LOOKING INTO THE UC BUDGET -- Report #18 (e-mail version)
by Charles Schwartz, Department of Physics, University of California
Berkeley, CA 94720. 510-642-4427 July 1, 1996
SUMMARY
The financial conditions at the University's hospitals and
clinics have been worsening rapidly. Two UC medical centers (at San
Diego and Irvine) expect heavy losses this fiscal year and are
desperately seeking salvation through "partnering" with some
external enterprise in the tumultuous health care marketplace. UC
San Francisco, the "crown jewel" of California's medical centers,
while barely avoiding red ink this year, proposes a merger with
Stanford University as necessary for its survival.
In this Report I summarize these dramatic developments as they
have come up at recent meetings of the Board of Regents, pointing
out some of the contradictions that appear in the analysis and
proposals presented by UC administrators. I also present some new
numerical data that suggest alternative approaches to thinking
about, and perhaps dealing with, this deepening crisis.
The most surprising new statistic I have found comes from
asking the following Question: On the average, how many patients-
per-day are seen by each faculty-physician in UC's medical schools?
ANSWER: LESS THAN TWO.
BACKGROUND
The University of California owns and operates the country's
largest academic medical enterprise: five medical schools (at the
Davis, Irvine, Los Angeles, San Diego and San Francisco campuses),
each with one or more hospitals and an array of outpatient clinics.
Total annual expenditures of this complex amount to over 3 billion
dollars: about 1/4 billion coming from state general funds (plus
recently increased student fees), about 1/2 billion from research
contracts and grants from outside sources (mostly the federal
government) and over 2 billion dollars income from the commercial
enterprise (clinical practice) at the medical centers.
Professors of medicine need to be actively engaged in seeing
and treating patients in order to maintain and advance their
effectiveness as teachers and as researchers. This clinical
practice is also a form of public service, which is a part of the
University's mission. There is also a lot of money involved. At
medical schools generally, according to a recent UC document, 50%
of the faculty members' total salary comes from clinical practice
income; and 20% of the net profits from this enterprise are used
to further support teaching and research within the medical schools.
This nation's health care industry has been in a period of
strong growth and profitability for the last few decades, and
academic medical centers have enjoyed a generous flow of dollars
from both the public and private sectors. Now all that is changing.
A new marketplace dynamics has come into dominance, one which
rewards low cost and large market share (and also large capital
resources and ruthless competitive actions). This puts the academic
players at a severe disadvantage because of their traditionally high
overhead and specialized capabilities. In addition, government
funding programs (Medicare, Medicaid, Medi-Cal, etc.) which have
been a vital revenue source for university hospitals are now,
politically and financially, very much "at risk."
In the new health care market, the strategy of HMOs, insurance
companies and big hospital chains is to sign up the largest number
of customers into their integrated network of doctors and hospitals
and then keep other costs down by limiting referrals to expensive
specialists and advanced technologies - just those things that
university hospitals excel at. These emerging trends, challenging
the financial viability of academic medical centers, were recognized
several years ago by UC's leadership and a broad plan of action was
laid out by the medical school deans, hospital directors, and the
relevant chancellors and vice presidents. UC medical centers set
out to become competitive in the new marketplace: they would trim
the costs of their internal operations and seek affiliations with
primary care physicians in their geographical areas in order to
secure a share of patient referrals. The medical centers would also
set up dispersed outpatient clinics to capture more of the market
directly; and the medical school faculty were pushed to become more
dedicated in serving patients and to do so in a more cost conscious
manner.
UC set out to become more aggressive, business-wise, and this
meant that the medical centers would have to make bold moves and
incur significant risks - a major departure from past habits. The
Board of Regents gave its enthusiastic support to this whole effort,
streamlining its own process of review and approval, listening to a
variety of expert consultants and bringing in a new vice-president
from the commercial sector. It has appeared to this observer that
the ongoing crisis at UC hospitals has been the most engaging
subject that many of the regents encounter on the Board. The world
of business is more exciting than academic life.
A year ago, in my Report #17, I raised an issue that appeared
to have been overlooked. The financial risks that the UC medical
centers were being forced into were actually risks that could
threaten the whole of the University; and it would therefore be
prudent to make a formal divorce, legally and financially, between
the medical enterprise and the rest of this academic institution.
