In the middle of 2012, Hadassah Medical Center’s board of directors received a damning report on its two Jerusalem hospitals -- which have over 5,000 employees and annual revenues of some 2 billion shekels ($568 million).
The report revealed that a major medical center that plays a key role in the health of Israel’s biggest city was not being properly managed on the most fundamental level. The center had no financial targets for increasing revenue or market share. There was no cost accounting for procedures done by doctors -- no one knew if the medical treatments were profitable or lost money -- and by how much. There was no breakdown of expenditures by department, and department heads did not know whether their units were in fact making or losing money. But they also didn’t feel they were being deprived of useful information because none had ever received management training.
There were no work plans, no data collection, no supervision of the hospitals’ financial management or of manpower costs.
The report, which was prepared as Hadassah Director General Prof. Shlomo Mor-Yosef was stepping down as was the medical center’s comptroller and chief financial officer, was the start of the snowball that ended with the Hadassah receiving protection from its creditors in court a week ago.
Over the past 18 months, not a stone has been left unturned in Hadassah by its new director general, Avigdor Kaplan, and the board. And under every stone more and more failures have been found. All together they add up to a financial and management fiasco at a world renowned medical center.
Everywhere you look, there seems to have been a glaring lack of management at the medical center. For example, doctors have been paid overtime for working in the afternoon to help reduce long lines for appointments. The extra hours are a part of the regular operations of the hospital - not part of the private medical services (Sharap) it offers. Shortly after Mor Yosef’s departures, Hadassah’s new management began exploring way to tackle a deficit that by the end of 2012 had reached 850 million shekels. What they discovered was that in many specializations the number of procedures carried out in the morning hours was suspiciously low. Instead, most were performed in the afternoon when the doctors received overtime pay.
This kind of featherbedding reached its peak when the private medical services were involved. The doctors performed procedures on a private basis also in the afternoon, the same time they were supposed to be providing services under the hospital’s public health service requirements. In practice, a few of the highest wage earners at Hadassah were doctors who received salaries for the public healthcare services they provided, but in practice worked only in the private services. Hospital management seems to have known and done nothing.
Artificially long waits
Management never supervised the hours of the private healthcare services, or the scope of services provided. By creating impossibly long waits for receiving treatments and appointments in the public health system, doctors were easily able to maneuver patients toward private care. Research conducted at Hadassah a year ago showed that the average wait was 55 days for treatment in the public system and only seven days for exactly the same treatment, by the same doctor and in the same hospital in the private system.
It was of course not particularly complicated to prevent this. All that had to be done was to set quotas between the two systems: No department could offer private medical care beyond a certain percentage that must be dedicated to public services, and no doctor could receive patients privately if he did not provide a certain number of the same treatments in the public framework.
Similarly, Hadassah could have linked waiting times for public and private medicine, for instance by creating a rule that a private appointment would always be one day longer than in the public system. Creating such a linkage would give the doctors an incentive to increase the quota of their activities on the public side and reduce as much as possible the waits for treatments for the government-subsidized patients.
The lack of management supervision was also evident in the odd contracts governing the operation of the private healthcare services. These were historic contracts signed decades ago -- it seems even as much as 50 years ago -- and have never been changed out of a fear of upsetting the hospital’s labor relations. The contracts state that the hospital receives only 22% of the doctor’s gross revenues from the private services -- for net revenues of just 16%. This is a ludicrous amount considering that the entire expense of providing private medical services is absorbed by the hospital. Moreover, private services were so popular in the first place because of Hadassah’s reputation as a leading medical institution. Hadassah management must have certainly known that such a contract was problematic for the hospital itself, but management was afraid of angering the doctors.
Research vs treatment
The problem of managerial neglect was compounded by Hadassah’s role as a university teaching hospital. The division between healthcare, which earns money, and research, which is a pure expense, was never made, or monitored. Many doctors spent more of their time on research than they did treating patients. In some cases, it turns out that the doctors continued their research projects even after their research grants ran out - while the hospital continued to fund the projects out of its own pocket.
The lack of oversight over research activities is common at state-owned hospitals in Israel as well, the report says. It is a major waste of resources and takes away from doctors’ time treating patients. But at government hospitals there are limits on research activities and a doctors need to win external grants to finance their research.
What is shocking is that Hadassah was supposed to be much better run than the government-owned hospitals. Hadassah, after all, is controlled by Hadassah, the Women’s Zionist Organization of America. It has an active board of directors that is supposed to oversee management -- this, in contrast to the outrageous situation in state-owned hospitals, which have no boards at all.
