Date: To: From: RE:

August 16, 2012 All Employees, Medical Staff and Volunteers Aaron Crane, Chief Finance and Strategy Officer Salem Health update

This memo is the beginning of more frequent updates to help you be aware of the Salem Hospital financial picture and our current work. We plan to send these updates about every two weeks. As a reminder, we are in what we call the new normal in health care. Patient volumes have declined at hospitals, particularly large facilities like Salem Hospital. Pressures from a weak economy, health care reform and employer-sponsored commercial insurance plans are causing us to look differently at what we do and how we do it. These are challenging times, and our health care industry needs to transform, reflecting this new reality. In our June update we talked about our commitment to transparency; we see the value of providing you with information concerning our financial performance, constraints and the actions under consideration in advance of final decisions. We know this approach fuels speculation but we stand firm in our belief that the members of the hospital team (which includes physicians, other providers, hospital staff and volunteers) who are most directly involved and affected need to be included in solution design before decisions are made. As you read through this memo, please know that we continue to be committed to our redeployment policy that seeks to place into open positions those employees who want to continue employment with Salem Health. Finances Beginning with this update we will provide you with visuals and descriptions about how we are doing financially. We hope the combination of the information and text will help make this very complicated subject more understandable. Please let us know what information is confusing to you and any information you might want addressed in future updates. July results were fairly close to budget, maintaining a year-to-date shortfall of about $15 million. In June and July we saw a significant

decline in the percentage of our patients who are commercially insured. It is too early to call this a trend. Regardless of whether or not it is a trend, it is very important to continue our tight stewardship of resources and preserve the gains we have made over the past four months.

Net revenue has been consistently 11 to 12 percent below budget all year long. The cumulative shortfall is $66 million. We have had 50 fewer patients each day than was budgeted.

Managers and directors have been working to schedule staffing to reflect the current patient census instead of the staffing level that had been budgeted at the beginning of the year. We also reduced nonproductive time budgeted for training and education.

Expenses are $51 million under budget. In addition to achieving $4.7 million in expense savings through our fiscal improvement plan, we have also realized the following savings: Reduced medical benefits costs by our employees and their families. The consolidation of the Kaiser option into the Salem Health self-insured plan (Great West) is a major factor. $2 million in additional Medicare reimbursement to cover costs incurred to care for our impoverished population.

Operating margin is confusing to many people. It helps to think of it in terms of a personal budget. At home, this would be the amount of cash left over after you pay your mortgage, rent, or other bills. Whats left over (the operating margin) is what you have available to set aside for the future, maintain your home or to meet any other needs of your family. In a hospital, our operating margin is the cash we have left over after we pay all of our bills, (expenses). Our operating margin is the primary source of funding to sustain Salem Health. We are dependent on this cash to pay for our equipment, and facility improvements and replacements to ensure continued access to care in our community. It also pays for wage and benefit increases and protects the organization when external factors result in economic constraint. Our only other source of cash comes from investments, but as you know those are highly variable due to global economic factors. Our year-to-date shortfall in operating performance is about $15 million (operating margin), which is an improvement from the anticipated $25 million estimated in January. In future updates we will provide information about the results so far of our fiscal improvement plan from January which has resulted in $4.7 million in savings already this year. Thank you to everyone for your hard work to address the budget challenges. But please be aware that our diligence cant stop. We all need to continue to pay attention to the steps we can take to reduce costs. The Lean projects occurring throughout the organization are a good way to look at the opportunities we have. Staffing In May we announced that we were looking to eliminate 150 positions. We did decide to close the admit and observation units, directly related to the fact that we have 50 fewer patients per day and dont need to staff so many beds. The observation unit was created to put all patients who only needed observation into one unit and run it cost effectively. Unfortunately we have been unsuccessful in getting all the observation patients admitted to that unit, resulting in observation patients continuing to be housed in various units house-wide, leading to our inability to build the volume to sustain the unit.

The admit unit had been created before the new tower opened and we needed to relieve pressure on a congested emergency department. Since we moved to the new building, combined with the decrease in volumes, this unit is no longer needed. The observation unit officially closed on Aug. 1. Staff who had not yet been offered a job within the organization were assigned special projects on designated areas and/or as helping hands on an inpatient unit. While these kinds of changes are difficult for everyone involved, It was a smooth transition and staff continue to interview for job openings. We hope to have all of the staff from those two units placed in positions when the admissions unit officially closes on Aug. 21. As of the date of this memo, all but seven of the 56 staff affected who have chosen to participate in the redeployment process have been placed in vacant positions within our organization. We continue to work closely with the remaining staff in an effort to retain them if we are able. Our financial focus has shifted from the elimination of 150 positions, as noted above, to balancing our budget for next year. Our next communication in a couple of weeks will describe the initiatives being budgeted to meet our financial needs over the next year. Pediatrics Thanks to the work of a large group of stakeholders, including physicians and pediatrics staff, a decision has been made to move the pediatrics unit from Building B to Building D, next to the Mother-Baby unit. In other words, the pediatrics unit is moving, not closing. During the last several months, four groups met to review the role of the inpatient pediatrics unit, to identify possible ways for the unit to be able to support itself. The groups focused on costs and revenue, collaboration between providers, philanthropy and the future of pediatrics. The workgroups recommended a three-phase approach, which has been approved. Phase 1. Combine the pediatrics unit with the mother-baby unit in the Family Birth Center. By placing the pediatrics unit next to an existing unit, instead of in a wing of the hospital isolated from others, labor costs can be reduced because staff can be shared and safety maintained. Phase 2. Partnerships will be increased with sub-specialties such as orthopedics, surgery, and anesthesiology, to engage them more in the

care of pediatric patients. This will help other providers refer patients to our pediatrics unit and for children to be able to stay here for care. Telemedicine will also be used more. During this phase, a long-term vision will be developed for pediatrics. Phase 3. Increasing public awareness about the pediatrics program here and philanthropic opportunities will be explored. As with all of our current program reviews, this was a thorough review that looked at all options. We looked at why some operations are not profitable and sought to understand the cause. And we asked those most involved to participate in these discussions. We thank the pediatrics group for their work and dedication. Questions? Remember that the Financial Challenges link in the Quick Links section of the intranet site is the place to submit your questions so they can be answered for everyone to see.