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Good progress in budget deliberations

Posted Mar 17 2009 2:42am
Here's a message I sent out to the staff last night. It is a follow-up fromtown meetingsand the previousbudget message.

Dear BIDMC,

It has been a very busy couple of weeks, with thousands of you attending town meetings and sending suggestions to me personally or on our chat page. As promised, here’s my analysis of the options we have considered and suggestions for going forward. This is going to be a long message, so grab a cup of coffee while you read it. I apologize if I don’t address each and every idea that has been suggested, but I am pretty sure I will cover the major ones. At the end of this e-mail, I will tell you how you can best provide input into the next stage of this process.

First, though, an important summary. Your participation in this process and your advice to me has succeeded in accomplishing two very important things: First, we have reduced the number of necessary layoffs dramatically, from over 600 to about 150. This is a major victory and will mean a lot to more than 450 families who would otherwise lose their income from BIDMC. Second, we will do this at the same time we provide earnings protection to our 900 lowest wage workers. As you will see, this does come at a higher cost to the rest of us, but you have all made clear to me that this is consistent with our community's values and expectations. Thank you in advance for your generosity of spirit.

The Situation
Unlike the years leading up to 2002, when most of the hospital’s problems were self-inflicted, we are finally seeing the effect of the general economic downturn on our hospital. As you know, these problems are not ours alone. Our sister hospitals in Boston and across the country, as well as institutions and companies all over America, are facing similar situations. BIDMC has had seven years of extraordinary growth: Our revenue has grown from about $800 million to $1.4 billion and our staffing has grown by over 2000 employees since 2002. But the brakes must now be applied.

The main problem we face is a likely budget imbalance in FY2009 because of reductions in state funding, a slowdown in research spending, and because the number of people we have on staff is not proportionate to our expected level of patient volumes. After at least two years of volume growth that exceeded the regional average, it has slowed down considerably. Some of this is due to the economy, with people deferring medical care. Some portion is due to the fact that the state no longer permits diversions from emergency rooms. In the past, we benefited from diversions in other hospitals, but that has now diminished.

The problem for FY2010 will be more of the same, but it is also compounded by a likely requirement that we will have to make a large cash contribution to the pension plan, and also because we continue to project lower than adequate reimbursements from Medicaid and Medicare. For example, President Obama has proposed a reduction in Medicare payments to hospitals and doctors as part of the “down-payment” on expanded access to health care.

We do not want the hospital to end either of the next two years with an operating loss. Therefore, we believe it is prudent to aim for cost reductions of about $20 million in the remaining six months of FY2009 and at least an additional $20 million in FY2010. My focus in this note will be on FY2009, but many of the steps we take now will also be helpful going forward.

Savings Across the Medical Center
While it is possible to reduce expenses other than personnel, e.g., energy and supplies, these reductions would not be significant enough to eliminate the need to look at personnel-related expenses. We have already taken some major steps to save funds in our research budget. The largest single item is that we will be decreasing the amount of research space that we are renting. But that change will not have an impact until FY2010. The major step we have taken this year was our decision not to fill many positions throughout the hospital. During the last several months, at least 100 vacant positions have not been filled, blunting the previous growth rate in staff.

The personnel budget, including benefits, is about $545 million per year. A $20 million savings is thus approximately 4% of this amount. If we were to accomplish this in layoffs alone, we would have to eliminate over 300 jobs. (This is based on an average cost of $80,000 per employee. This number may surprise you, but it is a “fully-loaded” figure, including all benefits, taxes, and the like. Also, this has to be offset by the amount of severance pay for those people laid off.) With 6,200 full-time equivalent employees currently on staff, this would be nearly 5% of the current staff.

But that is on an annual basis: To achieve the same savings in the remaining six months of the fiscal year, we would have to double the number of people laid off, or over 600.

Our task, it seems to me, and the one with which you have been so helpful in your comments, has been to come up with alternatives that dramatically reduce this number of layoffs and get us close to these total dollar figures. With the strong support I have felt from many of you, I also am trying to shield our 900 lowest paid workers – transporters, food service people, housekeepers and others – from impacts on them and their families. As we have discussed at our town meetings, this will mean a bit more sacrifice from the rest of us, but I sensed a clear commitment to doing that.

