The University Record, May 8, 2000

Health System works to reduce costs

By Kara Gavin
Health System Public Relations

The Health System (UMHS) has taken the next step in ensuring its future financial health by asking clinical and administrative units to work together to seek new cost efficiencies and clinical redesign opportunities, while continuing to improve the quality of patient services and increase total revenues.

The initiative is part of the Health System’s ongoing efforts to proactively avoid the deficits that have plagued other hospitals and academic medical centers in the face of reimbursement reductions from private insurers, Medicaid and Medicare.

To reach its targeted 2 percent budget operating margin, the Health System will have to achieve $35 million in cost efficiencies during the University’s fiscal year 2001, which begins July 1. The expenditure reductions are in addition to the 4 percent across-the-board trimming already made in fiscal year 2000.

Some clinical areas that do not fit with the UMHS strategic plan will be cut or reorganized, some functions may be outsourced, and some areas will eliminate positions to bring themselves in line with highly efficient peer institutions. UMHS officials expect to minimize layoffs through attrition and redistribution of employees to fill vacant positions in other units or elsewhere in the University.

While the main cause of the budget pressures is the Balanced Budget Act of 1997 that cut Medicare and Medicaid funding through 2002, it is not the only factor, says Gilbert S. Omenn, executive vice president for medical affairs. The Health System, like all hospitals and physicians, faces continuing pressures from all payers and must continue to implement more cost-effective clinical and administrative services, he says.

“We have done well to stay in the black the past several years, while so many other academic and community hospitals were laying off large numbers of staff and still incurring big deficits,” Omenn says. “However, just to keep our noses above the water line, we must improve our performance by nearly $40 million each year, by obtaining greater net revenue from increased activity and better collection rates, and by decreasing expenditures per unit of service. That will be true for as far into the future as we can imagine.”

“We cannot escape the reality that our costs are too high,” says Larry Warren, executive director of the Hospitals and Health Centers. “We must bring them down in line with our local and national peers. We must continue to grow in strategic ways to be responsive to the communities we serve. Our patients and their families deserve no less than our very best.”

Each unit of the Health System’s hospitals, health centers and administrative departments has received a summary of its expenditures and a target budget that lays out a percentage for reductions in its operations. They will be asked to make recommendations on how to enhance revenue. They also will be asked to decide how to reduce expenses by redesigning processes, changing services, decreasing spending on commodities, and/or eliminating salary dollars. The academic departments of the Medical School, which is facing similar financial challenges, also will examine ways to reduce their costs and collaborate closely with the Hospitals and Health Centers to keep the Health System strong financially.

“Both in the short-term and long-term, we need creative, cooperative efforts to figure out how we can modify our workloads, increase our services and improve our financial margins, unit by unit,” Omenn says. “We can and we must continue on a sound course so as to avoid worse problems each year ahead.”

The Health System will continue to invest in strategic capital projects funded through depreciation and investment funds, such as buildings, equipment and renovations, that will encourage long-term growth in clinical services. Proposed plans for additional facilities may require a much larger level of capital spending than in recent years. The Health System, Warren adds, also must continue to invest in its employees by providing appropriate support services to help them facilitate their work.

Like the Health System, medical institutions across the nation face financial threats from decreased reimbursement and increased demands from payers. Especially vulnerable are academic medical centers, where medical students receive training in hospital, primary care and medical specialty settings. The Association of American Medical Colleges estimates that the typical teaching hospital will lose $45 million in the next two years, and that 40 percent of those hospitals already are in the red.

On May 4, Medical School Dean Allen Lichter spoke at an American Medical Association (AMA) media event in Chicago, titled “The Plight of the Academic Medical Center,” that was designed to draw attention to the issue. He was joined by senior officials from the AMA, the University of Chicago, Northwestern University, Harvard University and Emory University.