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Updated 10:00 AM June 22, 2009

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UMHHC weathers tough economic climate, plans for growth

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Despite a very challenging economic environment, the U-M Hospitals and Health Centers will end the fiscal year in the black later this month, according to preliminary results presented Thursday at a meeting of the Board of Regents. It is the 13th year in a row that UMHHC has had a positive operating margin.

The regents also approved UMHHC's proposed budget for the next fiscal year that renews the challenge to end in positive territory, despite an economic climate that will continue to include declining revenue growth for care provided at U-M's three hospitals and 40 outpatient locations.

UMHHC expects to end fiscal 2009 with a margin of $14 million on operating revenues of $1.8 billion — a 0.8 percent margin that's smaller than a 3 percent goal set last spring. The proposed target for 2010 is a 1.7 percent margin on revenues of $1.91 billion.

What kept the fiscal 2009 operating margin in positive territory was the diligent effort at all levels to use teamwork, collaboration and integration to contain costs while also serving more patients, says Doug Strong, director and CEO of UMHHC.

"The collective efforts of our faculty and staff and administration, both those in direct patient care and the rest that support that care, made it possible for us to achieve a positive margin at a time when many of our peer institutions regionally and nationally are struggling," Strong says. "The coming year will likely be even more challenging. But the strength of our organization, and the willingness of our people to innovate in ways that both conserve resources and serve patients, put us in a good position."

Says U-M Health System CEO Dr. Ora Pescovitz, "I am confident that we can weather the current environment if we continue to harness the ingenuity of our faculty and staff, and to build on the factors that have produced the high quality of care we provide."

Pescovitz and Strong presented the preliminary year-end results and the proposed 2010 budget to regents Thursday. They noted that UMHHC has experienced a 15 percent increase in uncompensated care in just the past year, with increases in the number of patients who qualify for charity care, and those who cannot pay bills for care already received.

At the same time, a higher percentage of UMHS patients are covered by Medicare, Medicaid and county health plans, which do not reimburse at the same rates as private insurers. In fiscal year 2008, UMHHC was reimbursed $153 million less by these plans than it would have been if the same patients had been covered by private insurance. UMHHC is a major part of UMHS.

To help UMHHC meet these challenges, many units have poured tremendous effort into collaboration and teamwork aimed at improving efficiency, including boosts in labor productivity and reductions in supply cost growth, leaders say.

Strong points to the success of projects that have transformed operations in clinical and non-clinical areas using a "lean thinking" approach called the Michigan Quality System.

"Lean projects in a broad variety of areas have helped us add value and serve more patients with the same number of staff, reduce wait times, cut financial waste, improve safety and eliminate re-work," Strong says "As a result, patient care quality has improved during this challenging time."

At the same time, the non-clinical areas of UMHHC have used attrition management and a hiring freeze to minimize layoffs while reducing staff levels. Some areas have had a reduction in force, affecting 60 employees. The majority of these staff have found other positions in the organization; others are receiving transition assistance.

Building for the future

A number of expansion projects now under way at UMHS show why positive operating margins are so important. All will help UMHHC and its partners in the Medical School's Faculty Group Practice serve even more patients in coming years. And all are paid for out of UMHS reserve funds that come from years of positive operating margins. Some borrowing is used for large projects, but U-M's excellent bond rating ensures interest rates are as low as possible.

Among the projects:

• An 18-bed Medical Observation Unit that will open next month in University Hospital for patients who do not need a regular inpatient hospital bed but need to be observed for a time. Such care is on the rise, and helped account for the 3.2 percent rise in adjusted hospital discharges that UMHHC experienced in fiscal 2009. Outpatient visits also were up by 3.1 percent.

• In fiscal year 2010, an additional 21 beds in renovated space at University Hospital, and three new intensive care beds in C.S. C. S. Mott Children's Hospital will be available for use as needed, based on rising demand. New medical imaging facilities will also go on-line for patient care.

• The Brehm Tower, an expansion of the Kellogg Eye Center, will open in less than a year and will replace and expand existing clinics and operating rooms while adding to medical research space.

• A new children's and women's hospital will open in three years, with 1.1 million square feet of inpatient and outpatient space, featuring all single, private rooms in the Children's Hospital.

• The former Pfizer complex, now part of North Campus, also will offer UMHHC an opportunity for more efficient use of financial resources. Although the bulk of the buildings on the campus will be used for research, some space may be used for administrative functions that now occupy leased space elsewhere.

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