back

KITTANNING, Pa. — Surgeons, the medical masters of the universe, are not noted for their willingness to cooperate. So it is no surprise that the operating room at Armstrong County Memorial Hospital used to stock five different hip joint implants, a favorite model for each of its orthopedic surgeons. Implant prices could range widely, from $4,000 to $6,000, and for years, no one seemed to care. 

But that was before Armstrong, the only hospital in this rural and coal mining county 38 miles north of Pittsburgh, slid into a financial black hole and faced the likelihood of closing or being sold to outsiders.

After much discussion, the surgeons were persuaded to agree on one implant for nearly all procedures. The hospital was then able to get a discount and save $34,900 last year. A small step, but it was typical of the measures everyone at Armstrong has taken over the past several years to save the 186-bed hospital.

There are thousands of small suburban and rural hospitals like Armstrong all over the country. They are integral parts of their communities — and often the largest employers. When community hospitals close, hundreds of people in a small town can lose their jobs, town residents may defer important preventive care, and emergency care is often far less accessible.

But most community hospitals are in crisis, faced with decreased payments from insurers, weak management and inefficient technology. Two-thirds of the nation's hospitals are so financially feeble that they are unlikely to get financing for new technology that will be essential to their survival, said Richard Wade, vice president of the American Hospital Association. With the economy weakening, the picture is likely to darken.

More than 450 community hospitals closed in the 10 years from 1989 to 1998, about 8 percent of the total, according to the most recent count by the federal Department of Health and Human Services. Even so, most of the 4,900 that remain, including Armstrong, run with at least one in three beds empty, suggesting that still more will close. 

Armstrong stands out as a rare example of a hospital that has tackled these problems. Its story is a template for hospitals struggling to stay alive.

The Setting: Managed Care Arrives Late

Managed care came late to Armstrong, but the effects were seismic. Beginning in the early 1990's, insurance companies lowered payments and pressed for patients to be sent home from the hospital more quickly. Meanwhile, the number of patients admitted to the hospital declined as coal mines and factories closed and the Moonshine Mushroom Company, a major employer, shut down for several years. Some residents left in search of jobs; others put off obtaining care after they lost their insurance.

Adding to the pressures on the hospital's management, the United Steelworkers of America won elections in June 1994 to represent more than 600 nurses' aides, housekeepers and other nonprofessional employees at a time when there was no money for higher wages.

Worse yet, Medicare, which pays 61 percent of the hospital's bills, reclassified Armstrong County as a lower-cost area and reduced annual payments to the hospital by $1 million.

Management was slow in adjusting to the new pressures. Patients stayed 6.9 days, on average, in 1994. It would take three years to shorten stays to under five days, the national average, according to the Ingenix/ Center for Healthcare Industry Performance Studies. 

By mid-1994, the hospital found itself in violation of its debt agreements, forcing the board to call in an outside financial expert for help. Armstrong fired its chief executive, who had taken the job just as the bad news was snowballing, and hired a turnaround expert as an interim chief.

"I got there at Halloween 1994 — it was an appropriate time," said George Hartnett of Modern Management Inc., a human resources consulting firm in Graylake, Ill., that was originally hired to try to stave off the unionization drive. 

"They were at death's door, frankly unable to continue," he said. "There were only a few days of cash left. The medical staff was unhappy. The board was dysfunctional. They were coming apart, and the community wanted to make sure their hospital stayed alive." 

The Cuts: Bitter Medicine for the Staff 

In a matter of months, Mr. Hartnett cut all salaries 5 percent, dismissed 106 workers, including 50 registered nurses, and reduced employees' time off by one vacation week, one holiday and one personal day each. The Steelworkers union objected to the cuts at first but accepted them after a group of worried employees petitioned the National Labor Relations Board for withdrawal of recognition of the union. 