Here are my suggestions to meet the likely budget shortfalls. I have outlined here my initial proposal of steps, along with their impact they would have on the budget. It doesn't look to me, at this point, like a menu of options is workable – financially or logistically. In other words, I had hoped to give you some individual options to choose from, but, as you will see, all of the items mentioned below would be necessary.

1) Temporarily discontinue the employer match to the 401(k) plan and the contribution to the executives' 403(b) plan. We currently provide up to a 2% match to the 401(k) plan. The savings from suspending these two types of contributions amounts to $3.5 million for the remainder of FY2009. We would expect to reinstitute these payments in FY2011.

2) Withhold the 3% annual salary increase for those people who would receive it on April 1 and thereafter, exempting people in Grade 4 and below, as well as our residents (physicians-in-training). This freeze on raises would stay in effect through FY2010. The savings from this will be $2.4 million in FY2009.

3) Re-set the salaries for managers and directors to their level before the 3% salary increase received on January 1, 2009. This will save $540,000 in the remainder of FY2009.

4) We had reserved $3 million in the budget for market adjustments in certain highly competitive job classifications. We will choose not to use those funds, saving that money in FY2009.

5) Suspend earned time accruals for five weeks of payroll. This means people will not accrue 3 to 4 days of earned time between April 1 and the second week of May. Then, accruals will start again at the regular rates. This will save $2.8 million in FY2009.

6) Eliminate the ability of people to cash-out their surplus earned time days. Those days would remain in each person’s “bank” for short-term disability purposes, but could no longer be received as cash until an employee leaves BIDMC. This will save $1.0 million in FY2009. (Note: Unlike the other proposals listed here, this one goes into effect immediately.)

7) Continue to reduce payroll by attrition, leaving the vast majority of open positions unfilled, saving $1.25 million in FY2009.

8) Eliminate the employee barbecue this year, economize on other events, and eliminate most hospital reimbursements for cell phones and Blackberries (more on this below), for a savings of about $100,000.

9) On top of this, we will save $1.4 million in the voluntary pay reductions taken by the senior VPs, the VPs, our Chief Operating Officer, and me.

Taken together, these actions would save about $16 million in FY2009, eliminating the need for about 450 layoffs. This is a major step in the right direction! Unfortunately, it does not get us all the way there, and we would still be about 150 positions overstaffed for FY2009. How would we deal with this?

Layoffs and Department Responsibilities
Our first guide to reducing our staff will be based on structure and performance. What do I mean by structure? Many of you have pointed out that there are too many management layers in some cases, and reducing these would be consistent with “flattening” the organization and responding to some of your concerns.

There are also a few departments that are clearly overstaffed relative to the amount of work that needs to be done and will likely be done during this recession. Those departments will be given an overall budget reduction target, and the vice president in charge will have to come up with a plan to meet that target. This might result in some layoffs or it might result in other operational changes or reallocations of staff or managers.

It is clearly our intent to look first at managers and staff who have consistently substandard performance. We will look at performance reviews, your comments on the employee survey, progressive discipline records and other performance factors in making these decisions. We will not make them lightly, but we want to retain employees who work hard and come in on time; managers who have great people and management skills; and employees throughout the organization who make important contributions to patient care.

Finally, we are exploring incentives for early retirement, so that people could voluntarily choose to leave. We are thinking about a plan, say, for people 62 and older, who would be able to leave with their full severance payment but also with an opportunity to continue health insurance coverage at employee rates through age 65. More details will come on that in a few days.

Will This Be Enough?
All of this would likely close the gap for FY2009, but we have to understand that there would be some uncertainty about that for FY2009, and there is still more uncertainty for FY2010. But I would want to defer action beyond this and see how things work out for us and the national and state economies. Only if still needed after these steps would we return to the idea of other layoffs. I expect we would review that early in the summer, and of course, will keep you all informed as we go along.

Your Other Suggestions
Let me address some of the other ideas and suggestion you have brought up. Although they do not amount to a lot of dollars, they have symbolic importance, and we should probably be considering them anyway, in terms of the efficiency of our hospital.

Many of you have offered to voluntarily give up prior earned time and/or make charitable donations to the hospital. We will certainly make that possible and will send out information on how to do it. To the extent that people contribute in this way in the next few weeks, we will be able to see the dollar value of that and apply it against payroll reductions.

