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The Kaleida Health hospital system is the largest private employer in the region, and the largest health care provider, with one million patient visits and more than $1 billion in annual revenue.

But there are razor-thin profit margins in health care, with Kaleida earning just $15.6 million in 2012, following a loss of $20 million the previous year.

The acute financial challenges, coupled with heated competition in the industry, have put intense pressure on Kaleida and other hospital systems – and ultimately cost Kaleida CEO James R. Kaskie his job Friday.

The competition takes many forms: The Catholic Health System has its own set of hospitals here, outpatient facilities and urgent care centers have sprouted throughout the area, and medical centers in Rochester, Cleveland and Pittsburgh draw away complex cases.

Further, Kaleida is grappling with cuts to Medicaid and Medicare and stringent regulations, including an attempt to change the standard, fee-for-service reimbursement model, as its inpatient visits decline.

“Kaleida’s going through a lot of changes, just trying to react to all of the changes in the health care industry,” said Cori Gambini, a registered nurse and president of Communications Workers of America Local 1168, which represents nearly 4,000 Kaleida workers. “We’re not losing tons of money, but we need to look at how we’re doing business.”

An impatient Kaleida board of directors, seeking dramatic change, forced out Kaskie and replaced him with interim CEO Jody L. Lomeo, who is widely credited with improving the culture at Erie County Medical Center, where he serves as president and CEO.

The Kaleida board wants to pursue stronger ties between Kaleida and ECMC, return Kaleida to better financial footing and reposition Kaleida as the best – not just the biggest – health care provider here.

While officials weren’t offering specifics on Friday, the change is likely to take the form of a restructuring of the administrations of Kaleida and ECMC, which function under a joint operating agreement, and a leaner business model that could mean employee layoffs.

“We determined that change was needed. A change not in strategy or direction, not in what we were doing, but how we were making it happen, or not. And that meant a change in leadership,” John R. Koelmel, chairman of the Kaleida board of directors, said at a news conference Friday in the Gates Vascular Institute.

The issues facing Kaleida aren’t unique to the Kaleida system, nor to hospitals in the Buffalo Niagara market. A key problem is Kaleida was built to handle a level of patients that the system doesn’t see anymore.

The four hospitals in the Kaleida system served 50,578 inpatients in 2013, according to the state Health Department, a 15 percent drop from the 58,217 inpatients those facilities and the since-closed Millard Fillmore Gates Circle saw in 2003.

Kaleida faces stiff competition within and outside of Western New York, from other hospitals, urgent care facilities and outpatient facilities. Doctors increasingly do procedures in their offices instead of the hospital, and centers in nearby major cities seek patients for such high-margin services as heart procedures.

“The CEO is functioning in an environment that is very regulated and where you can’t control pricing to a large extent,” said William Joyce, a former Kaleida Health board chairman who was among the group of officials who recruited Kaskie.

To make matters tougher, the patient pool here isn’t growing, and there is constant pressure from government payers and health insurers to cut costs.

Kaleida has had revenues of over $1 billion annually since 2007, and consistently made between $14 million and $26 million per year until suffering its first annual losses of $20 million in 2011, according to its audited financial statements.

The system rebounded in 2012, earning $15.6 million, but Koelmel confirmed that Kaleida will show a loss in 2013.

Even as Kaleida confronts its fiscal challenges, Koelmel said the system is moving forward with plans for the new Oishei Women & Children’s Hospital.

Members of the Kaleida board also are seeking greater collaboration, and consolidation of services with ECMC.

Under a state-ordered agreement in 2008, the medical center and Kaleida Health remain separate institutions but operate under a unified governing organization known as Great Lakes Health, and Kaskie had served as CEO of Great Lakes.

Dr. Irene Snow, medical director of the Buffalo Medical Group, said Kaskie did a good job but worked in a hospital market that could benefit from more collaboration between competing institutions. Kaleida and Catholic Health, for instance, compete strongly in heart procedures, and both operate neonatal intensive care units. “All hospitals are quite challenged,” she said. “We still need to create efficiencies by stopping the duplication of key services.”

Does the appointment of Lomeo signal that a full merger of Kaleida and ECMC is possible?

Great Lakes Board Chairman Robert Gioia said officials with Kaleida and ECMC chose to avoid this “herculean” task when Great Lakes was established. “Now, that was then, this is now. I think the dynamics within the industry have changed dramatically over the last five years,” Gioia said.

Besides “change,” “leadership” was the word most often repeated at Friday’s press conference announcing the shakeup.

Health care administrators such as Kaskie are paid a lot of money – he earned $1.5 million in 2011, according to a Kaleida filing with the IRS – and those high salaries bring with them high expectations. When expectations aren’t met, changes are made, industry observers said.

“Part of this might just be the cycle and dynamics you see in this business,” said Joyce, the former Kaleida board chairman. “Institutions reach a point where there is value in getting a new blood and perspective.”

Koelmel wouldn’t provide specifics about Kaskie’s deficiencies, but said a close review of Kaleida’s operations convinced the board of the need for change. “Making a leadership change is the most difficult decision every board ever has to make,” said Koelmel, the former CEO of First Niagara Financial Group, who was voted out by the bank’s board last March.

Koelmel declined to provide a precise timeline on when the Great Lakes, Kaleida and ECMC boards took their votes, nor when Kaskie was asked for his resignation, beyond saying that it was done very recently.

He did reveal that the Kaleida and Great Lakes boards voted, unanimously, to support a change in leadership, and Kaskie was then informed.

Koelmel did not reveal Kaskie’s severance package but said it would be negotiated based on the terms of his employment agreement.

The departure of Kaskie, who had served as Kaleida’s CEO since 2006, isn’t surprising, given the high turnover among hospital CEOs. Seventeen percent left their positions in 2012, according to the American College of Healthcare Executives, and 40 percent of hospital chief executives in 2013 had three years or less on the job.

It’s not clear whether staff or physician dissatisfaction played a role in Kaskie’s ouster.

Koelmel did talk about the need for better relationships with labor, and Lomeo is known for doing that at ECMC.

Gambini, the union president, said her union didn’t always see eye to eye with Kaskie but she believed he did a lot for Kaleida. She said she looks forward to working with Lomeo.

“We want to be a part of solutions,” Gambini said. “We want to see Kaleida succeed.”

Kaleida in December began a process of deleting jobs in underused areas of the system and adding jobs in busier parts of the system, Gambini said.

While 100 positions were “impacted,” according to Michael Hughes, a Kaleida spokesman, Gambini said the system won’t know for some time how many layoffs will be made.

Koelmel didn’t rule out further layoffs, saying personnel has to be looked at because it’s 60 or 65 percent of Kaleida’s costs.
It’s not clear whether Kaskie will be replaced on a permanent basis, or whether one CEO will serve both Kaleida and ECMC.

Koelmel said the Kaleida board isn’t launching a search for a permanent CEO now. “We are using this time, this circumstance, to further evaluate – re-evaluate – the business model, core structure, not just within the parameters of Kaleida but within the context of the broader Great Lakes system,” he said.

News Staff Reporters Henry L. Davis and Brian Meyer contributed to this report.

email: swatson@buffnews.com