Despite some appreciative words sent in my direction by a few of the
regents, no such a move has been given any consideration.
Here is where matters stand today.
TWO ARE DOING BADLY
Each month regents are sent an "Activity and Financial Status
Report on Hospitals and Clinics." The bottom line, which is called
"Excess of Revenue over Expense," is given for the year-to-date
operations and also projected to the end of the current fiscal year.
Regents frequently complain that this data is misleading because it
may include some subsidy or some other accounting procedure that
obscures the practical question: Are we making money or losing money
at each hospital?
At the May meeting, regents heard that the UC San Diego medical
center is facing a $20 million deficit this fiscal year, due to a
sudden drop in patient numbers. Despite their best efforts to
survive in the intensely competitive local health care market, UCSD
officials now see their only salvation in some kind of "partnering"
with another large enterprise.
At the June meeting, a similar story came from UC Irvine. Their
medical center now faces an $8 million deficit for this year,
despite their best efforts in the very competitive market of Orange
County. They also are now seeking some outside "partner."
TWO ARE DOING WELL
Both the Davis and Los Angeles campuses report healthy earnings
at their medical centers this year. In response to local market
competition, UCDMC has formed an alliance with major community
hospitals in the Sacramento region and with the Mercy Hospital
network. UCLAMC purchased Santa Monica Hospital last year and that
seems to be turning a nice profit.
UCSF ON THE BRINK
At San Francisco is UC's oldest medical school, which is ranked
#1 in the entire country in medical research. This year the UCSF
medical center's financial bottom line is just barely in the black.
But, despite the best efforts to improve their market
competitiveness in delivering clinical services, the leaders of UCSF
have concluded that they will not long survive financially as a
stand-alone institution; and they have proposed a merger with
Stanford University's similarly endangered hospitals and clinics.
While many important details about this proposed merger are not
known outside of the secret negotiations ongoing between officials
of the two universities, there were public hearings and discussions
by the Regents at their May and June meetings held in San Francisco.
As an outside observer I found that many questions posed to the
responsible UC officials (President Atkinson, Vice-President
Gurtner, Chancellor Martin, Dean Debas, Hospital Director Kerr) were
not well answered. It appears that a number of regents are also
quite unsatisfied with the information given them.
The leading public critics of this proposed merger with
Stanford have been representatives of the employee unions at UCSF -
clerical workers, technical staff, nurses, and residents. They see
the proposed merger as "union-busting." UC and Stanford plan to set
up a private non-profit corporation (NEWCO) which will take over all
the clinical enterprise of both universities and pay out the
proceeds to the two medical schools. A first step would be for the
universities to fire all of their relevant employees and allow NEWCO
to rehire only those it wanted (at what wages?).
Much of the written and spoken presentations from UCSF
officials stressed the wonderful work that they do, in medical
teaching, research and public service, and how a joining together
with Stanford University's likewise outstanding medical staff will
make those academic and public service activities even more
fruitful. Nobody could dispute that image of a happy marriage. But
the driving issue is financial hardship and the real question is,
How will this merger between two failing business enterprises result
in their mutual salvation?
Here is a critical exchange that took place during the June 20
Regents meeting.
Regent Roy Brophy: "Many questions have to be answered. One of the
questions about which I am concerned is, I have heard about how we
make this a successful project by joining together the two entities
which by themselves, separately, evidently are not successful in the
changing climate in which we are all going to be living. If that be
true, and I have heard how we can make various savings throughout
these things, the question that I had asked before is, Where then
do we get the income side, the income side of course is additional
patients. That's been answered by UC up to a point but really not
to my satisfaction. Because I think I don't really understand. The
equation only works if we have more savings on one side of the
equation, which allows us to reduce cost on the income side, which
attracts more patients. I personally need a better description than
simply all these eloquent words saying, we will do this, we will do
that. That's my first question."