But it turns out a corporate governance structure is no guarantee of sound management. The weakness of the Hadassah board, as evidenced by the absence of any managerial goals, seems to stems from the unhealthy involvement of the Hadassah women’s organization.
In practice, the organization weakened the board by maintaining its own direct relations with the hospital’s director general. In such a situation, it should be no surprise that the director generals never really paid much attention to the boards they were supposed to be reporting to.
The Hadassah organization and its members are well-meaning Zionists who have also donated hundreds of millions of dollars to the medical center over the years. But most of the organization's leaders lack business and managerial experience. The only director from Hadassah who was considered to have significant business knowledge, Judy Swartz, one of the owners of the footwear and apparel manufacturer Timberland, resigned from the board a short time before the crisis erupted.
In their great generosity, the Hadassah women created the framework that allowed the hospital to deteriorate because management and staff acted with the knowledge that there would always be someone to cover the cost of high salaries, and deficits.
“The organization’s DNA was deep pockets. There would always be someone to pay -- the Hadassah women or the government -- and therefore no one had an incentive to ever become more efficient,” a senior official in the health system told me.
This DNA is embedded deeply in Hadassah, as evidenced by the fact that it employees are refusing, even when the hospital is collapsing around them, to agree to any cuts in their salaries. Employees of a private organization would never take such a stance if their employer was in such jeopardy. Management and staff could likewise take comfort in knowing their institution was too big and too high profile to fail. Management paid employees, mostly the doctors, whatever they asked for in exchange for peace. Employees, in particular the doctors, demanded more and more even if it was evident that it would be financially detrimental to the hospital.
Another indication that the supposedly privately run Hadassah was in practice a public institution was its practice of paying noncontributory pensions, even in the case of voluntary early retirements that were part of various recovery plans instituted at the medical center over the years. This meant that the employee contributed nothing toward his pension, which is paid entirely out of the institution’s budget.
The very generous retirement package Hadassah gave to Mor-Yosef, including a bridging pension of 75,000 shekels a month until he reaches the official retirement age, is in practice a budgetary pension in every way. Bridging pensions were paid by Hadassah regularly, which is one of the reasons why the recovery plans formulated by Hadassah over the past five years failed. Whatever savings were made by laying off staff were easily eaten up by paying pensions to those who left.
This DNA is also what prevented management from healing Hadassah. They had no partner who would agree to lend a hand to save the organization. Therefore, the only way to impose a recovery plan is to force it on the employees via the courts. Instead of acting through the Labor Court, in agreement with the workers, Hadassah management chose to petition the Jerusalem District Court as a way of coercing the employees. All sides will lose in this case.
But it is, of course, the government that made the decisive contribution to Hadassah’s managerial failure by exempting itself from overseeing the hospitals in Ein Karem and on Mount Scopus, since they are supposedly private. The Health Ministry claimed it had no legal authority to do so.
But let us remember that Hadassah also operates under the wage agreements set by the state; and under limitations on its scope of operations, set by the state; and under rate schedules, set by the state; under limitations on the number of inpatient beds it can have, set by the state; and of course under the state’s “too big to fail” insurance.
The claim then that Hadassah is a medical center that does not need to be supervised by the state is baseless. Given that the Health Ministry lives just fine with the fact that the hospitals it owns operate without boards of directors and without internal auditors, makes it easy to believe that the ministry didn’t think it had to supervise Hadassah either.
The treasury is no less at fault
The government’s other arm involved in the affair, the Finance Ministry, contributed no less to the management failure at Hadassah. The treasury placed severe limitations on hospital budgets. The portion of the state budget intended for health services was eroded within a decade form 5.2 percent of GDP to only 4.5% of GDP, and this was during a period when health costs only rose. This prolonged shrinking of the health care budget led to serious deficits in the system: Every hospital, except for Sheba Medical Center at Tel Hashomer, and every health maintenance organization are in debt; but at least the public bodies receive compensation via grants from the treasury to close their deficits.
These equalization grants for the HMOs and the subsidies for the hospitals are paid out regularly. The hospital subsidies have reached 720 million shekels a year. Hadassah, because it is seemingly a privately owned institution, was not eligible for these subsidies, and so its situation became worse than that of the other hospitals.
This is the chronic disease of failure that makes one tempted to say it was foreseeable. Since the government did not supervise and was not interested in supervising, Hadassah's colossal failure came as a big surprise. Now it will cost all of us at least half a billion shekels to fix the mess.
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