Bruce Reid, Blake Memorial Hospitals new CEO, rubbed his eyes and looked again at the 1992 budget worksheet. The more he played with the figures, the more pessimistic he became. Blake Memorials financial health was not good; it suffered from rising costs, static revenue, and declining quality of care. When the board hired Reid six months ago, the mandate had been clear: improve the quality of care and set the financial house in order. Reid had less than a week to finalize his $70 million budget for approval by the hospitals board. As he considered his choices, one issue, the future of six off-site clinics, commanded special attention. Reids predecessor had set up the clinics five years earlier to provide primary health care to residents of Marksvilles poorer neighborhoods; they were generally considered a model of community-based care. But while providing a valuable service for the citys poor, the clinics also diverted funds away from Blake Memorials in-house services, many of which were underfunded. As he worked on the budget, Reids thoughts drifted back to his first visit to the Lorris housing project in early March, just two weeks into his tenure as CEO. The clinic was not much to look at. A small graffiti-covered sign in the courtyard pointed the way to the basement entrance of an aging six-story apartment building. Reid pulled open the heavy metal door and entered the small waiting room. Two of the seven chairs were occupied. In one, a pregnant teenage girl listened to a Walkman and tapped her foot. In the other, a man in his mid-thirties sat with his eyes closed, resting his head against the wall. Reid had come alone and unannounced. He wanted to see the clinic without the fanfare of an official visit and to meet Dr. Rene Dawson, who had been the clinics family practitioner since 1986. The meeting had to be brief, Dawson apologized, because the nurse had not yet arrived and she had patients to see. As they marched down to her office, she filled Reid in on the waiting patients: the girl was 14 years old, in for a routine prenatal checkup, and the man, a crack addict recently diagnosed as HIV positive, was in for a follow-up visit and blood tests. On his hurried tour, Reid noted the dilapidated condition of the cramped facility. The paint was peeling everywhere, and in one examining room, he had to step around a bucket strategically placed to catch a drip from a leaking overhead pipe. After 15 years as a university hospital administrator, Reid felt unprepared for this kind of medicine. The conditions were appalling, he told Dawson, and were contrary to the image of the highquality medical care he wanted Blake Memorial to project. When he asked her how she put up with it, Dawson just stared at him. What are my options? she finally asked. Reid looked again at the clinic figures from last year: collectively they cost $1.1 million to operate, at a loss of $256,000. What Blake needed, Reid told himself, were fewer services that sapped resources and more revenue-generating services, or at least services that would make the hospital more competitive. The clinics were most definitely a drain. Of course, there was a surfeit of competitive projects in search of funding. Blake needed to expand its neonatal ward; the chief of surgery wanted another operating theater; the chief of radiology was demanding an MRI unit; the business office wanted to upgrade its computer system; and the emergency department desperately needed another full-time physician. And that was just scratching the surface. Without some of these investments, Blakes ability to attract paying patients and top-grade doctors would deteriorate. As it was, the hospitals location on the poorer, east side of Marksville was a strike against it. Blake had a high percentage of Medicaid patients, but the payments were never sufficient to cover costs. The result was an ever-rising annual operating loss. Reid was constantly reminded of the hospitals uncompetitive position by his chief of surgery, Dr. Winston Lee. If Blake wants more paying patientsand, for that matter, good department chiefsit at least has to keep up with St. Barnabas, Lee had warned Reid a few days ago. Lee complained that St. Barnabas, the only other acute-care hospital in Marksville, had both superior facilities and better technology. Its financial condition was better than Blakes, in part because it was located on the west side of the city, in a more affluent neighborhood. St. Barnabas had also been more savvy in its business ventures: it owned a 50% share in an MRI unit operated by a private medical practice. The unit was reportedly generating revenue, and St. Barnabas had plans for other such investments, Lee had said. While Reid agreed that Blake needed more high-technology services, he was also concerned about duplication of service; the population of the greater Marksville area, including suburban and rural residents, was about 700,000. But when he questioned Richard Tuttle, St. Barnabass CEO, about the possibility of joint ventures, he received a very cold response. Competition is the only way to survive, Tuttle had said. Tuttles actions were consistent with his words. Two months ago, St. Barnabas allegedly had offered financial incentives to some of Marksvilles physicians in exchange for patient referrals. While the rumor had never been substantiated, it had left a bad taste in Reids mouth. Reid knew he could either borrow or cut costs. But the hospitals ability to borrow was limited due to an already high debt burden. His only real alternative, therefore, was to cut costs. Reid dug out the list of possible cuts from the pile of papers on his desk. At the top of the page was the heading internal cuts, and halfway down was the heading external cuts. Each item had a dollar value next to it representing the estimated annual savings. Reid reasoned that the internal cuts would help Blake become a leaner organization. With 1,400 full-time equivalent employees and 350 beds, there was room for some cost cutting. Reids previous hospital had 400 beds and only 1,300 FTE employees. But Reid recognized that cutting personnel could affect Blakes quality of care. As it was, patient perception of Blakes quality had been slipping during the last few years, according to the monthly public relations office survey. And quality was an issue that the board was particularly sensitive to these days. Eliminating the clinics, on the other hand, would not compromise Blakes internal operations. Everyone knew the clinics would never generate a profit for Blake. In fact, the annual loss was expected to continue to climb. Part of the reason was rising costs, but another factor was the city of Marksvilles ballooning budget deficit. The city contributed $100,000 to the program and provided the space in the housing projects free of charge. But Reid had heard from two city