Scripps Health reorganization to include layoffs
The San Diego-based non-profit health care system Scripps Health is set to pursue layoffs in a restructuring process in 2018. Scripps missed its annual budget by $20 million and intends to target lower costs and a greater dependence on caring for patients outside of its hospitals. The company’s CEO, Chris Van Gorder, revealed in a memo that the cuts are necessary with insurers and patients increasingly targeting lower prices as health costs rise. The announcement by Scripps follows in a cost-cutting trend amongst large health care organizations; both Advocate Health of Illinois and Tenet Health announced similar measures following disappointing results. Although Scripps maintains a $2.6 billion balance in cash and investments, with an increased profitability of $350 million, its operating margin has slimmed from 9 percent in 2012 to 2.3 percent in 2017. The firm believes that it would not be responsible management to turn the savings towards a recurring problem especially as it requires favorable interest rates from lenders on its $2.6 billion building project. Alongside the personnel cuts intended to save $30 million in the current budget year, there will be a consolidation of management positions.

Scripps Mercy Hospital in Hillcrest is among the facilities affected by a reorganization plan underway at parent company Scripps Health.

Though it has billions in the bank, Scripps Health will pursue layoffs in 2018 as part of a reorganization strategy that emphasizes lower costs and greater reliance on caring for patients outside of its five hospitals.

In a recent memo to all of the health system’s 15,000 employees and 3,000 affiliated doctors, Chris Van Gorder, Scripps’ chief executive officer, says that cuts are necessary to remain competitive in a health care world where health insurance companies increasingly consider low prices as a main factor in contracting and patients are more often shopping around for services as deductibles increase.

Scripps missed its annual budget by $20 million last year for the first time in 15 years, Van Gorder said in an interview this week. It was a wake-up call, he said, that added urgency to the need to both cut costs and also re-think how the private not-for-profit health network does business.

Advertisement

“We’ve got to shift our organizational structures around to be able to deal with the new world of health care delivery, find ways of lowering our costs significantly,” Van Gorder said. “If we don’t, we will not be able to compete.”

Scripps is far from the only large health care system to announce cost-cutting measures in recent months.

Advocate Health, Illinois’ largest health care provider with 12 hospitals and 35,000 employees, announced in May that it would try to cut more than $200 million in costs due to flat revenue projections. Tenet Health, the nation’s third-largest medical chain with 77 hospitals, announced in October that it will eliminate a middle layer of management after posting a $56 million loss after a 1.4 percent single-quarter revenue decline, according to industry news source Modern Healthcare.

Things haven’t gotten quite so bad yet at Scripps.

A look at Scripps’ bond industry financial filings make it clear that this is not a company teetering on the edge of insolvency. Far from it. Scripps, the audited financial statements for the 2017 budget year show, has banked about $2.6 billion in unrestricted cash and other investments.

However, Scripps has recently seen its operating margin, the percentage of revenue left over after all the bills are paid, shrink significantly from about 9 percent in 2012 to 2.3 percent in 2017. Financial statements show that Scripps’ bottom line was significantly bolstered this year by investment income. A roaring stock market helped significantly increase the value of its holdings, pushing total profitability up to $350 million for the year, a number that is 25 percent greater than last year.

How can an organization be making money, have a significant financial cushion and yet still be planning for layoffs in the coming year?

Van Gorder said the basic fact is that operation of the organization must continue to bring in more revenue than it spends and declining operating margins must be addressed even if revenue from the stock market is currently masking those declines.

“As strong as we are on the bottom, bottom line, the trends at the top end are changing, and we have to adjust to them,” Van Gorder said.

Still, with more than two billion in the bank, couldn’t Scripps afford to burn some savings and stave off layoffs?

Van Gorder said that it’s not responsible management to fix a recurring problem with savings. And, having a hefty balance sheet, he added, is necessary to get favorable interest rates from lenders as Scripps moves to execute a recently announced $2.6 billion building plan that will replace Scripps Mercy Hospital in Hillcrest, add a new patient tower at Scripps Memorial Hospital, La Jolla and upgrade facilities in Encinitas, Chula Vista and Torrey Pines.

These upgrades and replacements, the executive added, are made more urgent than they would otherwise be due to a state law that requires all hospitals to meet certain seismic requirements by 2030 or cease operation.

In addition to borrowing and revenue from philanthropy, Scripps plans to tap its savings to fund its building plan. That plan, Van Gorder said, will continue but will be undertaken with knowledge that insurance companies want to avoid paying the higher prices charged by hospitals whenever possible.

