When Dan Lauffer ascended in 1998 to CEO at Saint Francis Hospital, his first post as chief executive, he assumed he had his job figured out.
It would consist mostly of days examining profit-and-loss sheets, keeping staffers happy and otherwise maintaining the status quo for an industry that developed exponentially during the 20th century. Being nimble under pressure didn’t seem to be a prerequisite.
But at age 61 and deep into a run as CEO with Thomas Health that began as a physician assistant and continued to a stint as director of surgery service, Lauffer laughs at his earlier naiveté. Lauffer’s duties have drastically evolved along with the ever-changing logistics of running a hospital.
That’s never been more evident than in 2020, when Thomas Health filed and emerged from Chapter 11 bankruptcy in a roughly seven-month span. A $60.1 million bond sale will help whittle $145 million in debt and provide cash to cover hospital operations. That includes facilities at the main Thomas Memorial Hospital in South Charleston as well as sister properties Saint Francis Hospital and THS Physician Partners.
The challenge of reorganization was compounded by the coronavirus pandemic. Gov. Jim Justice’s April order to suspend elective surgeries prompted Thomas Health to furlough 584 of its 1,663 employees. Thomas continued to pay for their benefits. All but 80 have returned to work. Fifty new employees have been hired to fill gaps.
Still, the COVID-19 crisis is only one obstacle Lauffer said Thomas Health faces. He sat down with the Charleston Gazette-Mail to discuss the decision to enter into Chapter 11, Thomas Health’s future and other challenges facing not only his organization but West Virginia and the nation.
CGM: Is seven months a normal turnaround from announcing bankruptcy to emerging from it? Was there an underlying factor that allowed that to happen during such a tight time frame?
Dan Lauffer: I think all of the prework and some of the things we did leading up to the filing in January allowed us the ability to move forward and the Chapter 11 process to take place.
We were sort of looking at a 10-year period from 2007 to 2017. You had to think about what happened over those 10 years. You had the housing crisis of 2008. In 2010, the Affordable Care Act came out and it changed the way providers and hospitals were reimbursed significantly. You throw in on top of that West Virginia’s own economic issues related to a declining population, the demise of the coal industry, lack of a diverse economy ... We were looking at patterns, business trends that revenues were going down, expenses were going up. There’s no way to go back in time and recapture lost revenue of that magnitude without thinking through our options.
CGM: What were those options?
Lauffer: Affiliate, get out or get a restructuring done of our balance sheet. And we made that decision probably as early as we possibly could. Why? Because we recognized the time factor involved: what it would take to get there and the money you’d have to have available to allow you to have optionality, being able to take a look at the various things that could be offered in this process. Many, many hospitals, many companies wait until they can’t make payroll and then they want to talk about a bankruptcy plan. You can’t plan a bankruptcy with no money. ... That’s clearly where our board and our medical staff and our leadership did not want to be. We felt strongly that the trends we were seeing were not just short-term things. So it just became evident that we had to do something to cover the long-term debt on the balance sheet.
CGM: How difficult was it to accomplish with the resources available inside your own buildings?
Lauffer: That’s one of the things that we’re proud of, that we went through this, but that we didn’t allow it to affect services, didn’t allow it to shut things down. Admittedly, prior to this, we had to take a hard look at consolidating services and ways we could do things more economically. We’d actually brought in a consultant in 2017 who worked here through 2018 making recommendations about how we could better align ourselves with services we provide and maximize our revenue while reducing our expenses. So we made some headway there from an operational perspective, but it clearly wasn’t enough.
CGM: How so?
Lauffer: Because even while we’re trying to make up for that loss of revenues, we continuously see through the Affordable Care Act reductions in reimbursements. We’ve seen an incredible shift of payers in West Virginia. What I mean by that: As these coal companies and coal miners lost their jobs, they had commercially insured health insurance. When they lost that, they went to Medicaid. Gov. [Earl Ray] Tomblin increased Medicaid expansion in 2014 and it exceeded anyone’s projections as to how many people would actually be added to the Medicaid rolls.
So if you take a look at West Virginia and see some of the statistics I think people need to hear, there are more than 500,000 people covered by Medicaid in the state. Another 400,000 are covered by Medicare. And I’m not picking on PEIA [the state Public Employees Insurance Agency] — public employees are an integral part of services that West Virginians need, government is obviously a necessary thing — but PEIA has another 230,000 enrolled in it. Well, do the math. Add it up. There’s about 1.2 million people in a state of 1.7 million being covered by government programs. Let me tell you about government programs: It doesn’t cover the cost of us providing the service to them. Seventy-five to 80% of our business [is] services that we receive payment [for] that doesn’t cover the cost of providing the care.
What we have to understand is this: When you can’t provide the care to cover the cost, you have patients who are not seeking care because they can’t afford care. So that care goes unchecked. And this is all pre-pandemic, but now we’re in the middle of a pandemic and it’s even worse. There’s a 38% increase in the number of cardiac deaths and strokes nationwide and it’s because people are avoiding the emergency room and avoiding seeing their doctor because they don’t want to get COVID. They think coming to the hospital they’re going to get exposed. What’s happening here is we have an insatiable desire for health care.
We have a population whose health habits and statistically — as Gov. Justice has said during the pandemic — we’re probably the most vulnerable population in the country because we’re aged; we have multiple conditions like high blood pressure, diabetes, cardiac disease; we smoke too much, we drink too much, we eat too much. And these services are continuously accessed, but the sicker we become — the more conditions we live with and the longer we live — the more it costs to take care of everybody. It’s just the nature of the beast.
CGM: And the funding hasn’t kept up.
