JULY 15, 2013 SPECIAL EDITION with MESSAGE FROM VICE CHANCELLOR BALSER

Message from the Vice Chancellor about economic repositioning

Dear Colleagues,
Openness and transparency are key elements of our culture. My goal in these regular, system-wide communications is to provide you with facts.
Vanderbilt University Medical Center has never been stronger.

Over the last few years, and even in recent months, our local and national reputation has grown significantly in all three of our mission areas – clinical care, research, and education. Your bold leadership strengthens us across the organization, and your substantive accomplishments are not only giving hope to ever expanding numbers of patients, but also are attracting the very finest faculty, staff, and students from around the nation and across the globe to our campus.

At the same time, we are all hearing stories of layoffs in health care in the region and around the nation. We are also hearing much about universities losing research funding. Not surprisingly, we at VUMC are not immune to these issues and speculation. While no one is excited about receiving difficult news, most of us become even more anxious when we have incomplete information, particularly when the daily news highlights turmoil in our industry. So we must do our level best to communicate about what we know, and what we see coming— early and often. Through seeing the environment clearly, we can more effectively support one another in taking the proactive steps necessary to secure our future.

The Environment
First, let’s discuss the latest information on the economic circumstances in health care and research. In a nutshell, the news is not good. Since my last communication in the May 24 edition of MyVUMC, the Bureau of Labor Statistics reported a net national job loss of nearly 6,000 positions within the U.S. health care sector during the month of May, the first such occurrence within our industry in many years. Right now, were you a resident of Baltimore, Chicago, Cleveland, Detroit, Pittsburgh or nearly any other large metropolitan area with a significant health care infrastructure, you would have already read in your local newspaper about workforce reductions among major academic health systems and smaller freestanding hospitals. Tennessee and Nashville are by no means unaffected by these forces; several hospitals in our state are actively considering closing.

My best analogy for what we are now facing is to think of health care as an inflated bubble. In America, health care accounts for 18% of the gross domestic product (GDP), and contributes substantially to the annual U.S. budget deficit. There is no other country on the globe where health care is nearly so expensive; even in the most highly developed economies health care is no more than 12% of the GDP.

Now, the bubble has burst.

We foresaw and began to prepare for a major shift in the health care economy 18 months ago, and for the first time in decades we are actually seeing absolute decreases in health care expenditures. Many sources of health care revenue that we rely on at VUMC, including government insurers like Medicare and Medicaid, are paying us less for the same care we have always delivered. Changes in reimbursement are moving at an unprecedented pace, and the floor of the correction is not at all certain. The situation is akin to the housing bubble that burst in the middle of the last decade—what people were willing to pay for homes dramatically fell over a period of only a few years.

And while the negotiations between the federal government and Tennessee surrounding the Affordable Care Act continue, as I wrote you in the April 2 edition of MyVUMC, payments to medical centers like Vanderbilt that continue to treat a disproportionate share of the uninsured are being reduced or eliminated. Vanderbilt and Tennessee’s other safety-net hospitals are bracing to manage the growing costs of uninsured health care while receiving significantly less financial support than in the past.

The news is no better at the National Institutes of Health, which provides research grants that support nearly one-fourth of the VUMC workforce. The funding reductions at NIH and other federal research agencies created by federal sequestration have not been reversed, despite numerous efforts by congressional leaders who believe America’s position of scientific leadership has been put at risk. While our federal relations team works with many of us to engage this issue, we cannot foresee passage of legislation that would substantially improve the conditions for research funding in the coming fiscal year.

For all of these reasons, when combined with the cutbacks we forecast in May, we must now manage more than $70 million of revenue reductions in this new fiscal year compared to the prior year. And we expect to learn of further reimbursement reductions during the coming months. It is important to recognize that what we are experiencing in payment for our services in no way mirrors the productivity of our health care or research enterprise programs or people. In fact, due to the incredible efforts of our extraordinary faculty and staff, we will end this fiscal year with record-setting operational performance on clinic visits, surgical operations, numbers of grants funded (despite reductions in payment per grant), the credentials of our matriculating students, and many other indices of productivity, quality, and safety.

Given the momentum and pace of these economic challenges, I believe we must take even more aggressive and proactive steps than we have to-date to ensure our leadership in biomedical science, education, and health care, as well as to safeguard the welfare of the Vanderbilt University Medical Center community, its patients, and its students. It is clear that we must embark on a comprehensive effort that is immediate, achievable, proactive, and ensures success over a multi-year period, while the health care and biomedical science economies we live in reshuffle into a “new normal.”