UCSF Chancellor Joseph Martin: "As you might imagine, over the last
several months, I am asked very frequently by business leaders, by
members of our community, by the members of our UCSF Foundation
Board, about why we are doing this. And three economic issues that I
find the most useful to describe are: cost savings from coming
together, which are relatively modest; the removal of expensive
duplication and technology in a relatively small region, the Bay
Area. That is, that if we buy a gamma knife for very sophisticated
radiation of brain tumors, that puts us in the market both to get
patients to get that treatment; we also have to charge the patients
to get the money back. And as soon as we do that, Stanford is very
likely to want to find that same high technology. Stanford, for
example, gets a new MRI for four million dollars; it gives them the
advantage of attracting a certain group of patients. And we are
then obligated, in order to maintain our particular ...; and in each
instance patients pay for that. So the second advantage is to try
and remove some of the redundancy in high cost duplication of
medical care in the interest of lowering the overall costs of
patients who can get into our combined system. The third is the one
that I think you are being most critical about and that is, Will we
really increase the market share by coming together? We have
analysed that and it's interesting to note that at the moment our
combined activities in the highest level areas - like very
technical neurosurgery, bone marrow transplantation, fetal surgery
for those babies who have malformations that can be corrected now
before they are born - that together we only capture about ten
percent of the northern California market. We were surprised by
that, we hadn't analysed that before until we got together with our
consultants. It is small in proportion to what we think we can
provide. So it is our obligation to try and seek a larger part of
that market by consolidating in the way I have described before,
lowering the cost in the use of those kind of technologies. And as
Dean Debas knows very well, you can combine that with analysis of
the kind that Dean Debas used in closed session, for example, in his
own field of gastro-intestinal surgery, procedures like Whipple's
procedure, which is the removal of the pancreas and part of the
stomach in pancreatic cancer, and showing that centers like Johns
Hopkins now have data that if we do a hundred of those a year, the
costs are less and patients do better than when you do two or three
a year, as many community centers are trying to do; their results
are not as good. Now, you've got to prove that, with statistics,
and that's what we are doing. We believe that many high technology
things that community hospitals now do will over time be shown to be
inefficient, impractical and too costly and those will come to a
center of the sort we envision."
WHERE'S THE BEEF?
Let me try to see what Chancellor Martin has said about the
economic justification for this merger. First is the cost saving,
the economy of scale, that should arise from combining two separate
but similar business enterprises. He says that these savings will
be "relatively modest", as one might expect, since each one alone
has already been striving to make itself operate efficiently.
Second, says Martin, is the saving from not having to duplicate
expensive high technology equipment at both hospitals. This piece
of expensive equipment will be bought and placed at Stanford, that
one at UCSF, and patients can be freely sent from one place to the
other to get the treatment they require. But, I would ask, why
cannot this mutually beneficial sharing of expensive resources be
arranged now, by intelligent cooperation between the two hospitals,
without the formality of a merger?
The third of Martin's economic arguments is even stranger.
These two academic medical centers have recently realized that they
ought to be attracting a larger market share of certain highly
advanced surgical techniques, which are now being performed at other
hospitals throughout northern California. It seems that what they
really need here is better marketing, perhaps again undertaken with
some cooperation between the two academic medical centers. Why is a
merger necessary?
FURTHER CONTRADICTIONS
At another point during the June Regents meeting a simple
practical question was asked of the UCSF officials.
Regent Leo Kolligian: "How much in cash are we to invest in this
merger and where are we getting it? And how much is Stanford
contributing in cash?"
...
UC General Counsel James Holst: "We should not be disclosing
information we have available from Stanford, pursuant to the
arrangements we have with them."
UCSF Medical Center Director William Kerr: "We will be transferring
cash and assets of the Medical Center in the neighborhood of a
hundred and twenty million dollars. ... We would pay from the
reserves of the medical center, that have been earned over the
years."
I looked at my copy of the Activity and Financial Status Report
on Hospitals and Clinics and could find no indication of anything
called "reserves." On the Balance Sheet, under Fund Balances, is
something called "Equity in Current Assets" that I knew about from
previous budget debates, and the amount listed there for UCSF, as of
April 30, 1996, is $105,139,000 and I wondered if that was the
money that Director Kerr was referring to. I had a brief encounter
with UCSF Chancellor Martin and put this question to him; he
responded only that I should ask Kerr about it. I FAXed a letter
to Kerr asking for his explanation. I am still waiting for a reply.
