What's wrong at Hadassah?

My Israeli friend Boaz Tamir at Israel Lean Enterprise asks exactly the right questions about Hadassah Medical Organization on a Facebook post:

The assumption that Hadassah will never fall is a continuation of escape from reality and the transfer of responsibility to Mother Country and its "Papa treasury." The "Aunt from America" can no longer save the place. The question for public discussion should be how to set up the new Hadassah on the ruins of the old without losing the human assets, professional, academic and technology built at a magnificent institution over nearly a hundred years.

For those who have not been following the story, here's a sample from the Jerusalem Post in November: 

HMO has a deficit of NIS 1.3 billion, due to reduced contributions by the Hadassah Women’s Zionist Organization of America that owns it; because it was forced by the Treasury to give large discounts to health funds; and because it has a relatively large administrative staff.

The crisis has been public knowledge for the last four months, and some 5,000 staffers have not received their wages on time for the past three months.

As it is not a state-owned hospital, the government is not legally bound to give HMO financial aid. The Finance and Health ministries have been working to bring about a painful recovery program for it since then, but so far it has been fruitless.

The four Israeli members of the HMO board, which is dominated by HWZOA leaders in the US, resigned a few weeks ago, claiming they were being kept in the dark in the negotiations. Those who resigned have not been replaced.

More recent events indicate a total meltdown:

Doctors at the Hadassah Medical Center launched a strike after talks between the Jerusalem hospital and the government over the institution’s $367 million deficit broke off. The doctors began the strike on Tuesday and are offering only urgent treatment on a Sabbath and holiday schedule. Teaching also has been halted. The strike also is protesting that hospital staff members will receive only half of their salaries this month due to the deficit. Some staff has been laid off, and more layoffs could be in the offing, according to reports. The state could seek a back-to-work order. According to reports, the state is planning to go to court to stop the deficit talks and assume control of running the hospital, then impose its own plan on deficit reduction that the doctors fear could involve layoffs.

What went wrong at the crown jewel of Israeli medicine?  A year ago, I prepared an analysis of the situation for people engaged in the hospital.  I was asked to keep it confidential at that time, but I have since learned that copies have been circulated to members of the government and others, and so now it is appropriate to share it more widely.  (Maybe I should have insisted on that last year.) Perhaps some of the items I mentioned then have improved somewhat, but there is little evidence that they have.  [In this report, HWZOA stands for the hospital's owner, the Hadassah Women's Zionist Organization of America, which has dominant authority on the hospital's board.  For years, American philanthropy through HWZOA supported the hospital and its operating deficits.  Following the Madoff scandal and the stock market crash, HWZOA was no longer able to lend this lifeline, but it still maintains ownership of the hospital.]

HMO faces a structural financial crisis of major proportions.  Its cash flow problems raise questions about its immediate ability to carry out its mission.  Beyond the short term, it does not have in place governance, leadership, and infrastructure to solve the issue of long-term sustainability.  There is lack of productive engagement by key decision-makers and leaders in the organization.  There is a failure to communicate the dimensions of the problem to key internal and external constituencies.  Hence, those constituencies are not sufficiently engaged in finding short-term and long-term solutions. 

The immediate challenge facing the organization is how to remain solvent for a sufficient number of months to work on the other areas of improvement that will lead to a sustainable solution.  It is not possible to continue to meet the payroll by withholding payments to suppliers, by ignoring deferred obligations, and by underinvesting in key infrastructure and medical equipment.  Timing is running out, and the leadership needs to precipitate an understanding of the crisis with a number of external and internal constituencies.

HMO is functionally bankrupt at this moment, in three respects.  First, on the financial level, there is insufficient cash to meet the current needs of the hospital and also its large deferred obligations.  There is nothing on the horizon that suggests a significant change in that situation.  It is remarkable to me that the external accountants have not yet issued a note in their financial audit that would question whether HMO is a going concern.  On the organizational front, there is a paucity of the kind of teamwork among and between doctors, between doctors and administrators, and between the hospital and the unions that is essential in the changing health care environment.  Finally, the hospital is on the brink of failing to meet its public service obligation to its patients, as the financial difficulties have started to impair its ability to maintain, renew, and replace clinical equipment and supplies that are required to provide world-class medical care.

The organization faces a financial crisis of large proportions.  More importantly, it faces a crisis of responsibility.  There is not yet in place a sufficient sense of understanding of the dimensions of the crisis, and there is not yet the willingness or ability to engage in a communal manner to solve it.   

Let’s start at the top.  That HMO has reached the point it has indicates a failure of governance.  Financial and existential crises do not develop overnight.  The current situation has been years in the making, and the inability of the board to acknowledge the trends in a way that would have enabled countermeasures to be put in place indicates a problem in the structure, focus, activities, and perhaps people on those bodies.  The board also needs to consider how it wishes to structure its relationship with the CEO, as the current distinction between governance and management responsibilities is unclear and interferes with effective decision-making.  Unfortunately, it is not unusual for non-profit boards to fail in these aspects, particularly those supervising medical institutions, but that is little solace right now.

