Fighting for Survival

Anna Jaques Hospital came close to closing its doors. Now it’s looking at a surplus.
Here’s how the hospital made a turnaround.

Some might consider 123-bed Anna Jaques Hospital in Newburyport, Mass., to be a pretty small institution, maybe even expendable. But to the citizens of Newburyport (about 35 miles north of Boston) and surrounding communities, it’s something else altogether.

“To put it bluntly, this organization is revered in the community,” says CFO Mark Goldstein. “Our employees live in the area. Their children are born here. Their families get healthcare here. Their parents come here. Their grandparents die here. The longstanding reputation of the high-quality, very active medical staff has won over the community. And they are willing to vote with their feet to keep coming here.”

However, it wasn’t too long ago that the hospital was faced with the prospect of shutting its doors.

Wrong-way cash flow
With $100 million in revenues, Anna Jaques is the largest corporation in Newburyport. It serves about 120,000 people in Newburyport and five major surrounding towns. A full-service facility, the hospital encompasses a recognized wound healing center, sub-acute care center, stroke service, trauma center, joint replacement program and birth center. It is one of only three healthcare communities in the state to be selected for the pilot Massachusetts e-Health Collaborative, which will electronically network the hospital’s physicians and inpatient facility.

The hospital has been an integral part of the community since it was founded with a grant from Ms. Anna Jaques in 1884. Situated in one of the fastest-growing areas of the state, it is positioned to play an important role in the region’s healthcare for years to come.

Yet for the past seven or eight years, the community of Newburyport has had to face the prospect of life without Anna Jaques. The hospital had lost $20 million between 1999 and 2006. It had a negative cash flow, and days of cash on hand had shrunk to the danger point. The hospital had exhausted its line of credit and was undercapitalized. Without cash, it was unable to replace aging assets. The bond market noted the dire straits the facility was in by downgrading its bond rating. At one point, there was talk of closing Anna Jaques and moving it to another town nearby, though given its cash position, such a move was unlikely. In 2000, the board brought in a new CEO with for-profit hospital experience, but he was unable to stem the losses.

Out-of-control expenses
Oddly enough, volume and revenue at Anna Jaques remained strong throughout, reflecting the facility’s integral role in Newburyport. But expenses were out of control. “[The hospital] had solid revenue growth from fiscal year 2002 through 2004, with revenues growing at 10 to 15 percent per year,” says Goldstein, who came to Anna Jaques in January 2006. “But expenses outpaced revenue growth by 5 percent.”

Prior to January 2006, Goldstein was assistant vice president of finance at 547-bed Boston Medical Center, where he had conducted a major cost-reduction effort, renegotiated managed care contracts with the major Massachusetts insurance plans and managed the development of a profitability model for the cardiology program.

Two things drew Goldstein away from a major metropolitan medical center, with an annual operating budget of $1 billion, to Anna Jaques. The first was Delia O’Connor, the hospital’s new president and CEO, with whom he had worked in the past. (O’Connor, like Goldstein, came to Anna Jaques in January 2006.) The second was the desire to turn around a vital community asset. “Knowing what I knew about this community, I wanted to take a shot [at turning around the hospital],” he says. “This place could have closed, and I wanted to be part of the turnaround team.”

Thinned ranks
Upon arriving at Anna Jaques, Goldstein found not only the grim financial indicators mentioned above, but a facility whose management ranks had been thinned out in an effort to cut costs. Among the positions that had been eliminated was that of director of materials management.

While it was clear to O’Connor and Goldstein that expenses needed to be reined in, it was also clear that chopping heads wasn’t the way to do it. “You can’t cost-cut your way to profitability,” says Goldstein. So, rather than eliminate more positions, he proceeded in the opposite direction, adding 30 full-time-equivalent positions (including a director of materials management, Rich Doolan) in his first 12 months on the job.

Goldstein’s multi-pronged turnaround strategy included:

  • A revenue strategy (an important part of which was the renegotiation of third-party-payer contracts)
  • A volume strategy (which called for not just bringing in more patients, but for redesigning work flow and the physical plant to facilitate faster patient turnaround)
  • A customer service strategy (to improve responsiveness to the community)
  • A quality strategy (to reinforce Anna Jaques’ reputation for clinical quality)
  • An expense-reduction strategy.

“We addressed all five,” says Goldstein, “but we got the biggest bang for our buck from the expense strategy.”

Lack of direction
Materials Management Director Rich Doolan joined Anna Jaques in May 2006, drawn to the facility for some of the same reasons that drew O’Connor and Goldstein there. “I like the challenge,” he says. “I knew that Delia and Mark were here, and that there was a chance to turn this place around.” Immediately prior to joining Anna Jaques, he had worked at Emerson Hospital, a mid-sized facility in Concord, Mass. Prior to that, he had spent time in big-city hospitals, including Partners HealthCare in Boston.

