Dr. Karpf's message to staff
Financial Roadmap Prepares UK HealthCare for the Future – June 2012
FY 13 BUDGET MESSAGE
The university budget has been the subject of substantial recent discussion and comment. However, the budget and its impact upon the university’s health care programs have not been discussed in any significant detail. It is time to do so in order to put the issue and its potential impact in perspective. To begin this review, it is helpful to examine where we have been, where we are now, and where we hope to be in the near future.
TRANSFORMATIVE YEARS: EQUIPPING UK HEALTHCARE TO MEET ITS POTENTIAL
FY 2004 – FY 2011
In October 2003 when I assumed the responsibilities of the UK Executive Vice President for Health Affairs, Chandler Hospital was losing market share and the College of Medicine had lost faculty. Nevertheless, the potential of both was clear and we committed to propel both institutions toward regional and even national prominence. To attempt such a transformation required a common strategic plan and adequate resources. Consequently, we integrated the hospital, clinics, faculty practice plans and the College of Medicine into a single integrated system of care – UK HealthCare – in order to forge a common vision, concentrate all available resources, and deploy them effectively and systematically. We recruited a team and developed a culture. The common thread in both was, and continues to be, excellence.
Our successes to date exceeded our most ambitious expectations. In FY 2003, the hospital experienced 19,000 discharges and did 16,535 surgeries. In FY 2012, we will exceed 34,300 discharges and perform more than 27,590 surgeries. The operating revenue budget in FY 2003 was just under $319 million and the proposed operating budget of FY 13 is projected to be $922 million. This magnitude of growth has propelled us from about the 85th largest academic hospital to approaching the 35th largest academic hospital in the country.
The UK College of Medicine has made similar strides. We have not only expanded our research portfolio, we have successfully competed for a five-year renewal of our Aging Center grant and received a CTSA grant. Although nothing is certain in these trying economic times, we hope to be on the threshold of achieving National Cancer Institute designation for our cancer center. Applications to the College of Medicine have doubled and our medical students are competitive for highly sought after residencies. Our own residency programs are vibrant and attractive.
What fueled our successes? It was the dramatic investment in faculty, staff and appropriate support systems. Over the last eight and one-half years, our clinical faculty has grown from 443 to 625. The basic science faculty has grown from 143 to 197. Our staff has also dramatically increased. The College of Medicine and the hospital have increased from 1,810 employees and 2,561.5 FTEs, respectively, in 2004 to 2337 people and 5,544 FTEs currently.
Progress has required massive investments in time and resources, as well as commitments not only for faculty and staff but also for technology and bricks and mortar. We have totally revamped Radiology and Radiation Medicine facilities. We have committed to major information systems, including an electronic medical record in both the inpatient and ambulatory settings. When we opened Pavilion A at Chandler Hospital, we expanded our ICU capacity dramatically and also expanded our med/surg capacity. We recently opened eight new operating rooms and a truly remarkable hybrid operating room. We have improved the physical plant and staff for our ambulatory facilities and a number of clinics.
The investment in people, programs, technology, and bricks and mortar over this timeframe has approached $1.4 billion. How did we manage this unprecedented investment? All resources were strategically deployed regardless of source – the reason we coined the phrase “all money is blue.” The clinical enterprise, through an expanded operating budget, strong operating bottom lines and a strong balance sheet that allowed us to borrow $350 million, supplied the lion’s share of the required resources. In addition to covering technology needs and construction costs, we aggressively supported clinical program expansion, which supported the recruitment of faculty and staff.
Without question, the commitment to the faculty and staff has been our most critical and best investment. Faculty and staff are responsible for attracting and servicing our increased clinical load, which has generated our expanded resources. We will only be as good and strong as our faculty and staff.
UK HealthCare is now a major medical destination for not only all of Kentucky but also for West Virginia, parts of Ohio and eastern Tennessee. We have come to appreciate that in order to be a successful major academic medical center, we will need to become a regional provider. Without our clinical growth and our expanded geographic reach, we would have to recant our ambition and promise to become a research-intensive academic medical center. We could not and would not achieve our goal of becoming a critical component of the health care system serving the Commonwealth and beyond. I know we are all proud to continue supporting the Commonwealth of Kentucky by being strong providers, strong educators and strong researchers.
Did we accomplish everything we set out to do? No. The premier medical destinations have robust integrated ambulatory care programs. Very few people know the name of the hospital that services the Mayo Clinic (St. Mary’s). The Mayo Clinic is literally an ambulatory care program with a hospital appended to it rather than a hospital with an attached outpatient program. We are more the latter. We must continue to grow our outpatient activities and integrate them so they are efficient for our patients and appropriate for our aspirations to be a regional referral center in a revamped health care system. As we continue to focus on cost-efficient care, the ambulatory setting becomes increasingly important.
