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Rehab Center Finds Limits to Cost Cutting

by Paulette Thomas

The Problem: Managed care slashes the revenue of a nonprofit rehabilitation center causing it to fall into disarray.

The Caron Foundation, a rehab stay for drug or alcohol addition, located in several beautiful old buildings on the green hills near Reading, Pa and dating back to the middle of last century can no longer offer 28 day treatments. The insurance rate spikes of the 1990's has created a new reality, lower reimbursements for fewer treatments at shorter durations.

Douglas Tieman was the number 2 executive at Hazelden, a rehab center in Center City, Minn., when he received a call from a recruiter about taking over at Caron. It seems that Caron was $5 million in debt, and revenues had dropped by half to $10 million. Previous managers had tried to solve the problem by cutting costs and reducing the staff from 450 to 200. As a result morale was very low.

Mr. Tieman had always wanted to run his own facility so he agreed to take over. On his arrival he found the situation to be much worse than expected with the beautiful buildings full of faulty plumbing as well as ancient heating and information systems. Also, there were many money losing programs and now in 1995, Caron was a year from closure.

The Solution

Cost cutting measures had gone too far. Instead Mr. Tieman focused on making better use of the funds available and seeking new sources of it.

Initially, he met with all of the 200 employees in small groups to hear their concerns. He praised their efforts, and told them exactly where things stood as well as what to expect including bonuses for measurable good results. These meetings continued monthly.

He eliminated cash draining programs. One such program for drunken driving has a local county pay $32 a day to cover a Caron stay with meals and therapy. He kept other programs with zero reimbursement, including one that charges $1,600 a week per person for family members of addicts. It's so successful that participants pay out of pocket.

Other simple changes also added to the bottom line. The staff to patient ratio was tightened and a big savings was gained from refinancing Caron's debt from a rate of 10% down to 3%.

Most important, Mr. Tieman strengthened Caron's ties to the philanthropic community. He took a 3 year comeback plan to wealthy alumnus of the center and sought a donor to cover the first year's shortfall of $392,000. The donor eventually gave $500,000 of the $1.3 million raised that first year. Armed with that backing and better financial results, other donors signed up. Last year the funds hit $6.3 million. Now, the debt is zero and patient satisfaction is above 90%.

The Lesson

Drastic cutbacks only go so far. How carefully funds are put to use and finding new sources of revenue set the course.