A historic hospital at a crossroads: Will Penn stop the bleeding?

For 247 years, Pennsylvania Hospital has provided top-notch medical care. And for most of those years, that was enough for it to thrive. But recently, America's first hospital, which sits on the corner of Eighth and Spruce streets, has fallen on hard times, losing at least $10.1 million every fiscal year since 1992. Pennsylvania Hospital, known to doctors as "Pennsy," has long focused on clinical excellence and patient care with little regard to cost. But managed-care payments no longer cover costs even at the leanest of hospitals. And Pennsylvania Hospital, far from trim, has been struggling to adjust. The hospital has seen three chief executives in the past seven years, each of whom has attempted to put the hospital in a better position to survive. An academic affiliation with the Hospital of the University of Pennsylvania that dates back to the founding of Penn's Medical School more than a century ago was abruptly discontinued by Penn in 1992 because Penn did not feel at the time that Pennsylvania Hospital was integral to plans for the University's nascent Health System. That was followed by a closer relationship with the Jefferson Health System, whose flagship Thomas Jefferson University Hospital sits a block away. Most recently, the hospital has swung back, merging with the University of Pennsylvania Health System in 1996 and becoming a wholly owned subsidiary in 1997. That merger led dozens of doctors to leave Pennsylvania Hospital because they did not want to join Penn's Health System. The departed physicians had previously accounted for a third of patient volume. And despite Penn's plans to revitalize the hospital, the troubles have left many questioning whether it will ever return to a position of preeminence in Philadelphia. Only the strong survive The story of the Pennsylvania Hospital's transition from independent to wholly owned subsidiary begins with the arrival of President John Ball in August 1995. For Ball, the need to merge with someone was obvious. The hospital, Ball said, faced two major problems. First, it had little leverage in negotiations with health maintenance organizations due to its small size, and was forced to accept the prices the HMOs offered. Pennsylvania Hospital had about $237 million in revenue in fiscal year 1995. The Penn Health System has generated more than four times as much revenue in recent years. Second, Pennsylvania Hospital had no real base of primary-care physicians to funnel patients into the hospital. "We were not in good relationships with either the payers or the patient market," Ball said. "These two things meant? that we had to merge." Even though the hospital had an existing relationship with Radnor, Pa.-based Jefferson, it needed a fuller affiliation, and Jefferson was not showing any willingness to bring the hospital closer to its system. So the choice came down to a fuller relationship with Jefferson or a return to Penn's Health System. According to Ball, the decision to merge with Penn was one of need -- UPHS needed Pennsylvania Hospital more than Jefferson, whose market significantly overlapped with Pennsylvania Hospital's. "You don't need two hospitals only two blocks apart," Ball said. He added that Jefferson's refusal to guarantee that Pennsylvania Hospital would remain open until late in the negotiating process played a large part in sending the hospital into Penn's arms. "There was a real sense that Penn could well afford to guarantee the survival of the hospital in a business sense," Ball explained. Also factoring into the process, according to Ball, was the hospital board's sense that Penn "was better prepared than the Jefferson system" for the managed-care era of medicine. Penn had "an infrastructure for managed-care contracting and information systems in place," Ball said. The staff of Pennsylvania Hospital split bitterly over the choice, and many of those who sided with Jefferson went there when the merger decision was made. The hospital is still trying to recover. David Paskin, former chairperson of surgery at Pennsylvania Hospital, was one of those who left for Jefferson. He sat on the committee which dealt with Jefferson during the merger process, and called Ball's account of the negotiations "bullshit," saying that Jefferson had made a good-faith effort to guarantee Pennsylvania's future. "[Jefferson] does things very slowly, but that doesn't mean things weren't happening," Paskin said. Besides, Paskin added, Jefferson needed Pennsylvania Hospital every bit as much as UPHS did. "At the time, [Jefferson] was already crammed for space, bulging at the seams," Paskin said. "The truth of the matter was, they needed Pennsy." To go or not to go Jeffrey Gerdes, chief of pediatrics at Pennsylvania Hospital, chose to remain at the hospital in the wake of the merger. He shares some of Paskin's skepticism about Penn and the changes UPHS will bring. "I had concerns that they were going to change things that were working pretty darn well," Gerdes said. But Gerdes stayed when Paskin left. The difference boils down to Gerdes' conviction that Pennsylvania Hospital "needed a change and needed to keep evolving to be successful." Indeed, their disagreement is not over what has changed at Pennsylvania Hospital -- more bureaucracy, more research and more formulaic medicine -- but whether those changes were tolerable. Paskin said he believes that he left a hospital with increasing amounts of "red tape," a place that increasingly "depersonalizes and dehumanizes medicine." And Gerdes acknowledged that there is "real potential for friction because the cultures are different." But he maintained that Pennsylvania has "cultural values that ought to remain the same," and he said he believes it is in Penn's best interest to maintain Pennsylvania Hospital's reputation as a place where "a personalized approach to patient care is number one." According to Mark Pauly, a professor of Health Care Systems at the Wharton School, the reactions are not atypical. "Some of the doctors will say, 'Formerly I was one of the barons [before the merger].' On the other hand, a lot of physicians really want to benefit from the most recent kinds of research," Pauly explained. The differing perceptions of the process determine how a doctor reacts. Debating the future The future of Pennsylvania Hospital is up for grabs between those who think the hospital will reassume its former preeminence and those who think it will survive only as HUP East. "The glorious past histories of Pennsylvania Hospital really don't matter much anymore," Pauly said. But whether the hospital needs to re-create that image to thrive is a point of contention. Penn says that maintaining the hospital's image is of great importance to them. A new ad campaign for the Health System, to be launched over the next few months, will emphasize the hospital's quality of care and its reputation as a "community hospital," according to William Ferniany, the Health System's vice president for marketing. But some question whether Penn's injection of much-needed doctors to fill the vacancies left by the merger will jeopardize the hospital's image in the community it serves. The new doctors, Paskin said, are more focused on academic medicine and less on patient care. "Pennsy has already lost a significant amount of its character," Paskin said. "And it will lose more." "A hospital is not bricks and mortar. A hospital is doctors," he added. And the loss of "the premium players," including about a dozen chairpeople since the merger, will forever change the quality and character of the hospital, Paskin said. Even among the doctors who remain at the hospital, there are concerns that the replacements have a different, research-oriented mindset -- and that developing a comfort level will take time. "There is a little bit of tension at the arrogance of Penn," Ball said. Part of the problem is that "we don't know them well enough," according to Michael Braffman, chief of infectious diseases at Pennsylvania Hospital. "These relationships take a long time to develop," he added. But Health System officials remain optimistic that Pennsylvania Hospital can be returned to solid footing. "The most important thing is revenue growth," said Tom Beeman, the Health System's vice president for hospital operations. "They really need more tweaking than anything. It's not that any miracles need to be worked." And according to Beeman, Penn has a plan to put Pennsylvania Hospital back in the black by fiscal year 2000. Indeed, Moody's Investor Services, which rates an institution's ability to repay debt, cited the plan in a recent decision to not downgrade Pennsylvania Hospital's bond rating as much as it could have. Despite all the turmoil, Braffman muses, "I really believe that in five to 10 years, Pennsy will continue to maintain its distinctive image. "It is a place that I have and will continue to bring family members to."

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