What Does Israel’s Hadassah Crisis Mean for the Country’s Health Sector? – an article at Knowledge@Wharton

(Was Originally Published at Knowlegde@Wharton)

The entire panoply of medical metaphors for dire situations could be effectively deployed to describe the current plight of Hadassah Hospital in Jerusalem, but any discussion of the crisis at Hadassah must perforce begin with a harsh legal term: Hadassah is the first hospital in Israel to be made subject to a stay of legal proceedings. In corporate jargon, that means that it is in Chapter 11.

By agreeing, on February 11, to the joint request made by the hospital’s management and the Ministry of Health to impose this status, Jerusalem District Court Judge David Mintz accepted that , to revert to medical terminology, the situation was critical and unstable and the ‘patient’ would die without this emergency procedure. By preventing creditors from taking action against Hadassah and by appointing a trustee to oversee the negotiations between management and staff over a recovery program , the judge was creating a 90-day window of opportunity to save Hadassah.

But how have things come to this pass? And, now that they have, what is the prognosis? What course of treatment might restore Hadassah at least to functionality and, ideally, to full health? Or is it, as some claimed, too late – and the plug should be pulled on the famous and venerable institution?

In the background hover other questions with wider implications: is the Hadassah crisis specific to that institution, or is it part of a problem that encompasses the entire Israeli health sector? If the latter – can the government leverage a rescue of Hadassah to address these systemic issues and fundamentally reform the funding and management of hospitals and health funds, the twin pillars of the Israeli health sector?

Finally, there is the fact that Hadassah Medical Organisation (HMO), which is the entity that operates the two university hospitals in Jerusalem – the larger one at Ein Kerem, in a south-west suburb and the smaller but older one on Mount Scopus in the east, overlooking the Old City – was founded and financed by Hadassah, the Women’s Zionist Organization of America. This claims to be the largest volunteer organization and the largest women’s organization in America; it is undoubtedly one of the most prominent groups in American-Jewish communal life and a key component in the link between that community and Israel.

 

Causes of the mess

The simplest part of the story is how the crisis came to be. It is a prosaic tale of poor management, short-sightedness and self-seeking that is standard fare in most financial collapses, whether of corporations, NGOs or even countries. But that was enough to bring down a proud and prestigious organization – and Hadassah has much to be proud of, having chalked up extraordinary achievements both in the medical and communal spheres over its almost century-old existence. This found expression in 2005, when HMO was nominated for the Nobel peace Prize in recognition of its contribution to promoting peace in the region through its commitment to equal treatment for all, and of the co-operation and co-existence that its ethnically, nationally and religiously mixed staff consistently displays.

But the seeds of the current woes had already been sown by then. The root of the trouble was that spending ran out of control. The biggest expense item for hospitals is wages and here the works committees of the three main groups of employees – doctors, nurses and administrative staff – gradually obtained benefits on a scale that became unsupportable and, having now been exposed to the light of day, are being roundly denounced as nothing short of outrageous.

Thus it turns out that 900 Hadassah staffers carry a managerial title, with the pay and perks that go with it – but only 400-odd actually fulfill managerial roles. Salaries were systematically boosted by overtime that was not worked, by extra pay for being on stand-by and ‘extra readiness’ to an extent that was unnecessary or in jobs where this was uncalled for. The free medical treatment offered workers and their families expanded to the point where it covers 25,000 people.

Meanwhile, doctors benefited from a feature unique to Hadassah among Israeli hospitals – a private medical service offered by the hospital in tandem with the mainstream socialized system, known by its Hebrew acronym sharap. This was originally supposed to function after regular working hours, but at least in some departments it became an almost equal partner – and for many senior doctors, their main line of business. Worse, from HMO’s point of view, its original 30% share of the fees paid for sharap services were whittled down over the years to only some 15-16%.

Nor were staff the only source of the growing deficits, which in recently years ran to hundreds of millions of shekels annually, so that HMO’s accumulated deficit now amounts to a massive NIS1.3 billion (some $370 million) . The Israeli health system requires everyone to be a member of a health fund, and hospitals vie to provide services to the funds – with a key competitve weapon being discounts offered relative to the maximum rate fixed by the Health Ministry for each service. All hospitals play the discounting game, but Hadassah apparently offered much larger discounts than others, thereby turning many of its services into loss-makers and ensuring that its deficits mounted steadily.

Management was responsible for these developments, either by direct complicity – it offered the discounts and signed the wage agreements – or by turning a blind eye. The technical excuse for its behavior may be that, as one former insider told K@W – speaking on condition of anonymity – “no-one had a full picture of the financial situation, because there were no reporting systems in place. An entity with a turnover of some NIS2 billion per annum was unable to generate the kind of quarterly reports that even small companies registered on the Tel Aviv Stock Exchange are required by law to provide.”