I have not adopted suggestions made about furloughs (unpaid leaves of absence); eliminating tuition reimbursement; and eliminating the pay differential for holidays. The problem with furloughs is that we generally have to backfill vacancies, often with overtime pay, so the savings are not that great. Also, there is a large administrative burden associated with this measure. I am loathe to eliminate tuition reimbursement because I do not want to abandon our goal of providing professional advancement for people. In addition to the personal value of these payments, they are important for the long-term viability of our workforce. Finally, holiday differentials in pay are needed to give people an incentive to work on holidays.

There are several hundred people on staff whose cell phone service and/or Blackberry service is reimbursed. Except in special circumstances, I have trouble justifying that. Some people who need to have quick and complete information on technical problems should be reimbursed for these services. But for the vast majority of people, a cell phone is something they would likely have anyway and a Blackberry is handy, but not a necessity of the job. Accordingly, we will do a complete review of who is being reimbursed for these services and will discontinue that reimbursement if we find that it is not necessary. I am guessing that this will save $100,000 for a full year.

Many of you have asked that we cancel the employee barbecue this year. I think that social events for our employees are important for our overall sense of community, but the $50,000 for this occasion is very hard to justify this year, and so we will cancel it. You have also suggested that we economize on other events, like the nursing awards, years-of-service recognition, and so on. We will do so, but we will not cancel them. It is good and important to recognize people for special service.

Many of you have suggested a reduction in catering and meals at meetings in the hospital. In my last e-mail to you, I suggested that this did not appeal to me. Meetings are often scheduled during the times that people would otherwise be having lunch or breakfast, and it seems to me to be appropriate to feed people in these settings. Nonetheless, I will defer to your comments and will say that the hospital will no longer pay for meals for staff people at meetings. Light snacks and drinks, however, will be permitted. I cannot estimate what the savings will be from this measure. (An exception: The meals prohibition would not apply to residents' educational sessions.)

Some of you have asked me to cancel our partnership with the Red Sox. I cannot because it is a contractual obligation, but I would not in any event. This is an important part of our marketing and community presence. The Red Sox are the strongest brand in the region, and our affiliation with them leads to multiple benefits for the hospital. Our name is seen and heard by 2 million fans per year at Fenway Park and millions more on radio and television during the games. We could never afford to buy that kind of visibility with traditional advertising. Our first aid crews provide medical care to thousands of patients each year. We are also involved in important community activities, like the Red Cross Blood Drive and the Scholars Program, with the Red Sox. When the Red Sox sought an "official hospital" six years ago, every hospital in Boston wanted the partnership, and they still do. I was very proud that they chose us, and I still am. In any event, as mentioned, this is a contractual obligation.

There have been other suggestions regarding staffing of the PACUs and other clinical areas. We will continue to review those. There have been suggestions with regard to energy conservation and recycling. We already have strong programs in those areas. For example, as a result of energy efficiency steps, our energy use is the same now as it was when we had 2000 fewer people working here several years ago. Nonetheless, we will continue to pursue enhancements in these areas, but I cannot quantify savings that I can count on at this time. Ditto for other operational improvements, like changes in laundry collection practices.

Now, for your reactions to this list of more concrete options: We have set up a new chat room called Budget Forum 2. See the BIDMC SPIRIT site or the link under “announcements” on our general portal, and each of the major proposals has its own "chapter." Please offer your thoughts there until 5 p.m. on Thursday, March 19. (The original Budget Brainstorm chat room will remain up for observation, but it will no longer be possible to post comments there.) It was great to see the overwhelmingly positive and heartening feedback on our first forum. While there was a small number of commenters who engaged in meanness and sarcasm, we are not going to let that interfere with our goal to give everyone here a voice. I'll ask again: Please use this forum in the way intended, i.e., to comment on these ideas in a polite fashion. (In this next round, we will delete comments that are inconsistent with our values and the purpose of the forum.)

And, of course, feel free to write me directly as well by return e-mail.

I will issue another e-mail within a week with my final decisions and more details on these matters.

Thank you for your patience and involvement as we work through all of these issues. Our commitment to excellent and compassionate patient care and superb research and teaching will continue unabated, and we will come through all this fine.

Sincerely,

Paul

Paul F. Levy
President and CEO
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