Health System CEO promises deep cuts to combat deficit

Unlike the last round of layoffs, future staff reductions may affect those in patient-care positions. In an interview with The Daily Pennsylvanian, Kelley, 60, acknowledged that a variety of factors -- including insufficient payments from insurers and the high cost of providing care for indigent patients -- have forced the system to consider even more drastic measures to cut a budget deficit estimated at $150 million for Fiscal Year 1999, which ended June 30. "There's no choice," Kelley said. "We will dismantle whatever we have to dismantle in order to take care of the losses, period. We can't continue to sustain these losses." Kelley also acknowledged that the system's relationship with its parent, the University of Pennsylvania, is under reexamination. "I think it boils down to how much risk the University is willing to take on," Kelley said. "We're in very different businesses. There may be reasons over the long run why there has to be some changes in the relationship, so we continue to look at those options." In terms of his own future at Penn, Kelley, who also serves as dean of Penn's Medical School, said he is committed to staying on at the University to fix the Health System's troubled finances. "If it turns out that someone else decides that I shouldn't be the person to do it, then that's somebody else's decision," he said. And while admitting that it will be a "hell of a job," Kelley said current plans optimistically call for the budget to be balanced by the end of the present fiscal year, which began July 1. While acknowledging for the first time that some workers directly involved in patient care may be laid off, Kelley pledged not to make changes that would negatively impact care. "Quality is what we're all about," Kelley said. "So we're just not going to do things that interfere with quality." But he did say he would consider eliminating entire departments and programs to save money. Kelley estimated that the Health System will need to make $100 million in further infrastructure cuts before the end of the present fiscal year. To assist the Health System in making those cuts, the University has brought in the Hunter Group, a health care consulting company known for making drastic recommendations for bringing costs under control. They are expected to issue a report this fall, which could include recommendations to dismiss top-level Health System executives. The causes of the Health System's problems are many, but Kelley singled out three for particular attention: inadequate payments from insurers, the lack of state subsidization for indigent care and federal cuts in Medicare spending that arose from the 1997 Balanced Budget Act. Federal Medicare cuts will soon cost the Health System $175 million a year and Kelley said that the region's two major insurers -- currently renegotiating their contracts with UPHS -- "must" pay the Health System more for care. But Kelley emphasized that one thing was not to blame for the present financial difficulties: the Health System's rapid expansion over the past decade. "I don't think we'd exist if we hadn't done what we did," he said. "We've made our share of mistakes but I think we'd be in deep trouble if we would try to function as a single isolated hospital and medical school. We would have been out of business a long time ago, in my opinion." Indeed, Kelley emphasized the universality of the issues facing the Health System, noting that similar difficulties nationwide are forcing academic systems to reconsider their commitment to research and the development of new medical technologies. "I think what will happen is that the academic health centers which are by necessity more expensive than a community hospital, will begin to cut out their infrastructure that has made them so successful and important. It took centuries to build these places and it could take a couple of years to dismantle them." The Health System has been plagued for years by large deficits, which have also impacted the fiscal health of the rest of the University, which has maintained ownership of the system. Kelley said that University officials will likely continue to re-evaluate the relationship between Penn and its Health System. But he noted that there are "tremendous advantages" to maintaining the existing close relationship, both for the hospitals and for Penn's Medical School, which has moved up in most national rankings since consolidating with the Health System in 1993. The flagship Hospital of the University of Pennsylvania has won numerous awards for patient care and innovative new programs in recent years as well. "The beauty of the relationship we have now is that it's all together," he said. "We have a fully integrated academic health system with a large primary care network that allows us to use it as a great teaching laboratory for our students." But that system has continued to post huge deficits, leading UPHS to cut 1,100 positions in May, including 450 layoffs. Kelley defended the spring layoffs as a way to make the system more efficient, saying that "we have gone to great extremes to try to not remove people directly involved in patient care." But that line may have to be crossed if continued layoffs are needed. And the litany of problems contributing to the Health System's financial difficulties leads Kelley to believe that further layoffs are likely. Despite all the financial troubles UPHS is currently experiencing, Kelley expressed hope that "all these pressures will lead us to be a more efficient organization." "There are a lot of things that improve quality and reduce costs," he said. He also noted that performance-wise, the Health System "has done as well as any in the country. The one problem we have now is financial."