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Monday, December 28, 2009
Legislative Report: Convert HHSC to non-profit, dump civil service (full text)
By Andrew Walden @ 12:07 AM :: 28100 Views :: Maui County, Health Care, Labor

by Andrew Walden

A legislatively mandated "comprehensive, independent review and evaluation of HHSC" calls for Hawaii's decrepit and failing rural State hospitals to finally be separated from the State "at high velocity in light of the financial status of both HHSC and the State."  The "draft final report" dated December 15, 2009 was prepared by national healthcare advisory firm Stroudwater Associates and the Honolulu accounting firm KMH LLP in response to a legislative mandate included in ACT 182, passed into law during the last Legislative session. 

Stroudwater didn't pull punches:  "HHSC is in a financially perilous condition. It received a 'Going Concern' finding as part of its 2008 independent audit report, calling the future financial viability of the organization into question. Its liquidity is at dangerously low levels with barely enough current assets to meet current liabilities. It is far behind in its payments to vendors (80+ days). The age of its facilities and other physical assets are well above national averages. Its future viability is at risk, particularly if the State is unable to provide increasing levels of operating subsidies for HHSC going forward."

HHSC is the nation's fourth-largest public hospital system.  The Hawaii Government Employees Association and United Public Workers take dues from the 4200 employees of the nearly insolvent corporation.  HGEA collects dues from a total of 44,000 government employees state wide.  During the last legislative session UPW rebuffed efforts to force members of UPW bargaining Units 1 and 10 into a newly-created HHSC-only Unit 14. 

HHSC-employed Senator Josh Green MD (D-Kona), the only doctor in a legislature larded with lawyers, is pledging to introduce legislation implementing the Stroudwater Report proposals.  Avery Chumbley, HHSC corporate board chairman told West Hawaii Today December 24: "We're encouraged that Senator Green is willing to work with us and do what's necessary to help HHSC move forward in the challenges ahead."

The Stroudwater report and Green's bill set up a continuation of last sessions' legislative fight between HHSC and the unions which have milked it dry.  But unlike last year, this Legislative session will be confronted with the need for massive cuts in State expenditures needed to balance the budget.  Hawaii is finally reaching the point where it can no longer afford to create work for the entire HGEA and UPW.  Something has to give.

Up to $90M in HHSC annual savings is projected to come from abolishing the antiquated and bizarre civil service work rules enforced by State law, HGEA, and UPW.  In the last session unions not only opposed efforts to convert HHSC but they even demanded that HHSC be returned to the State Department of Health.  In at least one private meeting, HGEA officials desperate to continue collecting dues from HHSC employees have suggested it would be preferable to close Kona Hospital than to take HHSC out of the civil service system.

Quoted in the Star-Bulletin April 27, Sen Roz Baker (D-Maui) argued: "You just don't go backwards.  What's the point of moving them to DOH? How does that improve anything? One reason we took them out of the DOH initially, they were dying on the vine."  HHSC was removed from DoH and established as a state-sponsored corporation in 1996.

Today, some HHSC hospitals are not provided with basic equipment found in African hospitals such as code carts and heart monitors.  For instance Ka`u Hospital has these items solely because of the fundraising efforts of community volunteers.  This shows that the socialist HHSC has consumed almost all of its capital.  The Stroudwater Report calls on the State to back a bond float to pay for $56M cost of converting the system to a non-profit and provide an additional $200M -$400m for re-capitalization.

Baker told the Star-Bulletin:  "We did not give them any operating capital, and we saddled them with all the debts coming out of the Department of Health and put the employees in collective bargaining rather than biting the bullet."

Backed by Green, Baker and a smattering of Wailea, Maui-based figures profiting from the issuance of $100M in bonds to build a new "tower" for the HHSC flagship Maui Memorial Medical Center, in 2007-08 led a successful effort to block the construction of the privately-funded Malulani Hospital on Maui.  The same monopolist profiteers will be eager to rake in commissions and interest income from the HHSC privatization--and they can be expected to continue to use the "Certificate of Need" process to obstruct competition.


