Operating budgets are just half of the struggle

851

During the last fifteen years there has been unprecedented restructuring, renovation and growth in the Ontario hospital sector. Throughout this period of time there has also been considerable government funding available to hospitals in order to offset some or most of the severance costs associated with restructuring and previously a two-thirds government and one-third “local share” funding for renovation and infrastructure growth. However, the timing of your hospital’s restructuring, renovation and growth in the Ontario hospital sector had to coincide with the government’s funding announcements. If your organization was too early or late in its efforts it could face having to fund most, if not all of these costs itself.

Windsor, as a community, was one of the first in the province of Ontario to embark upon hospital restructuring in 1994 with the release of the Final Report of the Steering Committee on Health System Reconfiguration in Essex County, also referred to as the “Win/Win Report”. It resulted in the merger of four hospital corporations into two and five physical hospital sites into three.

When Windsor Regional Hospital (WRH) was formed in 1994 it had a positive working capital position of $1.7 million and a current ratio of 1.08. Working capital is defined simply as current assets minus current liabilities. Current ratio is current assets divided by current liabilities.

The time, cost and effort to implement the Win/Win report was grossly underestimated both at the time of writing of the original report and then again by the Health Services Restructuring Commission (HSRC). The implementation of the Win/Win report was delayed until 1998 pending HSRC validation. In its final report in 1998 the HSRC estimated that hospital restructuring would be completed by 2001 and that the final cost of facility development at WRH would be $46.4 million. This compares to completing facility redevelopment at WRH by the year 2011 at a total estimated cost in excess of $230 million – 12 years longer and $170 million higher cost!

Due to the above timing the following occurred at WRH:

• restructuring cost reimbursement program during the 1998 to 2005 period came too late for WRH since a majority of its restructuring occurred in 1995;

• the creation of Infrastructure Ontario occurred after the $105 million Met Campus redevelopment

• the “local share” change from 1/3 to 10 per cent currently “cost” WRH approximately $20 million for the Met Campus redevelopment

• from 1998 to 2008 WRH’s operating budget went from $90 million to over $275 million dollars. The hospital experienced astronomical growth in all patient areas and programs.

As of March 31, 2008, WRH’s working capital deficit stood at $57 million dollars.

This working capital deficit creates a major strain on operations. Currently, WRH spends over $1 million dollars per year on interest costs incurred to finance this deficit. In addition, WRH forgoes additional savings by not paying its vendors in a timely fashion to take advantage of prompt payment discounts.

If the hospital was to enter into longer term funding for this deficit the payback of principal amount would increase this obligation to close to $4 million a year.

In addition to the cash flow struggle the working capital deficit has on the hospital, it makes reinvestment in new capital equipment next to impossible. A failure to replace older equipment leads to patient and staff safety concerns or the possibility of reducing services as a simple result of not having the necessary equipment. WRH is not alone with this working capital deficit problem. However, WRH has one of the poorest current ratios in the Province.

In the early spring of 2008, being proactive in its approach and before the world wide economic meltdown occurred, WRH embarked on a rather innovative and inclusive process to enhance patient and staff safety, patient quality and financial efficiencies. WRH needed to take a “step back” and assess its operations after a period of substantial growth. Also, the hospital has taken the position that it had to get “its own house in order” before it could make any request from the government for assistance. The process was entitled its Zero Based Budgeting (ZBB) Process.

The ZBB process is a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure. By contrast, in ZBB, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. This process requires the budget request justified in complete detail by each program starting from the Zero-base. The Zero-base is indifferent to whether the total budget is increasing or decreasing. With zero-based processing one can forget about last year, pretend that the program is brand new, and see if one can provide a detail of expenses for what one would need to fully accomplish the program. This technique will help one to develop a complete picture of what the program actually needs to cost and not just what it has been costing.

The ZBB process involved over 300 front line staff including physicians. It was a “bottom up” and not a “top down” exercise. Over 250 performance improvements resulted from the process. At WRH we live by the saying “if you want to talk to the experts talk to your front line staff”. The ZBB process followed a very successful strategic planning process that involved over 100 front line staff including physicians and resulted in them creating the new Vision of the hospital – Outstanding Care – No Exceptions!

As a result of the ZBB process WRH is projected to have a balanced operating budget for 2009-2010 at a time when many hospitals are struggling. We owe this achievement to our front line staff.

In addition, WRH has been honoured to receive many local, provincial and national awards for patient and staff safety and patient quality initiatives over the past 18 months. These range from having three of the top eight best practices and the best overall at Ontario Hospital Association’s 2008 HealthAchieve conference to being recognized nationally as a Level 2 – PEP by the National Quality Institute.

In order to continue to sustain and build upon the clinical and non-clinical success and to achieve its Vision of Outstanding Care – No Exceptions, WRH’s working capital deficit needs to be addressed and resolved. WRH continues to work positively with the Ministry of Health and Long Term Care, the Erie St. Clair LHIN and the Ontario Hospital Association and on developing a solution to this issue.