On July 19, officials with the Alta Bates Summit Medical Center, an affiliate of the massive Sutter hospital chain and the largest health care provider in the East Bay, finally made the announcement that everyone had long feared: The two hospitals, which make up the medical center and see roughly 40,000 patients a year, would slash at least three hundred jobs in a desperate effort to contain rising costs. Ever since Berkeley's Alta Bates and Oakland's Summit hospitals merged in January 2000, health care activists and labor union representatives had predicted a severe bloodletting; they pointed to the fact that Alta Bates Summit had recently hired a controversial downsizing consultant, and to internal documents leaked to the outside world six months ago that proposed cutting operations by $27.8 million annually. But no one was prepared for the staggering losses hospital officials reported as the reason for the cuts: $19 million as of June, with projections that the deficit could be as high as $40 million by the end of the year. It appeared that the brutal economics of the modern health care industry had finally come home to roost.
Throughout the debate that raged over Sutter's controversial acquisition of Summit hospital in 1999, one question loomed in the forefront: If Summit, which reported a $6 million loss in 1998 and was projected to lose $20 million annually, didn't affiliate with a heavily capitalized network like Sutter, how else could it survive? The finances of Alta Bates, its future partner, were not as carefully scrutinized. But an examination of the Berkeley hospital's financial data since its own incorporation into the Sutter family indicates that, far from enjoying the fruits of affiliation, Alta Bates has struggled to make ends meet for five years running. Despite a $1.4 million investment to transform Alta Bates into the birth center of the East Bay -- including a contract to provide maternity services to three thousand Kaiser members each year -- the Berkeley hospital's net revenue has fallen sharply from a peak in 1997, and has remained stagnant ever since. In fact, Alta Bates has sustained large operating losses during three of the five years since its absorption by Sutter in 1996. This raises serious questions about Sutter's strategy: If, after more than five years of affiliation, Alta Bates still cannot regularly pay its bills, how can the hospital chain hope to keep the long-troubled Summit Medical Center from financial collapse?
Since 1981, Sutter Health has grown from a small collection of Sacramento medical centers into a 26-hospital network, taking advantage of its nonprofit status to finance a massive expansion. Along the way, its critics argue, it has cut critical medical services at hospitals across California, while steadily accumulating millions in annual surpluses. In January 1996, Sutter merged with the California Health System, which brought Alta Bates into the fold.
Almost immediately after the merger, Sutter officials embarked upon a new strategy to transform Alta Bates into a "center of excellence" -- taking advantage of the hospital's expertise in maternity care, officials spent $1.4 million secretly expanding the maternity ward, prompting a brief lawsuit by the city of Berkeley, which contended that Sutter had violated the city's permit process. The hope was that by specializing in delivery and neonatal care units, the hospital would attract millions in new revenue. It looked like Sutter's strategy would pay off when, in December 1997, Kaiser Oakland farmed out all of its maternity services to Alta Bates, sending three thousand mothers annually to the Berkeley hospital -- and paying up to $12 million each year for their care.
But state records indicate that far from boosting its revenue, Alta Bates actually began to lose money immediately after securing the Kaiser contract -- and has never recovered. According to reports filed with the Office of Statewide Health Planning and Development, Alta Bates' net patient revenue fell from $301 million in 1997 -- the year before the expanded maternity services came online -- to less than $293 million in 1998, the first year of the Kaiser contract. Since then, the hospital's revenue has wavered between $290 million and $292 million, never returning to the levels it enjoyed before accepting the Kaiser contract. Meanwhile, its nonoperating revenue (cash typically acquired from real estate holdings and investments) has steadily dropped from a high of almost $8 million in 1996 to less than $1.4 million in 2000.
Not surprisingly, the stagnant revenue has frequently sent the hospital's overall earnings into the red. In 1998, the hospital reported an operating loss of almost $2.5 million -- the first time since the merger that Alta Bates slid into the red. According to Alan Fox, the chief financial officer for Alta Bates Summit, the 1997 congressional Balanced Budget Act sharply reduced federal Medicare reimbursements, and the hospital's finances went into a tailspin. "Nineteen ninety eight is when the Balanced Budget Act hit, and there was an $8 million reduction in Medicare payments as a result," Fox says. In addition, Alta Bates had long struggled with a bloated, top-heavy management structure; in May 1999, officials laid off 47 managers and directors, including the vice presidents of human resources and support services.