Mr. Hartnett also started a search for a new chief executive. Jack D. Hoard, a veteran of the Shriners' hospital chain, took over in December 1995. 
In turn, Mr. Hoard recruited Richard W. Szymkowski, a financial analyst with the New Jersey Hospital Association, who was brought in as chief financial officer in 1996 to clean up the hospital's books. "They hadn't put out a financial statement in three years," Mr. Szymkowski said. "I was the eighth C.F.O. in eight years," he said, including one in 1988 who was sentenced to six months in jail for skimming cash from the snack bar in the lobby.

The numbers were ugly. "We had no cash flow," Mr. Szymkowski said. "The balance sheet was weak; we had an operating loss of $2.2 million in 1995" on revenue from patients of $45 million. But from 1994 to the end of 1996, the hospital managed to reduce costs by $5.3 million, cutting payroll costs 15 percent and materials and supply costs 7.5 percent, even as the flow of patients picked up.

Contracts with doctors were reviewed and tightened to make sure they provided the consulting and other services they were supposed to. Bills to Medicare and managed care companies were checked for accuracy and completeness, eventually cutting more than five weeks from the average time the hospital waited to receive payments. The number of board members was cut to 13 from 27, and those remaining were given a training course in governance and strategic planning. 

The Plan: Trying to Cater to Rural Needs 

Building on a survey of county residents' health needs, the new board drafted a strategic business plan. Rural hospitals need to provide a broader array of services than small suburban hospitals, but they cannot offer everything a major medical center has. "We try not to go outside our core competency," Mr. Hoard said — primary care, general surgery, routine cancer therapy, cardiology, and CAT and M.R.I. scans.

So the new board decided to withdraw an application for state approval to conduct open-heart surgery. "You need high-powered technical people, follow-up caregivers," he said. "It's a big gamble, a different ballgame."

Armstrong broke off merger talks with the University of Pittsburgh Medical Center in the mid-1990's, insisting on keeping local control. "We were afraid we would end up just a first aid station," said Elizabeth White, a businesswoman — mining and livestock — with deep family roots in the county who later became chairwoman of the board. 

But Dr. Kathy Selvaggi, an award- winning oncologist recruited to run the cancer center at Armstrong, brought expertise and prestige as a faculty member of the Cancer Institute of the University of Pittsburgh Medical Center. 

Expanding local services, the hospital hired salaried doctors to operate primary care centers around the county. Those doctors wound up referring many of the sicker patients they saw to Armstrong.

One was Dr. Joseph A. Cippel Jr., a family physician who is medical director of the hospital's primary care center at Elderton, a hamlet 18 miles away. "I see 25 patients a day," he said, "nuts and bolts family medicine, lots of diabetes, heart disease, mental health issues, depression, alcoholism. A lot of farm people, mining accidents. 

"Yesterday, I had a guy who was putting in roof bolts in a mine and a big boulder fell on his hand." 

Tawni Samosky of Rural Valley, Pa., drives 12 miles with her three young children to the Elderton clinic, even though the hospital is closer. "We know all the nurses here," she said. "If I have questions, I can get right through." 
Just as Ms. Samosky prefers Elderton to the hubbub of Kittanning, population 4,838, many local people "have never been to Pittsburgh and have no desire to go," Dr. Selvaggi said. 

At Armstrong itself, the hospital recruited three obstetricians, including the first woman obstetrician on its staff. "They brought the obstetrics wing into the 21st century," said Dr. Harold Altman, a pediatrician. 
Sandra Falsetti, whose son Anthony was born two years and eight months ago, before the makeover, was delighted with the changes when she returned to Armstrong in February to give birth to Katheryn. 

"The difference is astronomical," she said. "Now it's like your own bedroom: hardwood cabinets and floors, dim lighting from regular lamps, the TV in an entertainment center." 

Armstrong also renovated its emergency room, opened a center for elderly diabetes patients who often need special care for wounds and started a pain clinic operated by anesthesiologists.

A group of pulmonary specialists was recruited to treat former coal miners for black lung disease. "People tend to be ill but they tend to live forever here," said Mrs. White, the board chairwoman.