EXTRAORDINARY CHALLENGES REQUIRE TIGHT MANAGEMENT
Over the last several quarters we have created significant improvement in our quality and safety metrics.
One of the most significant contributions of Rick Lofgren and his team to our institution will be the institutional commitments and efforts directed toward making our “core quality and safety measures” not only respectful but even praiseworthy. Increasingly, individuals and institutions are paying attention to these metrics that are now available on the Web. Until recently, we lagged behind our peer institutions. Currently, we benchmark quite strongly.
Our patient satisfaction scores, which were worrisome at best, have substantially improved recently. We need to hardwire these gains and continue our momentum. Our patients must feel emotionally and physically supported while receiving the very best medical care possible.
Pavilion A has been an immense success not only for our patients and their families and friends but also for our faculty and staff. It’s great to see faculty, staff and visitors take advantage of the discreet seating areas in the lobby, inner courtyard and terrace during breaks and lunch hours. The environment is meant to help our staff decompress as much as help our patients and their visitors deal with stress. Visitors and staff continue to compliment the art and music and its impact on the environment from visitors and staff alike. Our faculty and staff are immensely proud of the facility.
Since December, our inpatient volumes have been extraordinary. Extrapolating forward, we should finish this year with more than 34,350 discharges – approximately a 5 to 6 percent increase over last year. This is happening despite a shrinking inpatient market both locally and nationally; therefore, we should continue to increase our market share overall and even strengthen our already dominant market share in the advanced subspecialty areas we emphasize. Our surgical volumes are also attaining record numbers and increasing by about 5 to 6 percent. We have increased our admissions from all markets, all payer classes and in all service lines. Moreover, we have done this without sacrificing quality or efficiency.
From the very beginning of our strategic planning process in 2004, we emphasized our commitment to four critical success factors: efficiency, quality, safety and service. This is even truer today than it was then. We must settle for nothing less than absolute excellence in these areas.
Because of our continued growth, we continue to mature into an increasingly critical component of the health care fabric of Kentucky and beyond. This growth and the maturation of our specialty programs propel us on a path to indispensability.
Our success is not without challenges, which we view as opportunities. The most significant challenge faced this fiscal year was the financial performance of the hospital system for the first three quarters. We anticipated we would be challenged and actually budgeted deficits for the first three quarters. As of the end of April, we were $10.73 million to the positive in operations. Our volumes in May are extraordinarily high, and although we cannot be certain until we fully close out our balance sheet, we foresee an opportunity to have a strong financial month.
Our financial performance for the first three quarters has been impacted by several factors.
First, we deliberately overstaffed with patient care providers in order to assure a smooth and successful move into Pavilion A. We had to recruit and train a disproportionate share of new or recent graduates for our ICU expansion. The new nurses needed coaching and resource availability as they developed their practice skills in clinical decision making for complex, critically ill patients. The ramp-up in total available beds, and especially ICU beds, has gone extremely well and we are now operating at the full complement of additional beds since January. Our chief nurse executive, Colleen Swartz, and the nursing leadership team did an excellent job of appropriately ramping up nursing staff and now have done a superb job of managing productivity so we are providing the necessary resources to achieve our clinical outcomes while hitting our targets for resource utilization. As we grew programs and developed new information systems, we also added substantial numbers of other skilled employees to our already exceptional team.
Second, when we opened Pavilion A we did not close down significant space in the existing Chandler building. Consequently, we added 600,000 square feet to our footprint, and this additional space comes with additional costs for utilities and maintenance. We are focused on minimizing these additional costs. As we open up more of Pavilion A in the future, it may be possible to close down parts of the older Chandler facility or convert vacated areas to other uses that will minimize maintenance expenses.
Third, given the economy, we have had to serve more patients who lack the ability to pay. Both self-pay and charity care have increased over the last several years not only regionally but nationally – a consequence of the recent economic downturn.
Fourth, the Lexington Herald-Leader, nearly daily, publishes articles documenting challenges hospitals and physicians are having with the new managed care organizations operating in Kentucky. These challenges take the form of late payments and denials, and we have not been immune to these issues. We have taken significant efforts to preserve the special payments that reflect the complex care our Medicaid patients receive. Throughout we tried to work through these issues collegially, not through litigation.
Fifth, as we opened up new facilities and added new technology, our depreciation costs also went up. While this cost has an effect on the bottom line, it does not have a cash effect. In fact, the cash available to us increases if we maintain our bottom line.
