Hadassah, once considered the crown jewel of the Israeli medical system, is today a hospital on life support. In a first for any hospital in Israel, it has filed for the equivalent of Chapter 11 protection. On February 11, agreeing to a joint request from the hospital management and the ministry of health, Jerusalem district court judge David Mintz gave Hadassah a 90-day window to come up with a survival plan. During this period creditors would not be allowed to start recovery proceedings. A trustee has also been appointed to oversee the negotiations between the management and the agitating staff.

How have things evolved to this point? And, now that they have, what course of treatment might restore Hadassah at least to functionality and, ideally, to full health? Or is it, as some claim, too late – and the plug should be pulled on the famous and venerable institution?

In the background hover other questions with wider implications: Is the Hadassah crisis specific to the institution or is it part of a problem that encompasses the entire Israeli health sector? If it’s the latter, can the government leverage a rescue of Hadassah to address these systemic issues and reform the funding and management of hospitals and health funds, the twin pillars of the Israeli health sector?

Finally, there is the uncertain impact on the Hadassah Women’s Zionist Organization of America (HWZOA) and, as a fallout, the links between the U.S. and Israel in this vital area. The Hadassah Medical Organization (HMO), which operates the two university hospitals in Jerusalem — at Ein Kerem and on Mount Scopus — was founded and financed by HWZOA. This claims to be the largest volunteer organization and the largest women’s organization in America. It is undoubtedly one of the most prominent groups in American-Jewish communal life and a key component in the link between that community and Israel.

Skyrocketing Pay and Perks

Hadassah has much to be proud of, having chalked up extraordinary achievements — both medical and civic — over its almost century-old existence. In 2005, HMO was nominated for the Nobel peace prize in recognition of its contribution to promoting peace in the region through its commitment to equal treatment for all from its ethnically, nationally and religiously mixed staff.

The free medical treatment offered to workers and their families expanded to the point where it now covers 25,000 people.

But the seeds of the institution’s current woes had already been sown by then, because spending was running out of control. The biggest expense item for hospitals is wages, and the three main groups of employees – doctors, nurses and administrative staff – gradually obtained benefits on a scale that became unsupportable. Today, with the details now public knowledge, the pay and perks are being roundly denounced as nothing short of outrageous.

Some 900 Hadassah staffers carry managerial titles, with the benefits that go with them, while only 400 or so actually are in managerial roles, critics contend. Salaries were systematically boosted by overtime that was not actually worked and by additional pay for staff members being on uncalled-for standby. Moreover, the free medical treatment offered to workers and their families expanded to the point where it now covers 25,000 people.

Meanwhile, doctors benefited from a feature unique to Hadassah among Israeli hospitals – a private medical service known by its Hebrew acronym sharap. This was originally supposed to apply after regular working hours. But for many senior doctors, it became their main line of business. Worse, from HMO’s point of view, its original 30% share of the fees paid for sharap services were whittled down over the years to 15%-16%.

Staff wages were not the only reason for the growing financial crisis. HMO’s accumulated deficit now stands at NIS1.3 billion (some US$370 million). The Israeli health system requires everyone to be a member of a health fund. Hospitals vie to provide services to the funds. The key competitive weapon is the discount offered relative to the maximum rate fixed by the health ministry. All hospitals play the discounting game, but Hadassah apparently offered much larger discounts than others. The result: Many of its services lost money, adding to the deficit.

Where Were the Safeguards?

The management was responsible for these developments, either by direct complicity – it offered the discounts and signed the wage agreements – or by turning a blind eye. The technical excuse for its behavior may be that, as one former insider told Knowledge at Wharton – speaking on the condition of anonymity – “no-one had a full picture of the financial situation, because there were no reporting systems in place. An entity with a turnover of some NIS2 billion per annum was unable to generate the kind of quarterly reports that even small companies listed on the Tel Aviv Stock Exchange are required by law to provide.”

That begs a bigger question: Where were the whistleblowers? Where was the board of directors? Why didn’t either Hadassah headquarters in New York or the health ministry intervene?

The 15-member board comprised five Israelis, including the chair, and 10 Americans. All were appointed by the Hadassah organization. Apart from some of its own executives, there were people with strong backgrounds in business, finance and administration. Many of the latter served out of a sense of public service and without pay. But the board itself was neutralized, because, according to anonymous source quoted above, “the Hadassah leadership maintained a separate line of communication with the hospital CEO, bypassing the board and rendering it irrelevant.”

When the Hadassah leadership turned against the CEO in 2012 and sought to fire him – which it eventually did, softening the blow with a NIS10 million golden parachute that has now become notorious – the Israeli board members resigned en bloc. Having neither reliable or up-to-date data, nor the authority to demand changes, they still carried legal responsibility. But even their resignations did not bring matters to a head, observers note.

In Israel, the two ministries involved in the health sector play different roles: The health ministry oversees and regulates the system, but the finance ministry is the last word in funding. Yaakov Nevo, a former senior official at both the health ministry and one of the health funds – and hence someone familiar with all the key institutional players and their positions, notes that “all the hospitals are in chronic deficit — some more, some less. So, too, are the health funds. This is a deliberate policy on the part of the treasury, to ensure that the system stays under its control. The health ministry is, in this respect, a weak ministry which is always reliant on the treasury. It will therefore support the treasury in any clash.

“The treasury, for its part, will never intervene in a problematic situation – such as Hadassah – until it develops into a full-blown crisis. This is because the personal interests of the officials are served by avoiding a messy crisis during their watch. The treasury as an institution always seeks to avoid intervening because that would require committing funds. Consequently, the treasury only gets involved at a very late stage — by which time, of course, the cost has escalated dramatically.