SOME BROADER THOUGHTS & NUMBERS
Now I want to look more broadly at UC's medical enterprise and
see what new interesting features might be brought to light. I
found a lot of data in "University of California - Fact Sheet on
Academic Medical Centers," a hand-out provided by UC at the June 20,
1996, meeting of the Board of Regents. Here are some overall
statistics:
**UC medical schools educate approximately 2,600 medical students or
nearly two-thirds of the state's total each year.
**More than 4,400 medical residents currently train in [UC medical
center] programs.
**UC medical centers provide over 600,000 days of hospital care and
more than 1.9 million clinic visits annually.
These are impressively large numbers. It occurred to me to ask
the following question. What is the average number of patients seen
per day by the UC medical faculty who are engaged in clinical
practice? Table 1 shows the answer, based upon data gleaned from
the above-mentioned UC Fact Sheet.
Table 1. Statistical Data on UC Medical Centers
Number of Annual # of Annual # of Average # of
Physicians on Patient-Days Visits: Clinics Patients/Day
Campus Medical Staff in Hospital and Emergency /Physician*
Davis 1,000 130,000 360,000 1.8
Irvine 1,200 90,000 170,000 0.8
L.A. 1,000 140,000 420,000 2.1
San Diego 1,000 100,000 500,000 2.3
S.F. 950 150,000 400,000 2.1
The first three columns of numbers come directly from the UC Fact
Sheet.
* I computed the numbers in the last column as follows: divide the
number of Patient-Days in Hospital by 365; divide the number of
Clinic Visits by 250; add these two results (the "per Day" count)
and then divide by the number of physicians. The overall average
for all of UC's medical centers, calculated this way, is 1.8
patients per day for each medical staff physician.
THE OVERALL AVERAGE CLINICAL WORKLOAD FOR FACULTY-PHYSICIANS
IN UC'S MEDICAL SCHOOLS IS LESS THAN TWO PATIENTS PER DAY. I find
this astonishing.
Maybe something is wrong with this calculation; and I have
contacted UC officials in an attempt to clarify this. The data
given on the number of physicians at each medical center may be
inflated. For example, if some of these physicians are only part-
time UC staff members, using FTE data would raise the average
clinical workload calculation - I estimate that this could raise the
result by perhaps 20%. On the other hand, many patients are
handled by residents rather than by the faculty physicians, and such
a correction would lower the average workload calculated above -
perhaps by a factor of two or even more, according to some informed
opinion I have gotten.
___
In the economic analysis of any enterprise, the two basic
things to assess are: productivity and cost of the resources used.
The numbers discussed above are about faculty productivity in the
clinical enterprise. Now I want to take a look at the cost of
this resource. Figure 1, below, displays data on the combined
operating expenditures for UC's five medical schools, covering a
thirty year history. I count here only the funds expended under the
UC accounting category of "Instruction", which means that this
covers the salaries and benefits of faculty members plus
departmental support (personnel, supplies and equipment) for the
work of faculty.
In these graphs, the data for the medical schools is shown as a
percent of all UC expenditures for "Instruction" so that we need not
be bothered by such effects as inflation of the dollar or the
overall growth of the University over so many years. Furthermore,
and this is the most interesting feature of Figure 1, two sets of
data are graphed. One looks only at the General Funds portion of
the expenditures, for the medical schools and for all of UC; this is
the state appropriation for UC's basic academic mission. The second
set of data is labelled All Funds, which include: General Funds;
Designated Funds (collected by the University and under the Regents'
discretionary control); Restricted Funds (for use as specified by
outside sources); and Transfers (recharges within UC.) [Data source:
"U C Campus Financial Schedules."]
Figure 1.
Medical Schools' Share of UC Expenditures for Instruction
35%
- x x
- x
- x x
- x x x
30% x x
- x x x x x
- x x
- x x ALL FUNDS - x
-
25%
-
- x
- x x x
- GENERAL FUNDS - o
20% o o o o o o
- o o o
- x o o o o o
- o o o o
- x x o o
15% x o o o o o
- o
- x xox o
- o o
-
10%
___|_________|_________|_________|_________|_________|_________|
1965 1970 1975 1980 1985 1990 1995
What is most striking, and most informative, about Figure 1 is
the sharp divergence between the two graphs which are displayed.
