FY 2007 Budget
Hospitals and Health Centers end 2006
with 5.5 percent operating margin
The U-M Hospitals and Health Centers (UMHHC) has finished its 10th straight fiscal year in the black and has completed its fifth consecutive year of increasing its operating margin, a sign of the medical center's strong financial health as it prepares for an increasingly difficult health care finance environment. A positive operating margin is essential to fund continued advances in patient care, education, research, and the facilities needed to support these functions.
In a presentation to the Board of Regents, Health System leaders reported that the UMHHC unit of the U-M Health System (UMHS) has had another strong year financially, with an operating margin of 5.5 percent ($79.4 million) on revenues of about $1.44 billion. That exceeds the previous year's margin of 5.4 percent. UMHHC officials had budgeted for a 4 percent margin for the current year.
"Our faculty and staff performed at consistently high levels to produce these results," says Dr. Robert Kelch, executive vice president for medical affairs and CEO of UMHS. "We take great pride in the fact that the Hospitals and Health Centers have experienced a decade of solid finances, while also improving the quality of the care we deliver to patients."
As a nonprofit institution, the hospital uses its operating margin to reinvest in facilities and resources that ensure the highest quality of care for its growing patient population.
Regents also will review the budget for fiscal year 2007, which includes an operating margin projection of 4 percent ($62.2 million) on revenues of $1.55 billion. One of the goals and targets outlined in the UMHS Strategic Direction is that the UMHHC achieves an average operating margin of at least 3 percent per year during the next 10 years.
The next several years will be exciting as UMHS adds clinical space, says Doug Strong, interim director and chief executive officer of the Hospitals and Health Centers. But they also will be challenging due to the expenses of building projects and government reimbursements for health care.
The new Cardiovascular Center is projected to add operating expenses of $8.7 million in 2007, mostly due to hiring and training of staff in advance of the June 2007 opening, plus utilities and depreciation costs.
Also, the Orders Management Projectwhich will allow employees to enter, process, fill and carry out all hospital-based orders for medications, procedures and other careis expected to add operating expenses of $9.4 million in 2007, due to training, maintenance and other expenses. The project is a major contributor toward the Health System's goal of improving efficiency, safety and quality.
Additionally, Strong says, reimbursements from Medicare and Medicaid will affect the bottom line in the coming fiscal year. Both are expected to increase at a level far below the rate of inflationa 1.1 percent increase in revenue per case from Medicare and a 0.2 percent increase from Medicaid. The inflation rate is assumed to be 3.4 percent.
"The reimbursement levels present us with a distinct challenge," Strong says. "That is a large part of the reason we are projecting a lower operating margin for 2007 than we have experienced in recent years.
"Nonetheless, we are prepared to serve our patients with the highest quality of care. We will continue to increase efficiency, and increases in our capacity in coming years will assist us in our ability to meet financial challenges," he says. He also notes that philanthropic gifts are helping to fund many major projects.
UMHHC will add capacity with the opening of the new Cardiovascular Center and other expansions in 2007 and later. "Demand for our services remains very strong," says Tom Marks, UMHHC interim chief financial officer. "Until more physical capacity is added in coming years, we will continue to work hard to accommodate the demand through length-of-stay initiatives and improved patient flow in our existing facilities."
Other efficiency efforts are underway as well, most notably the Michigan Quality System, which builds on the lean-thinking approaches of Toyota Production and GM's Global Manufacturing System. Numerous projects around the Health System are focused on improving efficiency.
The three U-M hospitals—University Hospital, C.S. Mott Children's Hospital, and Women's Hospital—had 44,113 patient discharges in fiscal 2006, up from 43,345 in the previous year. Another 40,932 surgical cases, both inpatient and outpatient, took place in U-M operating rooms. Meanwhile, the many U-M outpatient clinics and health centers in three counties handled more than 1.6 million visits.
UMHHC's financial stability also is reflected in its excellent bond ratings with both Moody's Investors Service Inc. and Standard & Poor's. This bond rating is among the highest in health care systems across the industry and reflects a strong and sustainable financial position.