Our Plan
Today, I ask for your support to achieve $100 million of budgetary improvement during the current fiscal year ending June 30, 2014, and a total improvement of $250 million by the end of fiscal year 2015. For perspective, our annual budget at VUMC is approximately $3.3 billion. Hence, $250 million in savings over 2 years is approximately 8 percent of our current expenses, and the $100 million targeted for this year is just over 3 percent of our budgeted expenses. Many health systems around the nation, including our academic medical center peers, are announcing budget cuts well in excess of this, some as high as 15-20 percent. In recent years at VUMC, your leadership, support, loyalty, and patience as a community in achieving prior budget cuts while restraining expense growth has made it possible for us to avoid salary reductions and to develop a going-forward plan that is far more manageable and strategic than many hospitals and academic medical centers. Our plan will preserve the vast majority of our mission-critical programs while keeping compensation at market-competitive levels.

To engage this work, we are launching a system-wide organizational change process throughout all areas of VUMC. This workflow reengineering effort is focused on saving cost through improving function, and in targeted areas will enhance revenue. Called Evolve to Excel (E2E), our approach is as follows:

1) Savings from non-labor cost areas, such as supplies, facilities, and contract improvements, will be our highest and first priority. Through our own efforts, and with assistance from McKinsey & Company, a global leader in advising health systems on economic repositioning, we are identifying and will be implementing as many of these opportunities as possible throughout the year. As I have mentioned in prior communications, these changes will require adaptive flexibility by all of us. While we are accustomed to doing many things “our way,” there are tremendous cost savings opportunities in standardizing and simplifying a host of systems and services many of us use on a daily basis. We must take advantage of as many of these opportunities as possible in all sectors of the organization – clinical, research, and education.

2) Like all medical centers, the largest budget item at VUMC is the salary, wages, and benefits of our employees. As outlined at last year’s State of the Medical Center address, at VUMC we have been operating with an employee base that is above the national average for university medical centers, even when adjusted for the acuity of our patients and the size and scope of our activities. Moreover, these national benchmarks for organizational headcount at institutions like ours are continuing to fall as our peers begin to effect their workforce reductions.
Hence, there is no question that over the coming year we will need to reduce the number of employees at VUMC. Over the next two years, the overall size of the VUMC workforce will be reduced. As affirmed in numerous communications over the past year, we do not intend to accomplish this through a large-scale layoff. Rather, our approach will be one of strategic downsizing, as follows:

a) In the coming days, we will announce an early retirement option for staff who might wish to retire slightly earlier than they otherwise might have planned.

b) Each year, significant numbers of employees leave our workforce due to retirements and moves to other jobs. We will be taking advantage of as many of these departures as possible, while reengineering workflow to reduce the need to replace these positions.

c) Finally, it is clear that some number of occupied positions will be permanently eliminated. Similar to the limited hiring freeze we enacted over the last two quarters and which will continue in the coming year, the majority of these positions will be in support and overhead functions, as opposed to direct patient care positions. However, all areas of VUMC will be reviewed in a manner that preserves service, quality and safety. Administration will be reviewed like all other areas. And as we undertake these efforts, we will make every effort to match the expertise and interests of displaced individuals to vacant positions that will continue. As always, we will work extremely hard to retain our highest performing employees.

3) As planned, we lifted the hold on new vacation accrual beginning July 1, 2013. Effective January 1, 2014, we will move to a new paid time off (PTO) plan combining vacation, personal, holiday, and sick leave for staff in VUMC that provides more flexibility during different life stages while improving our ability to manage the accounting requirements and costs for backfilling absences. The plan will provide affordable short-term disability insurance for extended illnesses, including a base benefit at no cost to employees. We will also introduce a new paid parental leave benefit. These benefits will not only improve the safety net for critical life events, but also will help us attract and retain talented employees. We will be sharing details about the new plan with you in the coming days.

VUMC, its people and culture are unique and very special. Part of that special culture is honesty and transparency, matched with a resolve to succeed where other organizations with less resiliency and spirit would stumble. I hope that my messages over the last six months, and in particular my comments in this communication, resonate in this way. To succeed, these efforts will require the active engagement and energetic support of our entire medical center over the coming year. We must go the extra lengths to support one another as we engage the many operational and emotional challenges that are inevitable during an industry-wide restructuring of this magnitude. And as we experience together what we all recognize are new and stressful circumstances, we must also see this as a time of opportunity, to innovate and become far more efficient and effective than ever before.

At a Leadership Assembly just a few weeks ago, I spoke about much of what I have outlined above, and the proactive steps we are taking to position this medical center for the future. My comments at the Assembly are provided here for your viewing. Communication with an organization as large as ours is a unique challenge, so I’d be grateful if you could take the time to watch the link, which will require your VUnetID and password.

The important work we do speaks to the very core of the human condition: improving and saving lives through healing; performing groundbreaking discovery of global impact, and training the nation’s next generation of leaders in health care and science. Working together, I am confident we will succeed. Our patients, students, and families deserve nothing less.

Sincerely,
Jeff Balser, M.D., Ph.D.
Vice Chancellor for Health Affairs
Dean, School of Medicine