Bitter pill.

• Author: Noland, Terrance
• Position: Duke Hospital - Cover Story

Rather than succumb to the ravages of managed care, Duke med center took its medicine and got down to business.

Three years ago, Mark Rogers left Johns Hopkins University to run Duke Hospital. He'd seen managed health care cut a swath through Maryland, so he was surprised to hear Duke was planning a huge addition to its inpatient tower. As an M.D. with an M.B.A., he knew what managed care meant, and it didn't mean flush times for hospitals. Yet there was Duke, expanding, putting in more beds - "for all the patients who would come," he says facetiously.

It was a sign of arrogance - and ignorance. "Clearly, at the time, the institution thought its quality would protect it from managed care," Rogers says. After all, this was the medical jewel of the Southeast. The place Saudi Arabian royalty came for surgery. The fifth-ranked hospital in the country. Certainly it could stay above the fray. "There was a tremendous insularity here," admits Ralph Snyderman, chancellor for Duke University Medical Center, which includes the nonprofit teaching hospital and Duke's medical school.

About the same time, Snyderman and other administrators noticed a disturbing trend. "We had virtually no expense controls in place, and revenues were flattening out in many areas," Snyderman says. "That was very scary."

Duke had built its world-class reputation on its top-notch research, doctor training and specialty care. With managed care squeezing the hospital's margin, the entire medical center was at risk. That's because Duke's research and education programs lean on clinical revenues for support. Between $30 million and $60 million, depending on whom you ask, is shifted over each year. "As a very astute friend once said, 'We may be nonprofit, but no margin, no mission,' " says Mike Israel, the hospital's former chief operating officer who became CEO in June.

Duke heard the wake-up call. Since then, it has done such an about-face in response to managed care that it is now held up as a model by other academic medical centers and by Harvard's School of Public Health, which did a case study.

Rather than just raising a high-brow eyebrow at the problem, Duke changed the way it operated. Snyderman started to run the medical center, which has an annual budget of $954 million, like a business. He and Rogers recruited people experienced with managed care, and they made tough choices, such as cutting 1,000 hospital jobs, dropping nearly 300 resident slots and streamlining care to trim spending.

Shrugging off the academic-purist tag of "sellout," the medical center also partnered with outside businesses. It wangled new contracts with suppliers, hit up commercial sources to fund research and launched revenue-generating ventures. In the ultimate can't-beat-'em-join-'em play, Duke started its own health-maintenance organization last year.

Such moves have made for a sometimes-uneasy alliance between business and academia at the Durham-based medical center. "The word 'commercial,' still to this day, has some disdainful sense for some members of the faculty," Rogers says. "That conflict makes running the institution very difficult." Just ask Snyderman. Three years ago, faculty members called for his head when he removed several of the hospital's longtime department chairmen and replaced them with people like new Chief of Surgery Robert Anderson, who has an M.B.A. and a track record in HMO-heavy environments.

The bottom line is that Duke is in better shape today than many academic medical centers - some of which will likely have to merge or close. Instead of showing red ink, as it had once projected, Duke Hospital made $32 million in fiscal 1995.

"I feel like we have dodged a bullet," Snyderman says. "There are going to be additional bullets coming." For sure. Managed care has yet to hit North Carolina with full force but is coming on fast. And Duke could find itself in a squeeze if Congress makes good on threats to cut funding for Medicaid, Medicare and biotech research. "If we do not respond appropriately, we could be in a lot of trouble," Snyderman says.

He will have to do it without the man who pushed many of the first-round changes. Rogers left in July to join Norwalk, Conn.-based biotech company Perkin-Elmer Corp. as senior vice president, with Israel replacing him as the hospital's CEO and Duke's vice chancellor for health affairs.

"We have bought ourselves two or three years of stability," Rogers says. "we're satisfied with what we've done to date. But we're going to have to do a lot more."

In 1925, when James Buchanan Duke died, North Carolina...