councilmen that funding would likely be cut in 1992. Less city money and a higher net loss for the clinic program would only add to the strain on Blakes internal services. Reid had to weigh this strain against the political consequence of closing the clinics. He was well aware of the possible ramifications from his regular dealings with Clara Bryant, the recently appointed commissioner of Marksvilles health services. Bryant repeatedly argued that the clinics were an essential service for Marksvilles low-income residents. You know how the mayor feels about the clinics, Bryant had said at a recent breakfast meeting. He was a strong supporter when they first opened. He fought hard in City Hall to get Blake Memorial the funding. Closing the clinics would be a personal blow to him. Reid understood the significance of Bryants veiled threat. If he closed the clinics, he would lose an ally in the mayors office, which could jeopardize Blakes access to city funds in the future or have even worse consequences. Reid had heard through the City Hall rumor mill that Bryant had privately threatened to refer Blake to Marksvilles chief counsel for a tax status review if he closed the clinics. He took this seriously; he knew of a handful of hospitals facing similar actions from their local governments. When Reid tried to explain to Bryant that closing the clinics would improve Blakes financial condition, which, in turn, would lead to better quality of care for all patients, her response had been unsympathetic: You dont measure the communitys health on an income statement. Bryant was not the only clinic supporter Reid had to reckon with. Dr. Susan Russell, Blakes director of clinics, was equally vocal about the responsibility of the hospital to the community. In a recent senior staff meeting, Reid sat stunned while Dr. Winston Lee, Blakes high-tech champion, exchanged barbs with Russell. Lee had argued that the off-site clinics competed against the weekly in-house clinics that Blake offered under-and uninsured patients. He proposed closing the off-site clinics. The four in-house clinicssurgery, pediatrics, gynecology, and internal medicinecost Blake $200,000 a year in physician fees alone, Lee said. And because Medicaid was not adequately covering the costs of these services, the hospital lost about $100,000 a year from the in-house clinics. Whats more, in-house clinic visits were down 10% so far this year. A choice had to be made, Lee concluded, and the reasonable choice was to eliminate the off-site clinics and bolster services within the hospitals four walls. Instead of clinics, we should have a shuttle bus from the projects to the hospital, he proposed. Russells reaction had been almost violent. Most of the clinics patients wouldnt come to the hospital even if there was a bus running every five minutes, she snapped back. Im talking about pregnant teenage girls who need someone in their community they recognize and trust, not some nameless doctor in a big unfamiliar hospital. Russells ideas about what a hospital should be were radical, Reid thought. But, he had to admit, they did have a certain logic. She espoused an entirely new way of delivering health care that involved the mobilization of many of Blakes services. A hospital is not a building, its a service. And wherever the service is most needed, that is where the hospital should be, she had said. In Blakes case, that meant funding more neighborhood clinics, not cutting back on them. Russell spoke of creating a network of neighborhood-based preventive health care centers for all of East Marksvilles communities, including both the low-income housing projects and the pockets of middle-income neighborhoods. Besides improving health care, the network would act as an inpatient referral system for hospital services. Lee had rolled his eyes at the suggestion. But Reid had not been so quick to dismiss Russells ideas. If a clinic network could tap the paying public and generate more inpatient business, it might be worth looking into, he thought. And, besides, St. Barnabas wasnt doing anything like this. At the end of the staff meeting, Reid asked Russell to give him some data on the performance of the clinics. He requested numbers of inpatient referrals, birth-weight data, and the number of patients seen per month by type of visitroutine, substance abuse, prenatal, pediatric, violencerelated injury, HIV. Russells report had arrived the previous day, and Reid was flipping through the results. He had hoped it would provide some answers; instead, it only raised more questions. The number of prenatal visits had been declining for 16 months. This was significant because prenatal care accounted for over 60% of the clinics business. But other types of visits were holding steady. In fact, substance abusers had been coming in record numbers since the clinics began participating in the mayors needle exchange program three months ago. Russell placed the blame for the prenatal decline squarely on the city. Two years ago, Marksville cut funding for prenatal outreach and advocacy programs to low-income communities. Without supplementary outreach, pregnant women are less inclined to visit the clinics, she wrote. The birth-weight data were inconclusive. There was no difference between birth weights for clinic patients and birth weights for nonclinic patients from similar backgrounds. In fact, average birth weights in 1989 were actually lower among clinic patients. Russell had concluded that the clinic program was too new to produce meaningful improvements. On the positive side, inpatient referrals from the clinics had risen in the last few years, but Russells comments about the reasons for the rise were speculative at best. HIV-related illnesses and violence-related injuries were a large part of the increase but so were early detection of ailments such as cataracts and cancer. Reid made a note to ask for a follow-up study on this. He put the report down and stared out his window. Blake had a responsibility to serve the uninsured. But it also had a responsibility to remain viable and self-sustaining. Which was the stronger force? It came down to finding the best way to provide high-quality care to the community and saving the hospital from financial difficulties. The consequences of his decision ranged from another year of status quo management to totally redefining the role of the hospital in the community. He had less than a week to decide.

1. What does the statement, the solution lies outside the confines of the Institution, imply in the case of Blake Memorial Hospital? Explain how this can lead to a feasible strategic alternative for Bruce Reid.

2. What actions are necessary in order for Bruce Reid to initiate transformational change at Blake Memorial Hospital? Be explicit in your response, taking into consideration the strategic problem solving process.