But that merely begs the question of how such a situation could be allowed to exist and continue undisturbed. Where was the board of directors, and why didn’t either Hadassah headquarters in New York, or the Health Ministry, intervene in an effort to stop the rot?

 

Where were the board, the regulator and the owners?

The answers are as tough as the questions. The 15-member board comprised five Israelis including the chair and ten Americans. All were appointed by the Hadassah organization, including some of its own executives along with people with strong backgrounds in business, finance and administration. Many of the latter served out of a sense of public service and without pay. But the board itself was neutralized, because – says the anonymous insider , in a charge echoed in the recent spate of investigative media articles – “the Hadassah leadership maintained a separate line of communication with the hospital CEO, by-passing the board and rendering it irrelevant”.

When the Hadassah leadership turned against the CEO in 2012 and sought to fire him – which it eventually did, softening the blow with a NIS10 million golden parachute that has now become a cause celebre in its own right – the Israeli board members resigned en bloc. Having neither reliable and up-to-date data, nor the authority to demand changes, they had become a façade of respectability, whilst still carrying legal responsibility. They therefore felt they had little choice other than to quit — but even their resignation did not bring matters to a head.

As for the government, it is important to distinguish between the roles of the two ministries involved in the health sector. The Health Ministry has the role of overseeing and regulating the system, but with regard to funding its hands are tied – because the Finance Ministry has firm control of the purse-strings.

Yaakov Nevo, a former senior official at both the Health Ministry and at one of the health funds – and hence someone familiar with all the key institutional players and their positions –provides some essential guidance through the jungle of health sector finance.

“All the hospitals are in chronic, shallow, deficit — some more, some less. So, too, are the health funds. This is a deliberate policy on the part of the Treasury, to ensure that the system stays under its control. The Health Ministry is, in this respect, a weak ministry which is always reliant on the Treasury and will therefore support the Treasury in any clash.

“The Treasury, for its part, will never intervene in a problematic situation – such as that at Hadassah – unless and until it develops into a full-blown crisis. This is because the personal interests of the officials are served by avoiding a messy crisis during their watch, while the Treasury as an institution always seeks to avoid intervening because that requires it must commit funds. Consequently, the Treasury only gets involved at a very late stage — by which time, of course, the cost has escalated dramatically.

“In the current crisis”, Nevo adds, “the Treasury has an additional goal. Although it will have to contribute several hundred million shekels to the eventual bail-out of Hadassah, it must ensure that the agreement under which this money is committed does not create a precedent which could – and therefore will – be used by other hospitals or health funds in a subsequent crisis.”

 

What next?

The outline of the agreement that is taking shape and the protection of  the court is fairly clear.  Much of the ongoing struggle is really about the relative size of the cuts in each area – and hence about who will bear how much of the cost of ‘rehab’.

Thus several hundred administrative employees will be axed, in addition to some 200 fired at an earlier stage, while all employees will take a wage cut, graduated by income level. Many of the cosy feather-bedding practices noted above will be eliminated, or at least considerably reduced.

The future of the sharap is part of a wider debate over the provision of private health services in Israeli public hospitals. A committee headed by Health Minister Yael German, is considering whether the Hadassah model should be adopted generally, but the revelations about the extent of sharap activities have strengthened the opponents of private medicine. Nevertheless, within Hadassah itself, the sharap is likely to continue, with the hospital increasing its share of the revenues to at least 25% and perhaps to 30%. Other ‘revenue-enhancing measures’ are also expected.

The most obvious of these will be to sharply trim the excessive discounts to the health funds. Budget surveillance and reporting has already been improved, but will undergo further upgrading and the Treasury will appoint a representative who will be closely involved with Hadassah’s budgetary performance, at least for the duration of the recovery program – which will spread over several years.

 

What will and won’t happen

If all these measures are implemented, the hospital’s budget should be almost balanced – like those of other large Israeli hospitals. But even then, there will remain the deadweight of the accumulated deficit of NIS1.3 billion, much of which is money owed to staff for items of salaries, bonuses and perks for which payment was involuntarily deferred. . Other loans are to suppliers and banks. Even if the negotiations result in these various creditors taking ‘haircuts’ to reduce the overall amount owed, there will still remain a considerable amount. Who will pay this – and how?

The answer depends on how the Hadassah crisis is resolved, in terms of control and ownership of HMO itself. There are four possible outcomes, at least in theory, of which two are non-starters in practice.

