Sheppard and Enoch Pratt Hospital felt a pinch three years ago when companies began cutting employee benefits for mental health. Within a year it was a punch, and before the Baltimore area's oldest mental health provider could duck, its operating budget slid $5 million into the red.

Today the Sheppard Pratt system of specialty care is crowing about a turnaround. For fiscal year 1993, its budget for everyday expenses fell short by only $286,000. Overall it earned $1.6 million, after a net loss of $2.5 million in 1992.

It recovered by using techniques that others in the Maryland hospital industry are now resorting to as the realities of managed care sink in. Its story offers a preview of the steps specialty hospitals and their acute-care kin might take to survive.

The first measure was the toughest: Sheppard Pratt laid off almost 17 percent of its staff. The system, which includes the hospital and satellite offices and programs, now has the equivalent of 1,000 full-time jobs. Only two years ago, the comparable figure was 1,200.

Then it developed a strategy to reduce the cost of the care it provides. This, too, was tricky. Employers who used to pay $100,000 or $250,000 in lifetime benefits for mental health now were capping them at $10,000 or $20,000.

"We had to come up with programs that still meet the needs of patients but that are still quality and live within the new revenue source," said John J. Kent Jr., executive vice president and chief operating officer.

"So we [started] a lot of new outpatient programs, new hospital day programs, group residential programs, and a program called ACCESS -- acute community crisis evaluation service system -- so if people are in crisis at an emergency room or at home, we visitthem and try to spend enough time to avoid inpatient admission."

The hospital hoped to develop ways to provide the same care at a lower cost partly by creating alternatives that would allow some patients to avoid hospitalization altogether.

The new programs reduce the cost to patients significantly -- $125 to $200 a day compared with $600 to $700 -- because they don't involve an overnight stay. The hospital also began to move people to outpatient centers immediately after they were stabilized.

Historically, patients stayed months or even a year at Sheppard Pratt. This year, the average length of stay has averaged three weeks. One indication of its success in attracting new patients is that throughout the turnaround period -- with inpatients staying half as many days as three years earlier -- the hospital's revenues stayed at the same level. It brought in $58 million in 1993. (Of that,$10 million is from state and county grants to operate community mental health centers.)

At the same time Sheppard Pratt developed new day programs for its traditional patients, it began to market to new audiences, including the federal government, schools and corporations. It has contracts to provide mental health services, including counseling, to 107,000 people employed at 62 corporations. This business, employee assistance programs, has increased 20 percent since 1992.

The number of inpatients served at the hospital during this time grew a whopping 63 percent -- 3,266 people were served in the year ended June 30. Sheppard Pratt today has the largest share of the inpatient psychiatric-care market share in Baltimore and surrounding counties, about 14 percent -- up from 9 percent two years ago. Just behind is Johns Hopkins, according to a Maryland Hospital Association study provided by Sheppard Pratt. There is no comparable data on the growing market in outpatient services, the hospital said.

Sheppard Pratt also found new growth areas in the poor who are covered by Medicaid and the disabled covered by Medicare. Medicaid patients now account for 12.3 percent of patient days as a result of a decision three years ago by the state of Maryland to include private psychiatric hospitals in its reimbursement program. According to Mr. Kent, the number of Medicare-eligible disabled people in need of mental health services has risen nationally.

Commercial insurers and Blue Cross and Blue Shield accounted for more than two-thirds of patient days a few years back. Now their subscribers account for 44 percent of patients hospitalized. Sheppard Pratt beds used by Medicaid or Medicare patients have almost doubled.

As a result of these changes, especially the growth of day programs, the average cost of treating an inpatient in the Sheppard Pratt system dropped 40 percent, to $12,700.

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