That means pulling back on the previous tendency to include plenty of space inside hospital complexes to patients whose medical needs don’t require them to be admitted for a overnight stay. Scripps has already started on this path with the purchase of Imaging Healthcare Specialists in 2015. The company operates stand-alone imaging centers that offer cheaper scans than are available in the outpatient centers attached to the region’s major hospitals.

“We’re seeing a huge shift in the ambulatory side,” Van Gorder said. “We’re now, for example, doing total joint replacement in ambulatory surgery centers. A year ago, that didn’t take place. The experts are telling me and others that you’re going to see a huge jump in that as technology continues to improve … that’s going to pull a whole lot of utilization away from hospitals and hospitals that haven’t prepared for that shift are going to be in deep trouble in the not-to-distant future. That’s why we’re trying to make this shift proactively.”

Scripps’ bond filings do show that it has seen a significant shift in its business over the last five years.

From 2011 to 2016, the most recent year for which aggregated patient data is available, Scripps reported that inpatient discharges, the total number of days that patients spent in its hospitals, and surgeries performed in hospitals all decreased slightly. Meanwhile, the number of surgeries performed at its outpatient surgery centers increased 69 percent. Visits to Scripps Clinic and Scripps Coastal Medical Group increased 14 percent and 19 percent respectively and emergency visits were up 21 percent.

Scripps’ first step in its reorganization plan to better address the shift from inpatient to outpatient is to collapse its ranks of hospital management. Instead of having a chief executive officer to manage operations at each of its five hospitals, the plan is to have two executives handle those duties, one for hospitals in La Jolla and Encinitas and another to oversee operations in San Diego and Chula Vista. A third executive will be in charge of all ancillary services, including operation of the medical offices, outpatient surgery centers and other facilities that Scripps owns or leases throughout the region.

This consolidation will not require any layoffs. Gary Fybel, currently the chief executive officer at Scripps Memorial Hospital La Jolla, and Robin Brown, chief executive officer at Scripps Green Hospital, will retire. The northern chief executive officer position has been awarded to Carl Etter, current chief executive officer of Scripps Memorial Hospital Encinitas. The south position will be handled by Tom Gammiere, who currently runs Scripps Mercy Hospital in Hillcrest. Lisa Thakur, currently corporate vice president of operating rooms, pharmacy and supply chain, will fill the ancillary services post, and her previous job will not be filled.

Van Gorder said further personnel cuts are coming and are intended to save $30 million during the current budget year ending Sept. 30, 2018. Cuts should save $40 million in subsequent years, he added. Most will be focused on administrative job classifications.

“There will be layoffs,” Van Gorder said. “I don’t like it, but it has to be done for me to protect the organization and our ability to take care of our community into the future.”

So far, he said, there are no specifics to share on which particular jobs are most at risk.

He added that, as the current reorganization effort takes shape, hiring is also anticipated. More workers will be needed to provide quicker service to patients.

“What I want to do at the point of service is support our nursing staff with more paid professional staff,” Van Gorder said.

Gerard Anderson, a professor of health policy and management at Johns Hopkins School of Medicine in Baltimore, said the current trend of cost-cutting at large health care systems does indeed appear to be driven by decreases in reimbursement by Medicare and private health insurance companies.

“In almost every single hospital they’re losing some amount of money in operating margin but making it up in spades when you add in their investment income,” Anderson said.

The researcher said he was a bit disturbed to see organizations flush with stock market earnings discuss cuts, especially if those cuts are to employees who directly care for patients.

“You’re seeing layoffs but I don’t necessarily understand why you need to lay someone off when your margin is something like 11 percent after non-operating income is added into the mix,” Anderson said.

But what about the need to shift business strategy and reduce administrative expenses as reimbursement falls? Anderson said he can see that point as long as it’s true.

“If they really are doing this in the non-patient-care area, I think that makes sense,” he said. “In general, we’ve seen more across-the-baord cuts than targeted specifically to areas of management and administration. The salaries in management have grown faster than they have for clinicians.”

Health Playlist × On Now Video: Leaders urge public to help extinguish hepatitis outbreak On Now San Diego starts cleansing sidewalks, streets to combat hepatitis A On Now Video: Scripps to shutter its hospice service On Now Video: Scripps La Jolla hospitals nab top local spot in annual hospital rankings On Now Video: Does a parent's Alzheimer's doom their children? On Now EpiPen recall expands On Now Kids can add years to your life

paul.sisson@sduniontribune.com

(619) 293-1850

Twitter: @paulsisson