By Christopher Guadagnino, Ph.D.

Published December 2000

• React to this article in the Discussion Forum.

Robert D. Martin, Ph.D. is interim chief executive officer and chief operating officer of the University of Pennsylvania Health System.

PND: What progress have you made in improving the financial condition of the University of Pennsylvania Health System?

RDM: We had in fiscal 1997 a net operating loss of $105 million dollars, in fiscal 1998 a net operating loss of $104 million, and then in 1999 a net operating loss of $198 million. Recently we reported a net operating loss for fiscal 2000 of $30 million, approximately, so that represents an improvement. In addition, we have reduced the cash flow from operations from approximately a negative $10 million per month to what today is a positive $6 million to $7 million per month from operations. Those are some of the high points of the progress that this management team has made in addressing the need to financially turn around the performance of the health service delivery system.

PND: How were you able to do that?

RDM: Primarily through cost containment initiatives. We did have a sizable reduction in workforce last year, one in May and the other in November, the combined effect of which was to eliminate our full time equivalent positions in the organization by approximately 2800. In addition, we greatly scaled back a number of discretionary expenses for marketing, for public relations, for office of corporate finance. We also streamlined the management considerably—we eliminated about 25 executive positions. Finally, we have engaged our clinicians to look at ways of improving the practice at the bedside and reducing the consumption of resources in the care of patients. This was a coordinated effort on behalf of all of the members of the medical staff, of every subsidiary of this organization, and it ended up affecting the work that is done by everybody within this organization. It was necessary in order for us to reduce our expenses to a level that we believe now is less than our ongoing operating revenue.

PND: How are you going about reducing clinicians’ consumption of resources?

RDM: We have a process that’s actually led by physicians called Clinical Effectiveness and Quality. The basic idea is to use our own internal information to look at who is the most cost-effective, who does the most volume with the best outcome at the lowest cost. As you might imagine, there’s a considerable amount of variability. The idea is to use those best practices as the role model so that we are teaching—especially our residents—what is the most cost-effective practice, and use that within each of the clinical departments to identify who in their department is the gold standard and use that as a teaching device. We have internal systems to generate this information. We kicked this program off about a year and a half ago. It was one of the initiatives that I wanted to get launched when I took on the COO role the summer of 1999. We have budgeted an improvement of about $15 million or $20 million of expense consumption in fiscal 2001.

PND: What improvements have you made to Penn’s billing system?

RDM: Another institution-wide initiative, the Code Green Project, began in February 1999, with most of our milestones achieved in fiscal year 2000. The major accomplishments involved the following: process improvements in registration and charge capture; a consolidated and reorganized corporate billing office; monthly process/outcome measurement system to track results; a health system-wide registration training program with corresponding quality monitoring of staff; and a strategy to proactively work with the primary payers in the region to improve the institutional interaction with a specific emphasis on billing. Code Green is an on-going project in fiscal year 2001 as we continue to focus on additional improvements to the revenue cycle. We have seen about a 30 percent improvement in our days of revenue outstanding since this project was initiated.

PND: Are there any downsides to the system-wide changes you have described?

RDM: The potential downside of any such reduction in workforce is that the organization will not learn how to do the work with fewer resources. So far we have not been able to identify any areas where we’ve had to add back resources. There’s a learning period, as there is in any major change of this sort, as people throughout the organization were asked to take on different responsibilities. So far, we have been able to continue to do the work, to continue to see the increases in our patient volume and to continue to sustain the level of excellence throughout this organization that we have enjoyed in the past.

PND: Is it possible to sustain the three-fold mission of an academic medical center, i.e., medical training, research, and clinical care, at the same level with the considerable resource reductions that you’ve mentioned?

RDM: I hope so. We’ll see. We believe that, because of productivity improvements, we will in fact be able to sustain the level of excellence in all three areas. To this point that’s been borne out by our experience. We continue to be number two in NIH grants. We continue to have almost no turnover in the faculty here. We are still able to support most of the programs and initiatives that we had undertaken on the academic and the research sides. So, to this point, we have been successful in what we intended to do and will continue to do all of the things in the clinical, research and education areas that we have undertaken.

PND: Has Penn discontinued its disease management program?

