While the battle over healthcare is being argued on the national stage, another healthcare battle is being waged in small towns across this country. That is the struggle to maintain hospitals, nursing homes and other healthcare organizations in increasingly difficult financial times.  With cuts in Medicaid and Medicare and declining patient volumes, small healthcare organizations are looking to find ways to provide necessary services with decreasing income. Lincoln County Healthcare’s cutbacks, announced two weeks ago, were a sign of that organization’s continuing efforts to find even ground.

Over the years, local health care organizations have found it necessary and beneficial to join together.  Lincoln County Healthcare (LCH), which formed in 2007, encompasses St. Andrews and Miles Memorial Hospitals and their associated medical practices and care facilities.  St. Andrews and Miles are also members of MaineHealth, a family of not-for-profit healthcare organizations in Maine.  

Peter Mundy, Chairman of the LCH Board, said that the decisions to join MaineHealth, and for St. Andrews and Miles Memorial Hospital to consolidate governance in LCH, have been key to both organizations’ survival.  

“If it weren’t for MaineHealth, St. Andrews wouldn’t be here, and I don’t know whether Miles would be here, in the environment we are in today,” said Mundy. Mundy noted that St. Andrews and Miles are both stronger together.   

Despite these efforts to share resources and reduce costs, nationwide small hospitals and other healthcare organizations are struggling to balance their budgets.

Facing a doubling of the expected mid-year deficit, LCH laid off four full-time employees, terminated 10.6 unfilled positions and ended outpatient surgery at St. Andrews Hospital for the remainder of the fiscal year.  

What’s driving these cuts and what does the future hold for the healthcare organizations that support our communities?

Fewer patients

Jim Donovan, Lincoln County Healthcare’s CEO, explained the immediate and underlying causes of the recent budget cuts and their significance to the community.  Six months into its current fiscal year, LCH is $600K below budget and has recorded a $1.2 million loss.  Two factors are driving these greater than expected losses: an overall reduction in the number of patients seeking care, particularly elective procedures, and decreased Medicaid (MaineCare) and Medicare payments.

Statewide, fewer patients are seeking health care, probably at least partly due to the economic downturn.  Donovan noted that LCH has seen a cumulative downward trend in patients for the last five years. The number of patients admitted has dropped 12 percent over that time period and outpatient numbers are down about 10 percent.

“We are not expecting the pre-recession numbers to come back, even though there will be some growth due to the aging population,” said Donovan, “It’s the new normal.  The way that people think about how they access healthcare service has been fundamentally changed by the recession.”

An additional challenge of small hospitals is the need to maintain core staffing, regardless of patient numbers. “Whether we have two patients or 15, we must have two registered nurses on duty. This need for core staffing is true in other areas, as well,” Donovan said.

Wayne Printy, LCH’s chief financial officer, added, “This is the curse of all rural providers.”

Not only are overall patient numbers down, small hospitals are also finding it harder to compete with large hospitals for patients. “What we’re seeing is a shift in business from rural to urban,” said Donovan. “There’s a perception that bigger is better, when it really isn’t. What we do in small hospitals in Maine, we do as well as anywhere, but we have a limited menu of services. We don’t do open-heart surgery; we don’t deliver really sick babies; we don’t do brain surgery.”

MaineCare and Medicare as drivers

It is not only the perception of better service that is causing the shift to large hospitals; there is also the reality that large hospitals may be able to charge less for services. Smaller communities, such as those in Lincoln County, with fewer large employers that offer private insurance and more elderly patients result in what Donovan refers to as a “less favorable payer mix.” That equates to more patients on MaineCare or Medicare or simply uninsured - patients for which hospitals and nursing homes essentially lose money.

“Neither MaineCare nor Medicare pay us our costs. Medicare pays about 87 percent of our costs (not price) and MaineCare is several notches down from that,” said Donovan. “That’s 67 percent of our business. We are getting less than it costs to keep the lights on for 67 percent of our patients. So we have to shift costs to the other 33 percent (private insured patients) to break even.  Because of our payer mix, our prices to those insured go up.”

Steven Michaud, Maine Hospital Association President, explained that rural healthcare providers, which are more dependent on federal and state dollars, are particularly hurt by efforts to trim government programs.

“What’s really making things worse is the fact that the two major public programs - Medicaid and Medicare - are under so much pressure,” said Michaud. “We are seeing touch cutbacks statewide.  What everybody is fearing is if they (the feds) ever get serious about deficit reduction. We really fear the future.”

As part of the latest state budget compromise, Maine hospitals are poised to pay the state $14 million in exchange for maintaining current MaineCare reimbursement rates. Michaud notes that hospitals will pay the state, despite the fact the state owes Maine hospitals over $500 million in past due MaineCare bills, because they must save reimbursement rates. Preserving the reimbursement rate is essential to ensuring federal government matching dollars:  the feds pay $2 for every $1 paid by the state.  

Printy reported in an email that as of September 30, 2011, MaineCare owed Miles $2.4 million and St. Andrews $189,000.  

“Failure to make these payments will result in recognizing large operating losses against the recorded, anticipated receipt of this debt in prior years,” Printy wrote. Despite this outstanding state debt, LCH expects to pay the state $300,000 this year as part of the state budget deal.  That assessment was not anticipated in this year’s LCH budget.

Donovan said he also expects that federal reimbursement dollars for MaineCare and Medicare will be about $200,000 lower this year. With current projections and these additional losses, Donovan said LCH was facing a $2 million deficit by the end of September.  