Nationalization is an option, at least as an interim solution, but it won’t happen, for several reasons. One is that the Netanyahu government, which includes the new Yesh Atid party whose leader, Yair Lapid, is Finance Minister and another of whose prominent members, Yael German, is Health Minister, are ideologically opposed to nationalization. Another is that the government already owns many hospitals, including some large ones, and does not want any more. But even if the opposite was true, the process of buying out the Hadassah organization would be long and complex and, in the context of healing the hospital, quite self-defeating.

The opposite approach, of privatization, is also an option – but it would have to follow an interim stage of nationalization, because even if a suitable private owner could be found, it would demand that the legacy deficit be dealt with prior to the transfer of ownership.

Even then, it is difficult to imagine any commercial enterprise wanting to buy HMO. The only potential buyers are the existing health funds, but here again reality intervenes. The largest fund, Clallit, manages many hospitals including several large ones – and precisely for that reason, the government will not sell Hadassah to it. The smallest, Leumit, is too small, and another – Meuhedet – is in serious financial problems of its own. The remaining one, Maccabi, might fit the bill, but the concern is that it doesn’t have the managerial – let alone the financial – resources to take on so daunting a task.

Thus the option of selling Hadassah may be a ‘starter’, but it’s not a ‘finisher’. As for the ‘nuclear option’ of closing HMO down altogether, that might be financially and legally doable, but it is unthinkable from a social and hence political standpoint. To borrow a phrase well-known in another context, Hadassah is ‘Too Big To Fail’.

That is primarily because it serves the capital and its entire surrounding region – a population of more than one million people, including the Arab suburbs of East Jerusalem, whose residents are the main ‘customers’ of Hadassah’s Mount Scopus unit. In addition there is Hadassah’s role as a university hospital, with its schools of medicine, dentistry and much else. It is still a center of academic excellence and of research. No country can allow a world-class institution of that caliber to simply crumble into the dust

A process of elimination therefore leaves only one outcome, messy and unsatisfactory though it will prove: to hammer out a recovery plan under the relentless pressure of the court deadline and the court-appointed trustee and then implement it under the close oversight of the Finance Ministry. But, although industrial relations may be reformed and HMO’s management practices revamped, the ownership structure will be retained.

In this scenario, who will pay HMO’s debts? In the past, it would have been the owners, the Hadassah movement, who would have been obliged to step up to the plate – albeit with a significant contribution from the Israeli Treasury. But today the Hadassah organization in the US is too weak – it suffered a heavy loss in the Madoff scandal which forced it to downsize all areas of its activities – and it resources are insufficient even to maintain the level of ongoing funding that it used to provide.

Hadassah made the further mistake of pressing ahead with a major and very expensive project – a highly sophisticated medical tower within the main hospital campus at Ein Kerem. This cost $350 million and opened in 2012, but is still not fully operational, for lack of sufficient funds.  It will cost millions of dollars per year to maintain , but it is far more difficult to find donors to put up money for maintenance rather than having buildings, wings and rooms named after them.

In short, Hadassah as an organization is incapable of pulling its relative weight in the rescue effort. If, for the Israeli government, HMO is ‘Too Big To Fail’, for the Hadassah ladies it is ‘Too Big To Bail’. By default — almost literally — the tab to save HMO will be picked up by the Israeli government and paid for by the Israeli taxpayer.

What will he get for it? Probably very little, because for reasons noted earlier, the Finance Ministry is not interested in leveraging the Hadassah crisis to achieve a wider impact. Yaakov Nevo, like other seasoned observers – as well as current Treasury officials, speaking privately – therefore holds out little hope for fundamental reforms in the way the health system is funded.

 

End of an era

But the inability of the Hadassah organization to take responsibility for HMO makes the Hadassah hospital crisis of 2014 into a milestone in the relationship between Israel and World Jewry and, in particular, the American-Jewish community. For the first time, a trend that has long been developing beneath the surface has broken into full view: the relative standings of Israel and Israeli entities and institutions, vis-à-vis American Jewry and its organizations and institutions have undergone a far-reaching metamorphosis.

The doyen of Israel’s economic commentators, Sever Plotsker, writing about the Hadassah crisis on February 9, urged the government to nationalize Hadassah and make a clean break with the past: “Israel of 2014 is country with a strong economy, a strong currency and a standard of living that puts us in the global top bracket. It is therefore a national disgrace to have to ask for charity every year from Jewish ladies’ organizations overseas, to cover the operating deficit of one of the largest hospitals in the country…”

Israelis no longer want or need that kind of support and Hadassah is no longer capable of delivering it. Neither the government nor the Hadassah movement are ready to admit this, but such is the developing reality.

Some might say that in this, Hadassah hospital has once again served as a microcosm of the wider relationship between Israel and American Jewry.

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