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Buffalo's five Catholic hospitals are losing money -- and layoffs and hospital closings may be the bitter pills needed to cure the ailing network.

Jobs and hospital beds need to be eliminated to make the network financially viable, said Dale S. St. Arnold, new president and CEO of Catholic Health System. A team led by Arnold and a management consulting firm hopes to finalize a strategic plan by December.

"It's incumbent upon us to take any excess capacity out of the system," St. Arnold said. "Our first focus is to get our financial chassis in order, to make sure we can liberate resources to meet our community's needs."

A combination of the state's deregulation of hospital rates and managed care's push toward outpatient treatment instead of hospitalization have slashed revenue at many hospitals.

When the state allowed insurance companies the freedom to negotiate hospital reimbursements, revenue at the Catholic hospitals plummeted. The five Catholic hospitals billed $721 million in 1997, and had to write off $288 million as unreimbursed. The lost revenue was primarily because of new rates with commercial insurers, according St. Arnold.

"Medicare paid less, Medicaid paid less, and the insurance companies paid less," he said.

The slumping revenue resulted in a $23 million bottom-line swing. The Catholic hospitals collectively ended 1996 with a $4 million surplus but lost a combined $19 million in 1997. An additional loss of $6 million to $9 million is forecast for this year.

The financial hemorrhaging has slowed this year because the newly formed Catholic Health System has already eliminated 428 full-time equivalent positions.

Now the non-profit, religiously based medical system has hired McKinsey & Co., a management consulting firm that has overhauled some of the nation's Fortune 500 companies, to help right its financial ship.

The presence of management consultants at local hospitals has left employees "waiting for the other shoe to fall," said Barbara Bauch, president of Local 1133, Communications Workers of America, at Mercy Hospital.

"There is a somber feeling," said Ms. Bauch, who represents the hospital's nurses along with service, technical and clerical staff. "People are uncertain about what the future will be, but they are aware that the Catholic consolidation is going to result in a reduction of jobs. People are waiting to see if they will be affected or not."

Modern medicine is allowing local residents to receive more care on an outpatient basis. For example, gallbladder removal that once required a three-day hospital stay can now be performed without an over
night stay, St. Arnold said.

The number of outpatient visits at the system's facilities increased from 617,000 during the first half of 1997 to 655,000 during the same period this year.

During the same period, patient days at the Catholic hospitals plunged from 199,564 to 173,400. The bottom line is that the network has far too many acute-care beds. On an average day this year, more than half the 1,263 Catholic hospital beds are empty.

The decline in hospitalization is not exclusive to the Catholic system.

"There's pressure on everyone to learn how to treat people as outpatients. I think the whole hospital system in Western New York is going to shrink," said Dr. John J. Bodkin, president of Highgate Medical Group, a group medical practice with three area offices.

The same market forces were cited when Buffalo General Hospital, Millard Fillmore Hospital and Children's Hospital announced their merger last year. The CGF System is also evaluating how it can reduce excess capacity and align its resources with the community's health needs.

A major question for St. Arnold and staff is whether all five facilities are still needed. For example, only about 100 of St. Joseph Hospital's 208 beds are typically occupied.

About 210 of the 425 beds at Sisters Hospital are usually empty. Could the entire patient population at St. Joseph Hospital be served at Sisters? The two hospitals are already under the same management and have 60 percent staff overlap.

Similar market economics can be found in South Buffalo. Our Lady of Victory Hospital in Lackawanna lost $6.3 million last year, and the hospital's 232 beds are running at less than 40 percent occupancy this year. Could the patient population be served more cost effectively at nearby Mercy Hospital?

"I don't know," St. Arnold said, when asked if one of the hospitals will be closed. "Everyone jumps to that conclusion, but it's a little premature."

St. Arnold said the answer will come in assessing the community's health-care needs and matching resources to serve those needs. One of the network's hospitals could possibly be turned into an outpatient surgical center or some other type of specialty center, he said.

Most communities across New York State are facing similar crossroads with their health-care infrastructure, said Jeannie Cross, assistant vice president of the Health Care Association of New York State.

Deciding what to do with excess hospital capacity is a politically sensitive issue in many communities, she said.

"What the community wants and what the community is willing to pay for are often two different things. The struggle is to find what will meet the needs of the community and remain affordable," Cross said.

Rate deregulation has been a "tricky and complex transition" for all the state's hospitals, Cross said. The rate freedom left hospitals in a position of having to negotiate rates with all the commercial insurers and many hospitals wound up in the red last year, she said.

Hospitals in Western New York might have had an even tougher business climate because of the high penetration of health maintenance organizations here.

Health-care providers were at somewhat of a disadvantage entering the negotiations, because they generally do not have all the same patient-care cost data as insurance companies, said Dr. Arthur Orlick, medical director for North American Health Plans.

"What that means to me is they didn't negotiate very good contracts," Orlick said, referring to hospitals that lost money last year. "The payer has the responsibility to negotiate the best contracts possible so they can keep rates low for their subscribers."

St. Arnold said he expects the first step of the system's recovery to be administrative standardization. All the Catholic hospitals will move to a standard rate schedule. The hospitals will also consider centralizing purchasing, administration and other support service functions.

The overhead consolidation, expected to begin later this year, will lead to some cuts in the 2,000 full-time equivalent support service positions.

The Catholic system has already shrunk from 7,468 to 7,058 full-time equivalent jobs this year. Since many jobs are filled by two or more part-time workers, the system actually has more than 10,000 employees. So each full-time equivalent job eliminated could stop a paycheck in more than one household.

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