The Health System’s Road to Recovery

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Improving financial performance and preserving medical excellence. 

By Judith Rodin

Health care institutions across America are encountering financial difficulties, and many academic medical centers, in particular, are in financial distress. Cutbacks in government funding, slow payments or claims denials by health insurance carriers, escalating numbers of indigent patients, and other regional and national factors have placed unprecedented pressures on teaching hospitals and academic health systems.
    The University of Pennsylvania Health System (UPHS) has felt these pressures strongly. Through the middle of this decade the Health System produced record-breaking annual operating surpluses, allowing us to build an extraordinary medical faculty and research facilities, but the tide turned over the past three fiscal years (FY97-99), and UPHS has suffered large operating losses. A rigorous strategy has now been put in place for the financial recovery of the Health System, and you will find a report on it elsewhere in this issue of the Gazette. I would like to highlight several points of particular importance.
    First, some context. In July 1998, Moody’s Investors Service cited UPHS’s financial losses as “systemic of the general state of affairs for many large teaching medical centers that function in a large urban environment.” Examples are easy to come by:

  •  Detroit Medical Center lost $106 million in 1998, and another $93.2 million in the first seven months of 1999. DMC has eliminated 2,000 jobs and closed one hospital so far this year.
  •  University of California at San Francisco/Stanford lost $86 million in FY98. In FY99 it eliminated 2,000 positions, or 15 percent of its workforce, before announcing that the health system partnership between UCSF and Stanford would be dissolved.
  •  CareGroup Inc., which operates Beth Israel Deaconess Medical Center and New England Baptist Hospital in Boston, lost $100 million for the fiscal year that ended September 30.

    Three major causes are contributing to this situation: 1) the Balanced Budget Act of 1997, which severely reduced Medicare payments that historically have been a vital source of revenue for academic medical centers; 2) reduced reimbursements, increasing denials and extraordinarily long payment delays by insurers; and 3) for UPHS, in particular, the increasingly heavy burden, due to reductions in state assistance, of providing uncompensated care for indigent patients. (UPHS provided $66 million in uncompensated care and $40 million in under-compensated care in FY99.)
    Also, as Moody’s has noted, Philadelphia is one of the most difficult health care markets in the country because of its large number of hospitals, high managed-care penetration and the dominance of two HMOs, Independence Blue Cross and Aetna/US Healthcare. According to the Delaware Valley Healthcare Council, approximately 75 percent of area hospitals experienced operating losses in FY98.
    The combination of these factors has resulted in declining financial performance even though UPHS has continued to treat record numbers of patients. Outpatient visits increased 11 percent from FY98 to FY99, and adult and neonatal admissions to all four UPHS-owned hospitals increased 8 percent from FY98 to FY99.
    In July, UPHS retained the Hunter Group, a nationally known health care consulting firm, to help develop short- and long-term recommendations to improve financial performance while preserving medical excellence. Through its work with the Hunter Group, UPHS decided on a series of tough but necessary measures designed to return UPHS to a firm financial position while maintaining the highest standards of medical education, research and patient care, including:

  •  A workforce reduction of approximately 1,700 positions before the end of June 2000. The combination of this reduction and an earlier layoff in May 1999 will reduce the total number of health services positions at UPHS by approximately 20 percent and will save $40 million in FY00 alone.
  •  Restructuring and consolidation of work processes in hospitals and physician practices to streamline flow and eliminate duplicative functions.
  •  Development of a consolidated and standardized approach to purchasing equipment, supplies and services that will maximize UPHS’s high-volume purchasing power.

    In addition, UPHS is actively meeting with federal officials to seek Balanced Budget Act relief, working with state officials to earmark a portion of the multi-billion-dollar tobacco settlement to support research and indigent care, and negotiating with HMOs to improve rates and payment schedules.
    The financial recovery plan, once fully implemented, should restore UPHS to financial health. No endowment funds have been or will be used to cover UPHS losses, and no gift to the University will be converted from its intended use.
    In the meantime, the Health System will continue to provide the high-quality patient care for which it is well known and has been repeatedly honored. Our pride in the excellence of UPHS patient care, research and teaching is undiminished, and the University and the Health System are determined to achieve the same level of excellence in the implementation of the financial recovery plan.

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