Sixth, our clinical growth is the result of thoughtful, strategic investments in faculty, staff and programs. Our success is not a random event but carefully planned. Since we have maximized the amount of investment the operating budget of the hospital system can support, we will likely need to decrease some departmental investments as programs mature and become more self-sufficient. This reallocation will free up resources for additional new investments. To help programs mature financially, we are instituting a new practice plan for our clinical faculty that will encourage and reward increased productivity. All in all, the growth UK HealthCare experienced this year has strengthened our clinical enterprise and continues us farther along a path of becoming the indispensable provider in this region.
Finally, when others quit or limited making investments in infrastructure during the recession our nation recently experienced, we maintained a strong balance sheet and continued investing in our future. Not only did we achieve more than we originally planned to with the capital we invested, we retained our momentum.
WELL-POSITIONED TO COMPETE IN A NEW HEALTH CARE ENVIRONMENT
As we started the budget process for FY 13, we knew we would be facing further challenges. Regardless of whether the health care reform some know as “ObamaCare” is reaffirmed or rejected by the Supreme Court, health care reform will accelerate in FY 13. Managed care is here to stay in Kentucky for the Medicaid population and will probably become more important within the commercially insured population. We must anticipate that after the Presidential election, Medicare reimbursement will be cut. More and more financial risk will be moved to providers. Commercial insurers will try to minimize increases in reimbursement and will actually push to decrease utilization. If the President’s health plan is rejected, the burden of the un- or under-insured will only increase.
What does that mean for UK HealthCare?
We project increased growth. We must pursue and accommodate increased volumes of inpatients and outpatients. Our potential increase in volumes may mitigate some of the pressures on us. Our strategies of emphasizing subspecialty care on campus and partnering with local providers has worked, and we must continue to pursue this strategy aggressively. We will continue our outreach efforts to improve the quality of and accessibility to health care in our region.
We must recommit to efficiency and productivity. We perform best financially when our length of stay is at benchmark. Controlling length of stay is a team sport involving faculty, staff and management.
We must commit to judicious use of supplies and equipment. This means much more standardization and much less variation in care.
Our attending physicians must commit to increased productivity. Increasingly, care will be delivered in the outpatient settings. We must continue to mature our systems in ambulatory care.
Most important, we must make sure our progress and gains in quality and safety continue and are hardwired. We must continue to improve and hardwire our patient satisfaction successes. We must continue to provide efficient, standard care.
Specifically, our FY 13 budget projects an operations bottom line of $16-20 million, even taking into consideration an $8 million increase in depreciation cost. Careful attention to achieving operations revenue bottom line enables us to continue to invest, grow and develop our preeminence in to the health care system of Kentucky and beyond.
We expect continued growth and are budgeting for more than 35,000 discharges and a 7 percent increase in outpatient activity. Our length of stay is anticipated to decrease and essentially be at the UHC benchmark. Aggressive targets for utilization of supplies have been set using UHC benchmark data.
We are still an expanding organization, and as our volumes grow, our salary expenses and the number of FTEs we employ also grow. However, in line with our push for efficiency, some positions will be restructured or eliminated. Of course, we will endeavor to retain or re-employ employees with strong work records. We are not alone in this situation. Most hospitals and health care systems do not have our potential for growth and will be decreasing, not increasing, their workforces.
Support for programmatic development will remain at the FY 12 level. Therefore, some programs will have to mature and become more self-sufficient financially in order to free up resources for new investments. We must continue to invest in our faculty, staff and programs to secure and extend our gains. To better help faculty understand how they are compensated, a new practice plan will be put in place.
For FY 13, we anticipate increased pressures from health care reform regardless of what happens with “ObamaCare” in the Supreme Court. We are positioning ourselves and preparing to compete in a new health care environment. Our success will define our role in the health care system – our preeminence and our commitment to quality, safety and patient satisfaction.
Thankfully, our years of success leading up FY 12 have established a strong platform for our future performance. FY 12 has been a milestone. Once again we have been able to increase our inpatient capacity and improve our outpatient throughput. In spite of all the challenges, we will finish FY 12 with a strong operational bottom line. Even better, our improvement in patient outcomes and service paints a picture of an academic medical center that is truly transforming itself.
My colleagues around the country are concerned and fear the future. Most are surprised I am positively anticipating change. They need not be surprised. We have done what we needed to do to establish and secure ourselves; consequently, this time of change presents us with an opportunity. UK HealthCare is strong and growing and will become increasingly more important as a regional provider. You, the faculty and staff, have made this possible, and you will reap the benefits in terms of a secure organization that appreciates and treasures its employees.
I sincerely thank you for your efforts, and I am proud to work with you.
Michael Karpf, MD
Executive Vice President for Health Affairs