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Leadership Through Turbulent Times

Tough decisions necessary to set course for the future

By John Howser
February 2014

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In 2011, as the country was recovering from the worst economic crisis since the Great Depression, storm clouds gathered on the horizon as concerns deepened over rising health care costs.

The leadership of Vanderbilt University Medical Center (VUMC) began to see these challenges ahead for the health care industry nearly two years ago and initiated aggressive efforts to reduce operating expenses through non-labor cost reductions that would total nearly $70 million.

However, these cost savings were only a beginning as VUMC and many of the nation’s other academic medical centers would be required to respond even more aggressively to economic forces beyond their control.

With demand and patient volumes at an all-time high for inpatient and outpatient services, the Medical Center’s faculty and staff were working harder than ever. However, its hospitals, clinics, laboratories and classrooms would soon face unprecedented challenges.

Due to legislative changes at the federal and state levels, future payment levels for commercial insurance payers, and an aging population, VUMC was facing revenue reductions of approximately $100 million for its current fiscal year and an additional $150 million during fiscal year 2015. As a result, the Medical Center’s leadership identified the need to reduce overall operating expenses by approximately $250 million by June 2015.

“Vanderbilt and the nation’s other academic medical centers have been delivered an unprecedented set of economic circumstances. Here, rather than wait until we were in crisis, we chose to proactively embrace change, make some very tough decisions, and set the course for the future,” said Jeff Balser, M.D., Ph.D., vice chancellor for Health Affairs and dean of the Vanderbilt University School of Medicine.

Frequently during the past year Balser outlined four broad-based economic challenges facing the nation’s academic medical centers, which include:

Federal sequestration—Through the federal sequester, which went into effect on March 1, 2013, VUMC and other major academic medical centers will lose tens of millions of dollars in revenue each year through an ongoing 2 percent reduction to reimbursements for patients insured through Medicare and through reductions to funding for the budget of the National Institutes of Health, which funds much of VUMC’s research.

Tennessee’s failure to expand medicaid enrollment—Already the state’s largest provider of Medicaid services and the region’s largest provider of uncompensated care, VUMC is losing the opportunity to treat more insured patients because Tennessee remains among a minority of states refusing to accept billions of federal dollars through Medicaid expansion.

Concurrently, VUMC will also lose millions in annual revenue through the discontinuation of federal disproportionate share (DSH) funds to Tennessee through federal health care reform.

Shifting national demographics—Growing numbers of Baby Boomers departing the workforce are impacting revenues of nearly all U.S. hospitals as more patients shift, on a percentage basis, from commercial insurance to Medicare coverage. Medicare pays hospitals considerably less than most commercial insurers.

Changes in commercial insurance— Following trends of federal insurance programs Medicare and Medicaid, commercial insurers are already negotiating for reduced rates for inpatient, outpatient, laboratory and pharmacy services. As patients move from employer-based plans to exchange-based plans, the rates paid to hospitals will be less.

Before any measures were considered that might impact employment, other significant steps were taken including: a months-long hiring freeze, halting the accrual of vacation hours for three months and a voluntary early retirement program. The Medical Center also did not offer a traditional annual salary increase for the current year.

Nonetheless, Balser and other members of the Medical Center’s leadership were resolved to strategically reduce overall operating costs by an amount necessary to accommodate for these challenges. By early summer, it was clear that workforce reductions would be needed.

Balser made a strategic decision to use effective and open communication about the economic challenges and what steps would need to be taken, however difficult. While this degree of transparency created understandable anxiety, it also ensured that institutional trust would be preserved. As VUMC became one of the nation’s first academic medical centers to openly and aggressively address its financial circumstances, there was strong local and national media attention.

“The challenges we faced were multidimensional, and not only operational but also psychological,” Balser said. “Because we were so transparent we had to weather a period of intense media scrutiny. We also needed to address perceptions that Vanderbilt was somehow the only institution affected by these economic forces.”

Balser chose to speak directly to the Medical Center’s workforce about the challenges ahead through “Rounds,” a monthly self-penned column already being published within the Medical Center that he used to address other topics. He and other members of the Medical Center’s leadership team engaged in numerous faculty meetings, and town hall forums with medical students, house staff, nursing students and other audiences, both internal and external, about the forces creating the need for change and the steps that would need to be taken.

As summer drew to a close, other academic medical centers were featured in the press. Cleveland Clinic announced it would trim $330 million and 2,500 positions; Indiana University Health stated its goal was a reduction of $1 billion and 800 positions; Wake Forest announced it would need to eliminate more than 950 positions.

While a nine-month hiring freeze had already created the opportunity to eliminate more than 800 vacant positions, the most difficult period came in September when approximately 275 staff left the Medical Center through a reduction-in-force, as VUMC began to reorganize workflow through a system-wide process across all mission areas: patient care, education and research.

By year’s end approximately 1,500 positions had been eliminated through the hiring freeze, the early retirement offering and reductions-in-force. Operational redesign remains underway in 2014 as VUMC continues to achieve additional non-labor operational savings across all areas due to shifting sands underneath the health care industry.

“Our people and our culture remain our greatest asset and our first priority. Together, we persevered through last year with true teamwork and sacrifice. And together we will continue to face one of the most challenging periods in health care. The enormous amount of time and effort put into operational change this past year has set the course for the Medical Center’s future. We have emerged an organization that is more nimble and better able to adapt to the constant changes that will continue to occur within health care delivery, education and research,” Balser said. 

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