It is time for HWZOA to engage with the HMO board in a review of the governing responsibilities of the HMO board.  There are governance experts who can assist in this matter and, indeed, external help is usually needed to accomplish this task.  The desired result is a clear delineation of the responsibilities, authority, and accountability of the board (as compared to those of the management); the size of the board; the attributes of skills and experience desired for board members; an understanding of the process for recruitment and nomination board members; definition of term limits; delineation of conflict of interest rules; committee structure; design of board meetings; and, importantly, a system and process for periodic self-appraisal by the board.  

Let me turn now to the senior management and administrative systems at HMO.  The number and skills of people involved at the senior management levels of HMO is insufficient for an organization of this size.  The problem is greatly aggravated by the lack of administrative infrastructure in the organization.  Basic accounting, purchasing, personnel and other controls systems are not in place.  As just one example, the CFO currently often does not know what supplies and equipment have been ordered by people in the hospital until the bills arrive on his desk.  The human resources system is likewise inadequate.  Thus, effective costs controls are impossible.  

I will not spend time on this document on the relative strengths and weaknesses of the senior administrative and clinical leadership except to note that there are many people in both categories who do not have the managerial skills to properly run their jurisdictions.  In particular, there is a dearth of knowledge and experience in basic financial management, and even less understanding of principles of clinical and administrative process improvement (whether Lean or other approaches).  Previous decisions about hiring and retaining were not based on such skills, and little training has been done to enhance them.  Over time, those people will either need training or on-site assistance from deputies with strong business skills, or they should be replaced; future recruitment and hiring decisions should reflect the importance of these competencies, along with the traditional virtues needed in this academic and clinical setting.

I next turn to the issue of communication and transparency.  HMO is sorely lacking in its capability to persuasively explain matters of importance to the entire staff of the hospital.  This is a result of poor communications infrastructure, but it also stems from an inability (or perhaps unwillingness) to provide the staff with current and accurate information about financial and other business matters, and also about matters relating to the quality and safety of the care that is delivered.

It is fundamental to any turn-around situation that the people who work in a financially troubled organization need to understand--and believe--that things really are bad, that hard decisions will have to be made, and that their creativity and ideas are being sought by the management.  There also has to be a way to communicate whether a turn-around plan is being effective, and that there is hope for the longer run.  The absence of this capability at HMO, to the extent commensurate with hospital’s degree of financial difficulties, is a fatal flaw.

You might be amazed by how many times I have heard in just two weeks that a prevailing view among many is that the hospital administration is just crying wolf.  “We’ve seen this movie before:  We don’t need to watch it again.”  Even among chiefs who should know better, the level of denial is striking.  The result is that there is no constituency for change.  No chief sees it to his or her advantage to offer cost reductions.  “Why should I ask my doctors or nurses to make a sacrifice if they don’t really believe there is a problem?  And, if there is really a problem, why should I volunteer to help before everyone else, only to be additionally hurt by the next phase of the turn-around?”  The predominant attitude is, at best, to wait and see.  At worst, it is to spend more now, just in case austerity is really coming in the future.

Transparency and communication require sufficient administrative infrastructure to present and disseminate accurate information.  More important, it requires unabashed enthusiasm for disclosure on the part of the board and senior leadership and an understanding that the story must be told in many forums and in many ways to reach the wide range of constituencies in the hospital

The current system of health care finance in Israel works to the disadvantage of HMO.  Unlike government and health plan hospitals, it receives no financial support to meet operating deficits.  In addition, the system of capping patient revenues that is employed by the health maintenance organizations and the government causes financial losses to accelerate as patient volumes increase.  The discounts demanded by the health plans further aggravate this situation.  The lack of appropriate cost sharing by the university is an additional contributor to the deficit.  HMO needs to break this cycle, and it can only do so as part of a broad political agreement.  To date, the others (like the internal audiences) doubt the nature of the vast problems facing HMO and/or expect HWZOA to come to the rescue.  They see no political gain in volunteering to help.  Accordingly, no broad-based agreement will be forthcoming unless the other parties view it in their interest to avoid a public health and community disaster.   They have to understand that the status quo is worse than alternatives that include their participation.

I am certainly no expert in Israeli society or law, but two remedies occur to me.  One is that HMO could seek bankruptcy protection in the court system.  During the period of protection, a judge could be helpful in supervising a range of internal changes in the hospital, protect HMO from creditors, and buy some time for the organization.  A bankruptcy might also strike sufficient fear into the body politic that it would respond with some help.

An alternative is to approach the government with an accurate and honest appraisal of the current situation, stressing the likelihood of bankruptcy and/or public health disruptions, and ask for two things:  (1) a letter of credit or loan guarantee to enable the organization to meet payroll and suppliers’ needs during a restructuring; and (2) the creation of a blue ribbon panel to investigate and make legislative and regulatory recommendations to the government to help solve the inequities in the country’s health care finance system.  (This approach was employed when the largest health maintenance organization faced major financial problems several years ago.) 

In this situation, there is an additional matter relating to governance and ownership.  The question must be asked as to whether HWZOA should retain ownership of HMO and also effective control over the board of HMO.  Without diminishing the value of such a relationship in the past, we must question whether it is the community’s interest for it to continue.

The long-term financial solution for HMO will require a successful negotiation among a number of parties in Israel: the national government, the city government, the university, the health maintenance organizations, and the unions.  Each of these parties will need to contribute something in the way of support for a sustainable financial future.  Is this support likely when HMO is viewed as an American institution with an independent source of funds?  I think it less likely.