Upon arriving at Anna Jaques, he found its materials management program lacking. Without a director, purchasing agents were responding to the wishes of the facility’s clinicians and caregivers, instead of directing and assisting them in making wise acquisitions. The result was out-of-control spending. “When I walked in, they were buying surgeons’ gloves from 18 different manufacturers,” says Doolan.

The first step for Doolan was reviewing the hospital’s GPO affiliation. He sought bids from Novation, Amerinet and Yankee Alliance (a local shared-services organization that is a member of Premier). After conducting a line-item comparison, Doolan settled on Yankee Alliance. “Yankee is local, and it offers a lot of representation, which we felt would help us get a lot of things done.”

The next step was reviewing every contract in the hospital. “I knew the only thing I would be doing for the first few months would be reading agreements,” says Doolan. What he found was fairly predictable. “The department managers were negotiating their own contracts with manufacturers. But their expertise is in being the director of lab or radiology, not negotiating how much a [product or piece of equipment] should cost.” Doolan began replacing as many agreements as possible with those negotiated by Yankee and Premier.

“The first things we addressed were the seamless products, for example, gauze sponges, needles and syringes and pharmaceuticals,” says Doolan. In those cases where Yankee had agreements with the same suppliers as those already represented at Anna Jaques, he simply made the transition and paid the new – and lower – price. “There was no pain, no education needed, because we were simply cutting our costs, not changing products.”

After that, Doolan began addressing product areas in which the Premier contract manufacturer differed from the current vendor at Anna Jaques. For example, after evaluating three manufacturers of GI equipment, Doolan – with input and cooperation from the hospitals’ gastroenterologists – settled on Olympus, saving $280,000. Much of the savings resulted from the fact that Anna Jaques bought the equipment outright, rather than continuing to pay for it on a more expensive pay-per-click basis, which it had been doing up to that point. “That was a huge cost-savings right there,” he says. Switching to the Yankee agreement for specialty lab services resulted in another $125,000 of savings.

When the contract for orthopedic implants expired, Doolan approached the director of orthopedics for assistance. “I told him, ‘We have had only one vendor for a long, long time; I want to make this a bid process and get some competition going.’ To make a long story short, he knew exactly what I was doing. He wants to stay here; the town of Newburyport absolutely wants the hospital to stay here. So the physicians were willing to jump on board. In fact, I haven’t had one instance where a physician has given me pushback when I needed help negotiating agreements.” Doolan ultimately re-signed with the incumbent supplier of implants, but at an annual savings of $65,000. “The physicians were a huge help to me in evaluating all the other manufacturers,” he says.

Manufacturers’ reactions to Anna Jaques’ new approach have been mixed. “In our first year, Mark [Goldstein] and I have called all our vendors and manufacturers into the conference room and explained to them, ‘We have to turn this place around, and we’re asking you to cut your costs to help [do it].’ We’re finding that 50 percent of the vendors are willing to work with us. But others have been tough, saying ‘[Price increases] are the cost of doing business, we have our research and development costs, etc.’ And to them we’ve said, ‘OK, but it’s time for us to move on. We’ve been tasked by the town and the board to turn this hospital around and make it profitable, and we can’t do that doing business as usual.’”

Doolan orchestrated another big change. Having worked with Owens & Minor at both Concord Hospital and Partners, he decided to consider the Richmond, Va.-based distributor for Anna Jaques. Indeed, after evaluating the company’s fill rates and margins, he elected to make the switch.

First profit in years
All these changes wouldn’t have been possible without a committed group of people in materials management, says Doolan. “They have been kind of shell-shocked. To come in and say, ‘We’re going to change GPOs and manufacturers; we’re going to make massive price changes and dictionary changes; and by the way, we’re changing distributors too,’ is a lot to ask. But nobody has complained. They’ve all been on board. They’re vested in the hospital too. All of them live around here, and most are 20- and 30-year employees. It’s a nice place to work.”

In 2006, Anna Jaques recorded its first profit in years – a slim $56,000. The hospital is projecting a $1.5 million surplus for 2007. In March, Moody’s Investor Service revised the outlook for the hospital from negative to stable, saying that “[Anna Jaques] has stabilized and will continue to improve as new initiatives take hold.” At press time, the hospital was constructing a “fast-track” emergency room addition, which will expedite the treatment of less-sick patients and relieve backlogs in the ER.

“We actually enjoy coming to work and pulling this off, saving this hospital,” says Doolan. “We are really vested in what we’re doing, and we’re doing something good for Newburyport.”

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