The University Record, March 12, 1996

Newly named Michigan Health System faces budget challenges

By Rebecca A. Doyle

Explaining that a projected $19 million loss for the current fiscal year is offset by interest on cash reserves, U-M Hospitals Executive Director John D Forsyth told the Regents last month that the Clinical Delivery System at the U-M could face a "$65 million problem if we were to project our activity levels at no growth."

"About half that problem is that we get paid less for doing the same thing," Forsyth said, indicating that changes in reimbursements from all payers---Blue Cross/Blue Shield, Medicare, Medicaid and managed care organizations---would redu ce the income from inpatient and outpatient care at the U-M by approximately $35 million over the coming fiscal year. Inflation in salaries would contribute to the balance of the $65 million deficit, he noted.

In order to counteract the coming shortfall, an immediate "hard freeze" on hiring has been instituted, and approximately 75 of the 2,200-member nursing staff have been laid off. Over the next several years, the Clinical Delivery System at the U-M hopes to pare its workforce by 1,000 through early retirement and attrition.

In response to questions from the Regents, however, Forsyth said that the cash flow of the medical operation is "still very, very positive." Cash reserves earmarked for depreciating facilities and medical equipment yield $35 million ann ually and could be used to make up the deficit, he said, but then would not be available to replace hospital equipment or facilities when needed.

"We are not here to say the sky is falling," Forsyth continued. "I don't believe there's any academic health center in the country that is better positioned than our academic health center to face the challenges that are facing ac ademic medicine."

Funding for medical education is both dwindling and being redirected to insurance companies instead of medical education facilities, he said.

Another factor is the degree of illness of patients treated at the U-M, Forsyth said. "They're the sickest of the sick. After multiple referrals, they end up at our institution, and no one really wants to pay that differential for how sick our patients are. So we're challenged on both fronts at the same time, as are other academic health centers."

But the U-M stands in good stead with its AA credit rating, Forsyth noted, and could trade on that for up to $96 million in bonds, or even more if it were willing to accept a lower credit rating.

The Regents approved creation of the University of Michigan Health System, which will include the Hospitals and outpatient services currently under the Clinical Delivery System; the M-CARE Health Maintenance Organization (HMO); and Michigan Health Corporation, through which the University can make health care investments, such as buying out physician practices or making other income-producing investments in health care.