The Stroudwater Report may be read in its entirety >>>> HERE

Below are key excerpts from the report's Executive Summary:  (emphasis added)

HHSC is in a financially perilous condition. It received a “Going Concern” finding as part of its 2008 independent audit report, calling the future financial viability of the organization into question. Its liquidity is at dangerously low levels with barely enough current assets to meet current liabilities. It is far behind in its payments to vendors (80+ days). The age of its facilities and other physical assets are well above national averages. Its future viability is at risk, particularly if the State is unable to provide increasing levels of operating subsidies for HHSC going forward. We have assumed that the State will not have the capacity or tolerance to fund increasing subsidies going forward, and seeks options that will allow it to substantially reduce HHSC subsidies as part of its overall imperative to balance the State budget....

The study concludes that incremental change is unlikely to be sufficient to effectively address HHSC’s short term and long term challenges. It recommends three “essential changes” as a prerequisite for future strategic action.

The first “essential change” calls for a conversion of HHSC from a public benefit corporation to a private non-profit 501(c)(3) corporation. By definition, this change would end HHSC’s status as an agency of the State, disqualifying it from remaining part of the State’s civil service employment structure. By replacing the State’s existing retirement and paid time off benefits with a contemporary private sector benefit structure including a defined contribution benefit retirement plan and paid time off plan, HHSC can save an estimated $50.3M in annual operating costs. Assuming other work rule related changes (e.g. re-mix of salaried/hourly employee status) and a willingness on the part of the State to assume HHSC’s existing operating liability for retiree health benefit costs, HHSC’s annual operating costs can be reduced by an additional estimated $31.3M. It is also projected that HHSC would become far more effective in its ability to generate capital through solicitation of philanthropic support and Federal funding.

In order to execute this “essential change” HHSC requires re-capitalization. We have estimated that HHSC should be re-capitalized using a State general obligation bond falling into a range between $256M ($56M cost of conversion; $200M recapitalization) and $456M ($56M cost of conversion and $400M recapitalization). A detailed business plan including pro forma financials and cash flows will be required to generate a more precise estimate. The goal is to provide HHSC with adequate capital to retire a variety of existing financial liabilities which would be necessary as part of the conversion. The resulting financial performance improvement of HHSC would give it the ability to service the annual debt payment associated with this recapitalization estimated to total between $20M and $36M.

The second “essential change” calls for realizing operational efficiencies identified as part of this study, and allowing some portion of these savings to inure to the individual operating organizations that generate them. The results of an overall review of HHSC facilities operations identified performance improvement opportunities that would in aggregate result in annual financial performance gains within the range of $20M to $40M. Opportunities identified encompass: revenue cycle improvements, additional staffing savings, length of stay reductions, etc. Given the sharp time constraints related to this study and the inability to study and quantify every potential opportunity, additional potential savings certainly exist. However, all major performance improvement opportunities are linked to getting beyond the constraints of the current employment structure through a conversion. This creates the opportunity to drive accountability into the system by linking effort with reward at all levels of the organization from executive management down.

The third “essential change” calls for accessing efficiencies of scale that are inherent in the system model. While efficiencies of scale have never been broadly harvested by the HHSC system, they are currently being eroded as each of the individual regions begins to take on activities such as procurement and IT. Nationally, an estimated two-thirds of community hospitals operate within an affiliated system model—working to achieve efficiencies through a collaborative model with consolidation of shared services. The study conservatively identified annual operating savings related to these initiatives at $6.5M annually....

(The report then evaluates four "strategic options" and recommends the fourth....)

The fourth strategic option evaluated is an HHSC system corporate partnership strategy. This envisions that HHSC would engage in a formal process as a system to identify a capital/operating partner including both in-state and mainland options to help accelerate its transformation to a high performing contemporary delivery system. This option rests upon the conclusion that as a system HHSC by itself is insufficient in scale to move to the highest levels of performance, and that so many of its basic systems and infrastructure are in need of major updating that it will take the in-place resources of a more advanced system to help it catch up. This will result in a sharing of governance authority between HHSC and a chosen partner.

The study recommends the fourth option as the most effective one for meeting the needs of the people served by HHSC over the short and long terms. It further recommends that this option be pursued at high velocity in light of the financial status of both HHSC and the State. This targets re-structuring of HHSC governance and management, pursuit of operational efficiencies, conversion of HHSC to a 501(c)(3), and immediate pursuit of operational efficiencies identified. It further targets completion of a process for identifying the right partner with which to enter into a transaction. It recommends completing this entire process within the next 2-3 years. It identifies the need for continued State subsidy during the transition period, and ongoing support of the surviving entity based upon need beyond the transition. We recognize that these are aggressive time frames. We also recognize the intensity of financial pressures that motivate this proposed speed.




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