RDM: It’s in a maintenance mode. We did cut back the developmental dollars we were using to expand that initiative to add more protocols. We redirected some of those resources to look at best practices in the hospital. The disease management program was mostly an outpatient initiative. The total amount of expenditures on the maintenance of the program is about $200,000 or so a year, which is a shadow of its former self. We’ll evaluate the outpatient aspect of the initiative on an ongoing basis. At this particular point in time this has not been something that has been interesting to payers or to third parties. We’re going to continue to support it at the level that we are right now and continue to evaluate the merits prospectively, both as a scientific and a clinically cost-effective enterprise.

PND: What role did the Hunter Group play in reshaping Penn’s operations?

RDM: They were paid consultants. I hired them. They came in and made suggestions, some of which we implemented and some of which we didn’t. They made not one single decision involving cost reductions—all of those were made and carried out by this management team with, of course, the support of our trustees and the complete board of Judith Rodin and the University, all of which was important to being able to do all of these difficult things that we did over the course of the past year and a half.

PND: Will the Hunter Group play a continuing role?

RDM: No. They left over a year or so ago. They haven’t and they will not.

PND: How do things have to change, in your view, in order to maintain the academic medical center mission in the face of current fiscal realities?

RDM: For many years the medical education initiative was developed with the full support of the reimbursement regulations that were administered by HCFA and the whole notion of graduate and undergraduate medical education was viewed as a public good. The Balanced Budget Act of 1997 was a precipitous change of the rules because the amounts that were allocated in particular for medical education were reduced steeply and precipitously. For example, in fiscal 2000 we will have about $55 million less in revenue than we did for the year that commenced January 1997. We have been very proactive in looking at ways we could improve our productivity and cost-effectiveness without a drastic, or for that matter any, diminution in what we do in teaching. So far, we’ve been able to do that. Will we be able to continue? I don’t know that. No-one knows what the future portends for sure and no-one knows when we will reach the limit beyond which the rubber band stretches and then will give no more. We will have to continue every day of our lives to approach the work day with the notion that we have to find ways of doing our work at a lower cost. There’s no other way. We have to approach this from the perspective that the government is not a particularly reliable source of financing of anything. The government giveth and the government taketh away. We’re going to continue to look at alternate sources to try to find new and innovative ways of managing our costs and supporting our research. That’s what we have to do and we’re going to be challenged forever in this resource-constrained world.

PND: One of Penn’s stated priorities is to update its strategic plan, including new mission and vision statements, hospital strategy, primary care strategy and clinical service strategy. What do these changes entail?

RDM: Numbers one and three on that list, we’ve actually pretty much completed but we’ve not yet reviewed them with our trustees, so it would be premature of me to discuss them. The other two are under way and we will be reviewing those in the spring of next year with our trustees.

PND: What is your view of the future viability of Penn’s acquired physician practices?

RDM: I think we will have demonstrated our ability to integrate those as a financially viable and clinically important part of the University of Pennsylvania Health System. The strategy has been modified somewhat as a more market-driven, productivity-based compensation plan that our Clinical Care Associate physicians themselves were instrumental in helping design. We’ll continue to modify it on an ongoing basis depending upon market conditions, managed care and government reimbursement. But the practices are being integrated successfully into the University of Penn Health System. I expect that to continue.

PND: There has been a lot of controversy over the new leadership appointed at Phoenixville Hospital. Is it true that the physicians on Phoenixville’s medical staff were not consulted about the leadership changes there?

RDM: That’s a true statement. It’s my decision to select the leadership of this organization and I’m the person who’s accountable for that, including the leadership of Presbyterian Medical Center, including the chief financial officer, the head of marketing, Pennsylvania Hospital, CCA. When I have decisions to make that involve personnel, I cannot in good conscience involve a large number of people in that discussion. It will quickly end up being a media event, it will quickly end up taking on a life of its own and that would be irresponsible. So, when I have management initiatives such as the one that I undertook at Phoenixville Hospital to ask Kevin Mahoney to assume the CEO position there, that is very much my responsibility and it is one that I will continue to carry out in that fashion.

PND: The Phoenixville medical staff had previously voted to sever their institution from the Penn system. What are your plans to improve the situation there?

RDM: Kevin is addressing that quite effectively. I think that over the course of the next few weeks or months you will begin to see a completely different attitude emanate from the community and from the physicians there.

PND: What role does Phoenixville Hospital play in Penn’s strategic plans?

RDM: They have been and we believe they’ll continue to be a vital and important part of this organization. We believe the community of Phoenixville will and does view the relationship with Penn as a very valuable relationship. My guess is that most of the physicians who practice there will tell you the same thing.