March 19, 1999

Financial performance at the MGH from October through December 1998 was approximately $15 million behind budget. As a result, the hospital is taking steps to bring expenses and revenues back into line. A budget management plan announced this week involves both cost reduction and revenue enhancement efforts that will enable the hospital to correct this unfavorable first-quarter FY 1999 performance and move forward toward FY 2000 in a better financial position.

The cost reduction part of the plan, which is expected to result in $7.5 million in savings, includes paring down certain programs, particularly those that have been established during the past five years. Efforts to improve drug, blood and medical/surgical supply utilization, which have been significantly over budget, also are under way. To achieve additional savings, departments throughout the institution have been realigning work, redesigning activities and finding a variety of program-specific ways to reduce expenses.

Because approximately 50 percent of the hospital's costs stem from salaries and benefits, the budget management plan involves eliminating approximately 130 positions. While most of these positions are either vacant or are expected to be vacated through attrition, 17 of the positions are filled, and some of these employees will be laid off. Employees affected directly by the position cutbacks were notified earlier this week. Where possible, they have been offered other positions within the organization. For those who will be leaving the hospital, the MGH is providing severance pay and outplacement services.

"The changes that are upon us in health care mean that we must look constantly at the way we work and then make decisions – some of them painful – about how we best manage day-to-day operations to preserve the core missions of the institution," says James J. Mongan, MD, MGH president. "The changes we are making now will help us make up the ground we've lost so far in FY '99. Then, we have to prepare for the times ahead, which are expected to see flat or declining revenues, decreased funds for medical education and other challenges related to cutbacks in Medicare funding. We therefore must continue our efforts to hold down our expenses and identify creative ways to deal with the fiscal situation."

In the first quarter of FY '99, MGH net patient revenue was below budget by $1.2 million, while expenses during that period were $8.4 million over budget. Average length of stay (LOS) was significantly over budget, which was the major factor in the disappointing first-quarter results. LOS, which had been budgeted at 6.23 days, averaged 6.77 days in the first three months of FY '99.

This high LOS contributed to the hospital being quite full throughout the first quarter. Patient days totaled 61,584 compared with a budgeted level of 59,097, and occupancy for the first quarter was slightly above 79 percent compared with budgeted occupancy of nearly 76 percent. Yet, the 9,090 admissions recorded in the first quarter were 391 below budgeted admissions of 9,481.

Because two-thirds of the hospital's admissions are reimbursed on a fixed rate per case, the MGH does not get paid for "extra" time a patient is hospitalized, even though the hospital continues to incur staffing, supply and other costs. Also, a bed occupied for longer than anticipated may prevent another admission to the hospital, with its associated revenue. In addition, observation cases were over budget by 525 cases, putting further pressure on the hospital's bottom line because observation stays consume the same resources as a full admission but generate significantly less reimbursement.

Mongan has been meeting with MGPO leadership, chiefs of service and medical staff to review specific budgetary issues for each service and implement plans for addressing and monitoring these issues. The meetings are important, Mongan says, because the long-term success of the hospital's budget management efforts hinge on getting LOS and drug, blood and medical/surgical supply usage down to budgeted levels.

'I know that employees and staff are working incredibly hard to ensure that we offer the very best care to patients, despite the increased demands and pressures of this high level of activity," Mongan says. "I am enormously proud of and thank the MGH community for its dedication to providing extraordinary care and service."

The hospital's budget management plan also includes a series of revenue enhancement initiatives that are expected to generate approximately $7.5 million. These initiatives include a 10 percent across-the-board increase in charges; selected increases for specific medications to help bring MGH charges more in line with market rates; and a more vigilant approach to obtaining appropriate approvals and documentation before patients are treated. Too often, the hospital forfeits payment because of the lack of authorization.

"Change of any kind is difficult at an institution like the MGH," Mongan says. "It is vital, however, that we address our unfavorable financial situation now to prevent, or at least lessen, the more significant problems that we could encounter in the future. Academic medical centers clearly face some major threats in the coming years, and we must be prepared. We must make sure that the MGH remains a resource to patients who need us now as well as those who will look to us in the future."