The Future: Economic Worries and Other Problems 

There is still much to accomplish. Now that it is no longer so short of cash, the hospital, a sprawling three- story complex in an industrial park on the edge of this Allegheny River town, is reviewing bids for a new $4.5 million electronic system to handle billing and, it hopes, link with a new system to transmit patients' medical records from the hospital to doctors in their offices. 

Armstrong's current information system was not designed to deal with managed care or to keep track of the hospital's home care and clinic patients. So there are three separate systems that "don't talk to each other," Mr. Szymkowski said. 

"We live and die by the quality of our information systems," Mr. Hoard added.

But like those in every hospital, the new system must meet new federal privacy and security standards, a requirement that is expected to cost Armstrong as much as $2.5 million.

Prescription drugs, medical devices and hospital supplies remain nagging problems. "Pharmacy costs are killing us," Mr. Szymkowski said. "In some cases we had to tell physicians that we can't afford the new drugs they want." In an attempt to slow the spiral, Armstrong Memorial joined a Pittsburgh medical center purchasing group in 1996, but that proved largely unsuccessful. The hospital is now considering hiring a doctor of pharmacy to attack the cost problem. 

Standardizing supplies is another cost-cutting target. Although Armstrong has simplified its purchases of hip replacements, it is only now merging the operating room's supplies into the hospital's central supply room. 

The economic outlook is a worry for Armstrong and other hospitals. If the slowdown increases, the number of uninsured patients could increase, raising costs.

Relations with doctors have improved over the last several years, according to Dr. D. Wesley Minteer, a family practice osteopath and quality control specialist. "The major battles are fairly well over," he said. 

But the nursing staff, the essential heart of any hospital, is still feeling stress, according to several physicians and a union of registered nurses affiliated with the Pennsylvania State Education Association. The nurses held a one-day strike March 22, forcing the hospital to temporarily shut down almost two-thirds of its beds.

Most employees who were dismissed in 1995 were rehired, and revenue from patients climbed back to $53.8 million last year from $45 million that year. Cuts in pay and vacations were gradually restored and nurses have had two further raises. Earlier this month, the nurses ratified an agreement with the hospital that called for 3 percent raises for each of two years, some higher increases for more senior nurses, and limits on mandatory overtime in return for reduced family health coverage. The agreement will add $380,000 to operating costs.

But keeping nurses is still a problem. Armstrong recently hired a nurse recruiter, but offers of signing bonuses and retention bonuses "were not effective," said Joyce A. Shanty, a registered nurse who is the hospital's vice president for patient services. 

Improving relations with walk-in patients is another "work in progress," Mr. Hoard said. "The lobby is a zoo at times," he said. To try to "make it more user-friendly," Mr. Hoard said, two "greeters" were hired to check on patients' appointment times and help with directions.

The Street: Financial Rating Has Bounced Back 

Armstrong's improvements have been noted as far away as Wall Street. In 1994, when the hospital was running out of gas, Moody's Investor's Service, the Wall Street credit rating firm, reduced Armstrong's rating to junk bond status and pushed it lower still in 1995. Then, as the turnaround took hold and cash flow improved, Moody's raised the rating in 1996 and again in 1998. Last November, it restored Armstrong's debt to investment grade. 
Chris White, a hospital analyst at Moody's, said Armstrong was one of only 12 hospitals in the country whose ratings were raised last year, while 56 had their ratings lowered. 

In 1995, Armstrong County lost $2.2 million running the hospital; in three of the last four years, there were surpluses, Mr. Szymkowski said. Profit margins rose to 4.2 percent in 1999 and 2000, healthy for many hospitals, although well below the 8.9 percent average for the nation's strongest rural hospitals.

Mr. Szymkowski is not ready to let up. With the national economy weakening, a new administration in Washington and Medicare again an issue in Congress, "the rate of change is rising," he said.
"We're trying to stay ahead of that curve."