The job cuts seem to have worked: For the following year, the hospital reported a profit of more than $14 million, almost all of which came from reductions in operating expenses. But in the third quarter of 2000, the hospital reported a staggering loss of $14 million, erasing the previous year's gains altogether. Driving the downturn was a $12 million drop in patient revenue, which Fox attributes in part to the end of the flu season and to the not-uncommon seasonal practice on the part of both patients and doctors to schedule vacations rather than medical procedures. Meanwhile, the increases in labor, pharmaceutical, and supply costs driving the current financial crisis were beginning to make their appearance. "Hospitals are a seasonal business," Fox says, "and communicable diseases drop off in the summer. That's the worst part of a hospital's financial year. That's partly why we're so alarmed by the financial news in the first part of this year. When you're losing $19 million in the best part of the year, you have to take action." For the entire year, Alta Bates reported a deficit of more than $11 million.
While both Alta Bates and Summit continued to bleed money in the first quarter of 2001, the numbers can't explain the sudden drop announced by hospital officials last month. While second quarter figures have not been released, in order for Alta Bates Summit to have lost $19 million overall, the hospitals would have to have lost $14 million in the last three months. That represents a sharp downturn in the institution's finances; moreover, it seems to be part of a dismaying pattern. Since its affiliation with Sutter in 1996, Alta Bates has been subjected to a dizzying, unpredictable volatility in its accounts: up $1 million one quarter, down $14 million the next. Until managers stabilize their finances and bring the hospital along an even keel, everyone from nurses to patients will continue to wonder if they can rely on medical services from one month to the next.
Unfortunately, there seem to be no easy answers to the problems of Alta Bates Summit, which is still working hard to merge the operations of the two hospitals. Even as officials cut 300 jobs from the facility, they must find a way to fill 840 critical positions that are currently unstaffed. Up to 250 of these positions are registered nurses, and the hospital's nursing shortage is the most critical factor driving the current financial crisis; in June alone, Alta Bates Summit officials lost $2 million flying in temporary nurses to fill the gap. Until the hospital makes it financially worthwhile for nurses to sign on permanently, it will never get a handle on its rising labor costs -- but that means spending money it doesn't have. Other hospital chains are already taking steps to attract what few nurses are left in the job market; last month, Kaiser Permanente announced that it would raise its nurses' salaries by fourteen percent -- or four times what the current contract required. "The way to improve the Alta Bates problem is recruiting and retaining more nurses," says Carl Bloice, a spokesperson for the California Nurses Association. "And as we've said over and over again, the way to do that is to improve the working conditions, eliminate overtime, improve the staffing situation, and pay more."
The hospitals' flexibility is also hamstrung by the deeply polarized relationship between managers and staff. When an internal Alta Bates document that called for cutting $27.8 million in operations (including the abolition of Alta Bates' cardiac care center and Summit's neonatal intensive care unit) was leaked to the public in January, representatives from the Service Employees International Union Local 250 denounced Sutter officials as bloodless bureaucrats who, while publicly promising to invest millions in Summit, were secretly plotting to gut the institution. Now that news of the layoffs has been announced -- essentially fulfilling much of what the document predicted -- SEIU reps are crying for blood.
But CFO Alan Fox claims that Sutter has indeed invested $60 million in Alta Bates Summit since the merger, and that without Sutter's largesse, the two hospitals would be in truly desperate straits. "[Affiliation with Sutter] is not a guarantee that you're never going to lose money again, or have to take very focused action," he says. "But it does give you a great deal of comfort that if you go through difficult periods, you will still be able to serve your community."
Union representative John Borsos is not comforted by such assurances. He knows that while Alta Bates Summit cuts hundreds of jobs to stanch what could be a $40 million deficit, the Sutter parent organization doubled its profits last year, reporting a $111 million surplus in 2000. Meanwhile, the Hunter Group, a downsizing consultant with a national reputation for ruthless cost-cutting, has been retained to streamline Alta Bates Summit operations and is scheduled to announce its recommendations in August. According to Borsos, the pain at Alta Bates Summit is only going to get worse. "They're not saying that this is the end of it," Borsos says. "The impression among the employees is that this is the start of cuts, not the end. And [Alta Bates Summit] is not talking about a drop in services, but how do you think the work will happen after the cuts come?"
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