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For Lawrence & Memorial Hospital, the riskiest strategy would be to hunker down and maintain the status quo, rather than embark on new initiatives like the Dana-Farber Cancer Center under construction in Waterford or the pending acquisition of The Westerly Hospital.
If it took the "do nothing" path into the future, Bruce Cummings, L&M president and chief executive officer said Tuesday, the 100-year-old nonprofit would be operating in the red in just a few years, ending the financial stability and positive operating margins it has enjoyed for years.
That's why, Cummings said in a meeting with The Day's editorial board, L&M must expand into new areas even as it lays off employees and seeks to cut costs internally. What might seem like a contradictory strategies - expanding while contracting, making new investments while cutting costs - is actually the best recipe for the hospital to survive and thrive into the future, he said.
The new cancer center and the acquisition of Westerly Hospital, along with bringing the surgery department back to full physician staffing, promise to bring new revenues to L&M. But the hospital also must continue to find new ways to operate more efficiently and economically, Cummings said.
"The most conservative strategy is the one that's the most dangerous," he said. "Westerly Hospital and the cancer center are an example of judicious growth strategies. If we weren't doing those things, our future would be far more ominous."
Last week, the hospital, one of the region's largest employers, announced layoffs of 22 of its 2,500 workers and the elimination of seven vacant positions. More than a dozen other hospitals nationwide announced layoffs this fall as they, too, sought to cut costs to adapt to flat or declining Medicare and private insurance reimbursements, increasing scrutiny by regulators over allowable charges, rising employee benefit costs, and multiple other factors all converging into what Cummings called a "perfect storm."
The layoffs were necessary, he said, to achieve the L&M board's mandate that the hospital maintain at least a 3 percent margin of revenues over expenses for the fiscal year that began Oct. 1. Cost-cutting moves closed about half of the $3.2 million gap between projected expenses and revenues needed to meet the 3 percent margin, Cummings said. Savings achieved through the layoffs made up the rest.
L&M's annual revenues are about $320 million.
"There's a new revenue reality for hospitals," he said. "We're projecting the hospital will have to reduce its cost structure by 10 percent over the next five years. That's the new normal, not just for L&M, but for hospitals in general."
By a less optimistic analysis, he noted, hospitals are facing a 15 percent to 20 percent revenue loss over the next five years.
Expanding into Westerly
By the time the $69 million acquisition of The Westerly Hospital is complete early in 2013, Cummings said, the once financially troubled Rhode Island hospital is expected to be operating in the black thanks to the oversight of Special Master Mark Russo throughout the receivership process.
Shedding Westerly Hospital's pension obligations and restructuring accounting and billing procedures were key. Even though L&M will be borrowing funds for the purchase, Cummings said, the net effect on the hospital will be "cash positive." Adding Westerly Hospital to the L&M network, he said, not only will expand its market but also will create opportunities for efficiencies in eliminating duplication of some services and streamlining administrative costs.
The $34.5 million cancer center, too, will be a net gain for L&M, he said. Based on the experience of other Dana-Farber affiliates, he said, it is expected to significantly increase the number of cancer patients at L&M.
"People have been leaving this area for cancer treatment," Cummings said. "This stops the outward migration, and it will draw in modest numbers of people from outside our primary service area."
In response to a question about whether the salary levels of the hospital's top administrators are justified given the current scenario, Cummings said those amounts are set by the hospital board to be in line with the industry and similar size institutions.
According to L&M's 2011 IRS filings, Cummings' annual salary is $654,172, plus $48,240 in benefits and other compensation. At The William W. Backus Hospital in Norwich, a slightly smaller institution with 233 beds compared to L&M's 256, President and CEO David Whitehead is paid $533,927, plus $40,155 in benefits. The 248-bed Middlesex Hospital, meanwhile, pays its chief executive $722,515, plus $181,489 in benefits.
"I don't set my salary, nor do I for the vice presidents," Cummings said. "The board's compensation philosophy is to pay at market rates for all positions, and the board uses outside compensation counsel to advise."
The next decade, he said, promises to be a time when L&M will have to reinvent itself continually, he said. No additional layoffs are pending, he said, but he can't rule out more in the future. Complacency, he said, is not a realistic option as declining revenue trends now dominating health care are on track to get even stronger.
"We're going to have to constantly be looking at whether we can continue to provide the same services," he said.