Lauffer: No. If anything the funding has become expanded to say we have to pay for more drugs, more technology, we’ve got to pay for more supplies. So suddenly the cost for providing that care is outstripping our ability to generate revenue to pay our employees, cover our supply costs, pay for our buildings and all the rest of that stuff. So there’s a lot of that occurring that’s affecting it. The system itself is changing and has to change. [Y]ou’re going to see a lot more telemedicine, telehealth and that’s going to change what we do. But, clearly, the business model that was here pre-pandemic, pre-Chapter 11 is that 75 to 80% of our costs are not covered by three programs that cover 80% of [West Virginia’s] population. What I’m about to say is we can’t do Chapter 11 twice.
CGM: Which means you’ve got to get it right this time?
Lauffer: We’ve got to get it right. But we’ve got to have some changes. Status quo isn’t going to do it. This state needs a severe business plan. It needs a business plan for the next 10 years to figure out how we’re going to diversify this economy and begin to grow businesses, attract people to the state, keep people here who are valuable in terms of labor pool so we can generate a better economy. If we stay the way we are — if we don’t change things — you’re going to see other hospitals and other entities continue to have issues like us that we had to file Chapter 11.
CGM: Could there be a blessing to come out of your situation? That you didn’t want to explore Chapter 11, but you embraced it because it was what you had to do? Maybe serve as an example to other organizations and perhaps the state as a whole to be willing to evolve and change with the times even if at first reluctantly?
Lauffer: That’s it. It’s a brave, painful spot to hold because I’d much rather have someone else do it for me (laughs). This was not easy.
There are a lot of things we’ve had to overcome on top of West Virginia’s drug addiction issue. Here we are in the middle of an economic downturn, in the middle of an epidemic and then have a pandemic thrown on top of that. It’s just like how much more can we take? I will tell you that affected things because there was an offer being considered in January by the bondholders, but then the pandemic hit.
The people who had that offer on the table withdrew it because the market was tanking. So we had to go back and ask people to reconsider and other offers were made. So there was a lot of up, down and agony in this process. There were some days we didn’t know if we thought we’d get out of it. Because the only option you have if you can’t get through a reorganization is you have to sell to somebody. And there are obvious issues related to that. Would they reduce services, lay off people? Our issue was we wanted to save our jobs, we wanted to save our community hospital.
CGM: What’s the biggest difference from an operational or procedural standpoint now?
Lauffer: We have to be very careful about capital equipment and capital purchases. We have to maintain our facilities, but we have to be certain of a ROI on capital. We have to be much tighter on supply costs, on managing our supplies. We have to be much tighter on labor.
I’ll tell you another one: We have to collect up-front collections as much as we hate to do that because we know there are people hurting out there. It’s hard to do when people are losing their jobs but they’re saying, ‘My gallbladder is killing me, I’ve got to get it out because the doctor says I’m going to get an infection.’ We’re going to do the case. We’re not going to let somebody suffer. But when you say, ‘You owe this’ and they say they can’t pay it, we say, ‘Let’s get you on a payment plan and work through this.’ People don’t anticipate this kind of stuff, they don’t plan for it.
And let’s face it, some of the insurances that our own folks have, you’ve got people with $6,000, $8,000, $10,000 deductibles. Most people don’t have $8,000 in their bank account just waiting for an illness. That’s really what the problem is — health care has gotten to the point that it’s not insurance anymore, it’s catastrophic insurance. The country is struggling with this. What do we do with health care? It’s a problem before we went into Chapter 11 and it’s a problem now.
I’m gonna pick on PEIA a little bit. They pay us less than Medicaid — less than Medicaid. How can the state continue to ask us to provide services and not [interrupt] services and [close] hospitals if PEIA is not paying its physicians or hospitals at least at a rate they can break even? Name me another business that’s paid at 80% below cost and can still survive. I can’t think of any.
CGM: What kind of hit did not having elective procedures have on your bottom line?
Lauffer: It was huge. Huge. There was lost revenue there, probably $10 million a month or more. Because of the loss of elective surgeries, we had to furlough 500 employees away from the hospital. We’re hopeful it would be a temporary period and we paid their benefits while they’re away. Most were off up to three months. We want to treat our employees right to get through this.
And when you think about it, some surgeries are not really truly elective. You have a colonoscopy and you find a polyp and the polyp is cancerous. You’re not going to die today, you’re not going to die tomorrow, but who wants to sit around with cancer and it needs to be removed? So you’ve got to get them in here. There are certain eye surgeries you’ve got to have to maintain sight.
Yes, it might seem elective because we’re not doing it on an emergency basis, but disease progresses. It can progress to something more than your life. A limb or an organ could be in danger. It became an issue where you saw a backlog of folks needing to have surgery.
CGM: How do you deal with having to furlough that many people?
Lauffer: I think we communicate as much as we can. I think we’re as genuine as we can be with people. This has been hard, very hard. You don’t want to hurt people’s livelihood, you don’t want to hurt people’s family life, but we don’t have a choice. It’s the nature of the beast.
And this is going to go on. We’ve got the school year now to contend with and we’re concerned. We’ve got this issue: We bring the staff back. What happens if Kanawha County goes to red? Now, I’ve got a nursing staff with children at home. If they can’t send the kids to school, where are they going to send them? Some may call in saying, ‘I can’t come in, I’ve got to take care of my kids.’ I lose a staff member. How do we take care of that? Those are all the things we’re having to deal with in this process. So is everybody else. We’re not alone.
But you get it. Life is not what it was and it’s never going to be. And we’re going to have to adjust to it.