Published October 2004

Road to Recovery
After years of net losses, Stevens Hospital
is making strides toward fiscal health

By Kimberly Hilden
SCBJ Assistant Editor

Albert Einstein once said that in the middle of every difficulty lies opportunity. For the past nine months, Stevens Hospital has been learning the truth of that wisdom firsthand.

In January, the public hospital board fired Stevens’ chief executive of 14 years, Steve McCary, following a string of annual financial losses, including a $2.4 million net loss in 2003.

Snohomish County Business Journal/ KIMBERLY HILDEN Stevens Hospital in Edmonds has been serving the south Snohomish County community since 1964. In 2003, the hospital handled more than 42,000 emergency department visits as well as 1,239 births and 6,565 surgical procedures.

McCary’s firing, executed outside the public arena and accompanied by a $2.1 million severance package, ignited increased public scrutiny and calls for greater openness within Snohomish County’s Public Hospital District No. 2.

It was, according to hospital officials, a time of turmoil for the Edmonds hospital — one that tested the resolve of both the institution and the public it serves.

With the help of a national health-care consultant and increased public outreach efforts, however, Stevens’ fortunes are turning. Net losses are expected to decline this year, and public representation is expected to increase, with a ballot measure to add two hospital district board commissioners going to a vote in November.

Those changes, while having a positive impact in the short run, should make the hospital better able to serve its community in the long run as well, hospital officials say.

“We hope Stevens will be in a solid financial position with improved community relations — including the community at large as well as the community of physicians,” said Dr. John Todd, Stevens’ chief executive.

Road to recovery begins
When he was named to the post in February, Todd, then Stevens’ medical director, decided to separate the issues facing the hospital and resolve them one by one. The most pressing, he decided, was the hospital’s financial situation.

Between 1999 and 2003, the hospital reported a combined $15.8 million in net losses. The reasons for those losses were similar to those facing hospitals across the state and the country, Todd said, including the increasing cost of health care combined with a decrease in reimbursement for those services.

According to a report released in 2002 by the Washington State Hospital Association, hospitals are receiving only 60 percent of the amount they bill for health services, leaving “no allowance for margin” and no additional funds for technology and facility improvements.

At the same time, premiums for insurance are on the rise, premiums that Stevens has to pay for its own employee health-care benefits, thus reducing the bottom line, Todd said.

Another expense is caring for the uninsured, he said. “When they are ill and present at our emergency department, we must, by law, evaluate and stabilize their condition,” Todd said. In 2002, charity care at Stevens totaled almost $1.8 million; in 2003, that number had risen to $1.9 million.

And then there is the issue of malpractice costs, he said, which come in the form of premiums for malpractice insurance as well as in the “defensive medicine” that is practiced to prevent possible litigation down the line.

“Every possible condition is evaluated,” Todd said of defensive medicine. “So that adds not only to the premiums but the cost of health care in general.”

To get a better handle on Stevens’ situation, consulting firm Wellspring Partners Ltd. was hired in May to advise the hospital’s board and leadership. During the following six weeks, Wellspring performed a hospital assessment, finding multiple areas that needed attention, Todd said. Those areas included:

• The hospital’s revenue cycle — the documentation, coding and billing that goes on in the “back office,” Todd said.
• The hospital’s management of nonlabor expense, which includes supplies and contracts and comprises a third of the hospital’s budget.
• The hospital’s governance, including its board size and function.
• The hospital’s physician relations, which needed to be enhanced.

“We are approaching this in six-month intervals, and we are now two months into the project,” Todd said, adding that the hospital expects the overall improvement project to take two years, with four six-month intervals.

Already, steps have been taken to improve the revenue cycle, the hospital noted, including increasing the price for a white blood cell count closer to the regional average of $41. Previously, Stevens had been charging $20; it now charges $26. Such actions are expected to keep net losses to about $1 million this year.

“I have a great deal of confidence that things will continue to improve,” Todd said.

Community relations
Along with a solid financial footing, Stevens has been working to build a stronger relationship with the community it serves — a relationship that was put to the test following the termination of McCary.

At the time, some members of the public were upset by the private nature in which the firing was carried out. It was a decision hospital district Board President Fred Langer said was made with the intention of handling the situation with dignity.

“There’s no question that we complied with the statutory requirements when it came to notifying (the appropriate people). We just decided to handle Mr. McCary’s termination outside of the public limelight, because how we treat people is really going to, I think, impact our ability to recruit new people,” he said.

The termination brought with it a resurgence of interest in the function of the hospital, Langer added, with one of the first comments from the public being that the three-member board of commissioners should be increased.

After looking at the work required of the board, Wellspring Partners and the commissioners agreed, noting that a larger board would enable greater efficiency and effectiveness in carrying out board duties, such as serving on hospital committees.

Under Washington state’s Open Public Meetings Act, the public has to have prior notice every time a quorum of a public governing body meets. In the case of the three-member hospital board, that means every time two members meet to talk about hospital matters, a public meeting must be called.

“That’s really onerous for the commissioners and the hospital,” Langer said, especially when it comes to serving on such things as the hospital’s Performance Improvement Committee, where privileged information is discussed in looking at clinical performance.

“I’m the only commissioner that’s allowed to be on that. If another commissioner joins us, every time that happens, it becomes a public meeting,” he said.

The other benefit to increasing the board is to better serve the growing community of Snohomish County Public Hospital District No. 2, which includes Edmonds, Lynnwood, Brier, Woodway and Mountlake Terrace, Langer said.

Since the hospital’s founding in the early 1960s, the population has more than tripled, Langer said, from “maybe 100,000 to over 300,000 — and that population has not only grown, it has become more diverse.”

This summer, the board passed a measure asking voters to approve adding two more members in the coming November election, bringing the number of commissioners to five. There was a debate about growing to seven members, but that seemed “too unwieldy,” Langer said.

“The two public hospital districts that are in the Puget Sound area that I look to as being effective boards and well-run institutions are Evergreen and Valley,” he said. “People may debate that, but they have boards of five, and they look a whole lot more like we do than if you take a look at the Monroe public hospital that has a board of commissioners of three.”

If the measure is approved, the current board members, Langer, Dena Knutsen and Jack Tawney, would appoint two new members until the next time a board seat is up for re-election, in November 2005.

What’s next
As Stevens continues with its turnaround, it will have a steadfast leader in Todd, who thought he would only be filling in for “a few months” when he was named acting chief executive in February.

In June, however, the hospital district board voted unanimously to retain Todd for the next two years, following the recommendation of the hospital district’s CEO search committee.

“They didn’t think a search for a CEO at this time was appropriate because it would be unlikely that a CEO would stay beyond the turnaround,” said Todd.

Instead, the search for a new chief executive will start in mid-2005, and the process could take up to a year, at which time, Todd said, he will be ready to retire.

And the hospital — well, it will be in a more stable position, he said.

“It will be in a place where the new person can succeed.”

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