The cuts

To offset the projected $2 million loss, Donovan proposed changes in early April to save $800,000 through non-salary budget cuts and another $700,000 through staff cuts and a one-time reduction in earned time benefits. He said LCH also expects to take in an additional $500,000 in revenues through various programs.

Although some of the $800,000 in non-salary savings comes from in-house penny-pinching, a lot of those savings actually come from the lower patient numbers.  

“We calculate bad debt as a percentage of gross revenue,” Donovan explained. “When patient numbers drop, free care goes down as well.”  

Perhaps of most concern locally were the 14.6 positions terminated last week. “We always look to reduce non-salary expenses first. But we’ve known for quite a while that continuing business as usual is not an option,” Donovan said.

Donovan said the decision to not refill some vacant positions and to lay off four full-time employees was made with program managers and senior staff and will reduce LCH’s budget gap by about $600,000. Donovan was reluctant to identify the positions that had been cut, but said that laid off employees will be given preferential consideration for open positions within the entire MaineHealth organization.

“We have no plans for other personnel reductions for the remainder of the year,” Donovan said.  

All LCH employees will not accrue earned-time during one pay period this September, which will result in another $140,000 in savings. (Earned time can be used for sick, vacation or holiday time off by employees and can be “cashed in” when employees leave).

LCH has also suspended all outpatient surgery at St. Andrews Hospital for the remainder of the fiscal year. Donovan said the planned retirement of one of the surgical staff at St. Andrews was a deciding factor in terminating, at least temporarily, outpatient surgery in Boothbay Harbor.  Although this proposal has no specific cost savings tied to it, it is expected to improve efficiency. Presently, St. Andrews does about seven procedures a week.  

“That’s not sustainable,” Donovan said, but added that a final decision on outpatient surgery at St. Andrews had not been made.

What about those top earners?

In recent press, questions have been raised about the high salaries of senior management staff in health care organizations. A review of comparative top earner salary data from Guidestar showed that LCH’s top earners receive pay typical, on the low end, of other similarly-sized healthcare organizations in Maine.  

Mundy noted that LCH is the county’s largest employer with over 800 employees and a $100 million budget. He explained that the Board of Trustees sets the CEO’s salary based on a market survey of other comparable organizations, in consultation with MaineHealth.  

“That survey comes up with the range of fair-market values for someone in that position,” Mundy said, and added, “I will tell you that I am more than comfortable with the compensation of our top senior leadership. We have an outstanding team.”

Michaud said he was troubled by all the attention to CEO and top earners’ salaries. “The cost of paying top administrators in this state is less than one percent of the costs and it gets 99 percent of the attention.  Nationally, this subject is getting a lot of attention, but nothing could be more irrelevant,” Michaud noted.

Donovan said that no cuts were proposed to LCH’s senior management at this time because upper management had already been streamlined.

“When I came here there were, at a senior management level, two of everything,” said Donovan. “My job over my first 6 to 18 months was to develop a management structure, at a senior level and at the department director level below, that would cover both organizations. So, in the final analysis, three vice president positions were eliminated between 2009 and 2010. We also pared back the management ranks through attrition.  We’ve probably, over that same period of time, eliminated a dozen management positions.”

Mundy offered the same analysis, “We’ve done that downsizing,” he said. “The positions that were cut (this month) were cut because we don’t have the volume to need to provide that function or service.”

Effects to care

Donovan said that the cuts will have no effect on patient care or services. “Because of volume changes and the different work flows we put in place to improve efficiencies, the four positions (terminated) will not affect, in any way, the services we provide,” he said, “We’re changing things around to make sure everything gets covered.”    

Ending outpatient surgery at St. Andrews means patients will have to travel to Miles for elective procedures, such as endoscopies, but this will have no effect on other types of care offered in Boothbay Harbor.  Donovan said that when St. Andrews stopped doing inpatient surgery about 10 years ago, “That severed the link between surgical services and the emergency department. Broken legs, belly pain, head injuries, those have all gone to either Miles or Maine Medical Center. It is business as usual in the emergency room.”

What does the future hold?

Michaud noted that was is happening in rural health care facilities - the patient volume declines and “less favorable payer mix” - is reason for serious concern. “If you play that out over time, these hospitals are in trouble.  That’s when basic services will come under fire,” he said.

“Hospitals are doing cutbacks to make their budgets work,” added Michaud. “But they are also placing more emphasis on keeping people well and out of the hospital, and managing chronic diseases better to keep people out of the hospital. The irony is that means less revenue. We’ve got to change the payment system so you’re rewarded for doing those things that keep people out of the hospital. Finally there are federal and state efforts to start doing that - these are infant steps but at least they’re in the right direction. Our big mantra with Medicaid and Medicare is “Pay us for our performance.”

“Health care organizations like ours have a very large percentage of costs that are fixed,” said Donovan. “The way that we can address that is by eliminating programs altogether or by trying to build volume so we can spread fixed costs over greater volume and then are able to reduce prices to the commercially insured population,” he added.

Donovan said that LCH is in the midst of developing and implementing a strategic plan to guide its future.

“We are looking at what we do and where to do it best,” he said “We need to figure out the best places to provide services. I think we are absolutely on the right track. We just don’t know yet where it’s going to take us yet.”

Mundy added, “I believe that whatever changes that we may make down the line will be well thought out, will be the best we can do, and will allow us to continue to provide the services to the community that we need to provide.”