“In the current crisis,” Nevo adds, “the treasury has an additional goal. Although it will have to contribute several hundred million shekels to the eventual bailout of Hadassah, it must ensure that the agreement under which this money is committed does not create a precedent which could – and therefore will – be used by other hospitals or health funds in a subsequent crisis.

When the Hadassah leadership turned against the CEO in 2012 and sought to fire him – which it eventually did, softening the blow with a NIS10 million golden parachute that has now become notorious – the Israeli board members resigned en bloc.

The outlines of the agreement that is taking shape under the protection of the court are fairly clear. Much of the ongoing struggle is really about the relative size of the cuts in each area – and hence about who will bear how much of the cost of “rehab.”

Thus several hundred administrative employees will be axed, in addition to some 200 fired at an earlier stage, while all employees will take a wage cut, graduated by income level. Many of the cozy feather-bedding practices will be eliminated, or at least considerably reduced.

The future of sharap is part of a wider debate over the provision of private health services in Israeli public hospitals. A committee headed by health minister Yael German is looking at the issue. While the revelations about the extent of sharap activities have strengthened the opponents of private medicine, within Hadassah itself, sharap is likely to continue. But the hospital will increase its share of the revenues to at least 25% and perhaps to 30%. Other “revenue-enhancing measures” are also expected.

The most obvious of these will be to sharply trim the excessive discounts to the health funds. Budget surveillance and reporting has already been improved but will undergo further upgrading, and the treasury will appoint a representative who will be closely involved with Hadassah’s budgetary performance, at least for the duration of the recovery program – which will spread over several years.

If all these measures are implemented, the hospital’s budget should be almost balanced – like those of other large Israeli hospitals. But even then, there will remain the deadweight of the accumulated deficit of NIS1.3 billion. The creditors – employees, suppliers and banks – may be persuaded to take a haircut. But that won’t be enough.

Four Options

What then are the options for Hadassah? The answer depends on how the crisis is resolved, in terms of control and ownership of HMO itself. There are four possible outcomes, of which two are non-starters.

Nationalization is a way out, at least as an interim solution. But it won’t happen for several reasons. One is that the Netanyahu government, which includes the new Yesh Atid party whose leader, Yair Lapid, is finance minister and another prominent member, Yael German, is health minister, is ideologically opposed to nationalization. Another reason is that the government already owns many hospitals, including some large ones, and does not want any more. But even if the opposite was true, the process of buying out the Hadassah organization would be long and complex and — in the context of healing the hospital – self-defeating, observers say.

On paper, the government could allow Hadassah to close down. In practice, however, that is unthinkable from a social and therefore political standpoint, observers say.

The opposite approach – privatization – would require the deficit issue to be tackled first. It is unlikely that a commercial enterprise will step forward to buy HMO. At present, the only potential buyers are the existing health funds. The largest fund — Clalit — manages many hospitals including several large ones. The government would not like Hadassah added to its roster. Leumit is too small. Meuhedet is in serious financial trouble. The remaining one – Maccabi — might fit the bill, but analysts note that it doesn’t have the managerial – let alone the financial – resources to take on so daunting a task.

On paper, the government could allow Hadassah to close down. In practice, however, that is unthinkable from a social and therefore political standpoint, observers say. Hadassah is too big to fail. It serves the capital and the surrounding region – a population of more than one million people, including the Arab suburbs of East Jerusalem. In addition there is Hadassah’s role as a university hospital, with its schools of medicine, dentistry and much else. It is still a center of academic excellence and research.

According to many analysts, a process of elimination leaves only one outcome: to hammer out a recovery plan under the court-appointed trustee and then implement it under the oversight of the finance ministry. But, although industrial relations may be reformed and HMO’s management practices revamped, the ownership structure will be retained.

Who Will Foot the Bill?

In this scenario, who will pay HMO’s debts? In the past, it would have been the owners, the Hadassah movement, who would have been obliged to step up to the plate – albeit with a significant contribution from the Israeli treasury. But today, the Hadassah organization in the U.S. is too weak; it suffered a heavy loss in the Madoff scandal which forced it to downsize all areas of its activities. Its resources are insufficient even to maintain the level of ongoing funding that it used to provide.

Hadassah made the further mistake of pressing ahead with a major and very expensive project – a highly sophisticated medical tower within the main hospital campus at Ein Kerem. This cost US$350 million and opened in 2012, but is still not fully operational, for lack of funds. It will cost millions of dollars per year to maintain.

In short, Hadassah as an organization is incapable of pulling its relative weight in the rescue effort. If, for the Israeli government, HMO is too big to fail, for the Hadassah movement it is too big to bail out. By default, the tab to save HMO will be picked up by the Israeli government and paid for by the Israeli taxpayer.

Meanwhile, the finance ministry is not interested in leveraging the Hadassah crisis to achieve a wider impact in the country’s health system. Nevo, like other observers, holds out little hope for fundamental reforms in the way the health system is funded.

Writing about the Hadassah crisis on February 9, Israeli economic commentator Sever Plotzker urged the government to nationalize Hadassah and make a clean break with the past: “Israel of 2014 is a country with a strong economy, a strong currency and a standard of living that puts us in the global top bracket. It is therefore a national disgrace to have to ask for charity every year from Jewish ladies’ organizations overseas to cover the operating deficit of one of the largest hospitals in the country….”