare provider stocks have climbed 71% over the past 52 weeks in anticipation of brighter days.1 But that is certainly not the case everywhere.

Cost Pressures

In some market areas of the country, the impact of the BBA has been magnified by simultaneous changes in other payers’ practice, e.g., the move of Medicaid programs from fee-for-service payments to managed care capitation models and the shift in indemnity insurance to managed care models with increasing risk to providers. Southeast Michigan is one area where all three of the aforementioned factors hit at once, causing major financial losses in nationally recognized healthcare systems such as Henry Ford Health System and the Detroit Medical Center.2 Sustaining operating losses of hundreds of millions of dollars over the past two fiscal years, these prestigious health centers have had to slash, cut, redesign, reduce services, and utilize highly priced management consultants all in an effort to get back to financial stability. Operating margins for 17 hospitals in the metro Detroit area dropped 94% from 1997 to 1998.3 Southeast Michigan hospitals are not unique in their financial woes. Similar stories abound around the nation, in fact, 43% of not-for-profit hospitals nationwide reported negative operating margins in 1999.4 All this has led to a major boon for healthcare turnaround consulting firms such as the Hunter Group who, by August of 1999, was doing business in over 15 institutions across the country.5 The rapidity with which health systems have lost their bottom line has meant they have had inadequate time to fully assess the impact of their decisions. They have had to scramble to close operating units which were losing money, reduce staffing levels, place on hold facility renovation or replacement projects, and defer the purchase of clinical capital equipment.

Public pronouncements assure consumers that these cuts have been made with the accuracy of a surgeon’s scalpel, that only the fat and non-essential services or personnel have been reduced and that patient safety has not been and will not be compromised. Private conversation would yield a different assessment of the situation. Ask the chief nurse executives, the V.P.M.A.’s or physician leadership of these institutions and you will quite likely hear a different story.

FTE Pressure

The fastest way to shore up a sagging bottom line is through personnel FTE reductions. After an initial write-off for severance payments, institutions enjoy a reduction in their salary and wage line, which translates to a positive impact on the bottom line. While it would be nice if these reductions were all in non-clinical, non-patient care services, many organizations find it impossible to achieve the necessary targeted savings in these categories alone. Instead, nursing matrixes are stretched, pharmacists are reduced, respiratory therapists are asked to do nursing tasks, and extra, non-clinical tasks are placed on the caregivers as support staff is reduced. Institutions use benchmarks from top performing hospitals as goals to achieve specific FTE’s per occupied bed ratios, without having the time nor the inclination to do the benchmarking process, a process that requires the analysis of the work environment that lead to the specific operating performance targeted.

Ironically, even with healthcare systems layoffs, the industry is experiencing a significant shortage of nurses and other specific personnel. Due to deteriorating hospital reimbursement, actual wages of registered nurses have not kept pace with opportunities for female employees in other sectors of the health industry or in other industries. Enrollment at nursing schools has been on the decline for years and 50% of nurses are now over 50 years old.6 As a result of high vacancy rates among their nursing staff, hospitals are forced to pay high agency fees and incentive pay (time-and-a-half or double-time payments are common) just to keep their patient care units open. Such expensive labor further erodes their bottom lines. The double hit of reduced staffing patterns and inadequate staff to fill the remaining reduced staffing matrix represents the most serious threat to operational performance and patient safety in hospitals today. A recent multi-page expose’ on nurses’ errors in Chicago hospitals provides some impressive facts and clinical vignettes.7 Nursing position vacancy rates average 14% nationwide, but vacancy rates in some units on some shifts can be much higher, as high as 40 to 50%. Intensive care units have been particularly hard hit, a place where knowledge, experience, and teamwork are critical to providing a safe environment for the patient. Recent trends in California to reduce registered nurse FTE’s have led to legislation being enacted, defining minimal nurse-to-patient ratios.8 While such legislation is undoubtedly reactionary and potentially politically motivated, it does highlight the point that, despite statements to the contrary, FTE cuts have and will continue to negatively impact frontline care providers.

Reduced operating margins for the past two years, under 2% nationwide, have other long-term implications for safety.9 Operating margin drives a hospital’s ability to spend capital dollars. As margins drop, capital budgets must be limited. You can’t spend what you don’t make. This reduction in capital expenditures unfortunately delays clinical and facility purchases. Critical equipment replacement schedules are postponed as the definition of useful product life is extended. Monitors are no longer obsolete because their technology is archaic; they now become obsolete when they can no longer be fixed. Delays in purchases of new generations of anesthesia machines, ventilators, bedside monitors, and infusion devices must be occurring in the boardrooms of hospitals across the country. While the impact of these decisions is not readily apparent to the public and perhaps not even measurable, the clinician that utilizes outdated equipment knows that he or she is not providing the best or safest care possible.

In addition to delaying clinical equipment, important infrastructure enhancement is also being delayed. Bar coding systems for accurate patient identification, automated pharmaceutical systems for accurate drug dispensing, clinical information systems with decision support capability, and other system improvements are delayed or deleted as capital committees are faced with impossible choices regarding future expenditures. Funds for items that have been deemed to be life-safety or necessary to meet regulatory requirements are usually available, and thus allow hospital administrators to claim no impact on patient safety. The implicit statement is no impact on patient safety, as we know it today, nor as patient safety could be or should be according to the Institute of Medicine (IOM) report. The IOM report, if nothing else, should have established the status quo as unacceptable.10

Ironically, our inability to fund some of these infrastructure systems leave us with old work processes that rely on human performance and are neither accurate nor efficient. Thus, part of the necessary solution for reducing labor costs per patient by adopting and utilizing technology is not available to struggling hospitals, as these technological advances require significant capital expenditures.

Finally, the ability of hospitals to replace their facilities has been significantly impacted by the deteriorating bottom line. As hospitals’ fiscal performance deteriorated, so have their bond ratings and, therefore, their ability to borrow money at attractive rates. Last year, there were 6.2 healthcare bond downgrades for every one upgraded. In FY2000 an estimated $7.5 billion in bonds were downgraded.11 Thus, at a time they can least afford it, hospitals have to pay more for the money they borrow. The poor financial performance also hit the for-profit hospital industry, with the industry sector stock price falling 22% from December 1998 through June 1999.12 The cost of raising capital, at least temporarily, went up for the for-profits as well. As a result, renovated or replacement facilities were delayed, curtailed or completely shelved leaving hospitals with older, non-efficient physical plants. Once again hospitals are forced to incur increased operating costs, negatively impacting their current and future margins.

It is at best overly optimistic for anyone to claim that the BBA has not negatively impacted hospital’s ability to provide safe care. Of course it has. Over the next five years, the reduction in payments due to the BBA will lead to a $49 million reduction in payments to my institution for providing services to the Medicare population. That’s a reduction of over 14% in payments and much of that reduction occurred within the first two years of the new act. That’s $49 million dollars less our administrative team has for nursing salaries, FTE’s, clinical equipment, new facilities, information systems, and so forth.

It is important for the healthcare providers to realize that non-health industry leaders and purchasers of healthcare services are not supportive or sympathetic to the problems mentioned above. They point to isolated healthcare systems that do have profitable margins as examples that it can be done. They point to reports in our own literature of massive wastes, poor practices, over-utilization of procedures and under-utilization of effective treatment, and even fraud. They claim our product is of low value, our services deplorable, and our “product” overpriced. They point to business dictums and non-healthcare industry examples of process improvement and implore us to learn from them. In fact, Daimler-Chrysler sends their quality improvement teams into local hospitals based in the Detroit area to share in partnership their techniques for rapid redesign of processes. There are not many people outside the healthcare industry who believe we get paid too little for what we do. There is, in fact, an overwhelming belief that our costs are too high for the services and care we provide. We should not expect significant relief of our financial condition unless we do more to prove otherwise.

So, what can we conclude about the impact the BBA has had on the safety in our hospitals and the well being of the patient’s they serve? Without a doubt, the BBA has had, and will continue to have, a significant negative impact on the ability of healthcare institutions around the country to improve their operational performance and their safety records. Fewer dollars for salaries, FTE’s, and for equipment and facilities all make the challenge for the much needed improvement that much greater. Clearly hospitals that have had strong margins and have already invested in information systems, technology, facilities and clinical equipment, and have already committed themselves to efficient operations, can and will continue to offer safe and effective patient care. Those institutions who were behind the performance curve before the BBA was enacted, who have had to act quickly to stop ongoing monetary losses, who have to cut services and FTE’s and delay infrastructure improvements, face an increased risk of business failure. In these institutions, while their future hangs in the balance, care and patient safety will be in jeopardy.

Dr. Sottile is Hospital Vice President, St. Joseph Mercy Oakland Hospital, Pontiac, MI.


  1. Sector Tracker, Oct. 31, 2000
  2. “Hospital Profits ACHE: Earnings off 94% Amid Losses at DMC, St. John, Henry Ford” Crains Detroit Business, Nov. 15, 1999
  3. “Unpaid Bills Keep DMC Struggling” Crains Detroit Business, Feb. 15, 1999
  4. “Not-For-Profit Health Care: 2000 Outlook and Medians” Moody’s Investor Services, August
  5. “Turnaround Experts Get a Real Workout” Modern Healthcare, Aug. 16, 1999, p. 2
  6. “Future Fortunes, Financial Outlook for America’s Hospitals” The Advisory Board, 1999, p. 51
  7. “Nursing Mistakes Kill, Injure Thousands” Chicago Tribune, Sept. 10, 2000
  8. “The Right Ratio” Modern Healthcare, October 16, 2000, p. 3
  9. Ibid 4
  10. “To Err is Human – Building a Safer Health System” Institute of Medicine Report
  11. “Health Care at a Crossroad” Standard and Poors , Oct. 19, 2000
  12. “Investor Jitters Lead to Grim Six Months” Modern Healthcare, Aug. 2, 1999, p.48