Looking at the General Funds portion, the medical schools' share of
expenditures grew from 12% to 20% over the first decade, then stayed
relatively constant for the second decade, and then declined to 15%
over the last decade. By contrast, counting All Funds we see that
the medical schools' share of expenditures for Instruction, which
started out near that same 12% level, grew faster and kept right on
growing, reaching 34% in the most recent years.
It is the gap between those two history lines shown in Figure 1
that most interests us. This big difference between General Funds
and All Funds is due mostly to the amount of money taken in by the
medical schools through the clinical practice. (In the language of
UC's accounting system this income is categorized as "Sales and
Services of Educational Activities.") Table 2 shows the actual
dollar figures represented by the points in the graph for the fiscal
year 1994-95.
Table 2. 1994-95 Dollar Amounts of UC Expenditures for Instruction
Medical Schools UC Total
General Funds $ 154,641,000 is 15% of $ 1,042,750,000*
All Funds $ 632,380,000 is 34% of $ 1,863,519,000
* Includes $ 189,096,000 of "Educational Fee Expense Proration"
The difference between All Funds and General Funds expenditures
for Instruction at the medical schools is $477,739,000; and this
large number is indicated in the graph. Now we need to see how this
new data may contribute to understanding the present financial
crisis at the UC medical centers and suggest alternative solutions.
DISCUSSION
First, consider how academic medical centers may be viewed by
the big commercial players in today's health care marketplace. UC
medical schools have a high reputation for excellence in teaching
and research; but the business (profit-driven) dynamics of the
market will not put up money to support that academic mission. When
UC medical centers seek salvation by "partnering" with outside
entities, that is likely to succeed only if it is seen as a
profitable arrangement for those other businesses. If I were the
CEO of a large and successful health care company and some academic
medical center came to me and proposed some kind of "partnership", I
would want to see just the sort of data presented in the previous
section: How productive are these university physicians and what do
they cost? It doesn't look very favorable for UC.
Now let's look at the situation from the academic side. Medical
education and medical research are very valuable goods for the
general public and they are paid for by public monies - State
General Funds for the basic faculty salaries and supporting
infrastructure of the medical schools and federal funds (along with
some state funds and some private funds) for the additional costs of
medical research. This medical teaching and research cannot take
place just in the classroom and the laboratory; the medical schools
need access to real patients. Thus, the University needs access to
hospitals and clinics. Why must these commercial enterprises be
owned and run by the University? In the past, it has proved to be a
very successful arrangement - physically convenient, academically
effective, and financially profitable. The net income of UC's
hospitals and clinics has allowed the medical schools to double
faculty salaries, hire additional staff and provide further "program
enrichment." It has been wonderful for many years; but now it
appears that this smooth ride is coming to a bumpy end.
What UC officials are trying to do is to maintain the favorable
arrangement that has prevailed for the past few decades. They say
that the hospitals must run at a profit in order to build up the
capital necessary to purchase the continual stream of expensive new
medical technologies, without which they will no longer remain in
the forefront of medical practice, will be less and less able to
attract the patients, and will therefore lose even more money. What
they emphasize is that financial success of the UC medical centers
is necessary for the viability of the academic mission as well as
for the high quality patient service that they provide.
What UC officials do not mention, but which I am rudely
pointing out here, is that the largest amount of the money is paid
to the medical school faculty, over and above their academic
salaries. This is a sacred cow that should be looked at more
critically. The expected counter-argument is that if we (UC) do not
pay our faculty what they can get elsewhere, we will lose the best
of them. But financial conditions have gotten bad at academic
medical centers all across the country and so this competitive
picture needs to be evaluated more carefully.
If the prospect of having to live merely on their academic
salaries is too painful to medical school faculty, perhaps they need
to recognize that even more drastic changes might occur. A
prestigious commission set up by the Pew Charitable Trust has
recently concluded that the nation has a surplus of doctors and they
recommend that 20% of the medical schools ought to be closed down.
Such considerations should certainly be on the minds, if not yet on
the agenda, of the UC Regents.
This issue of a physician surplus hits UC in another way as
well. Experts claim that there is a surplus of doctors in the
major urban areas of California, where UC medical centers are
located. This situation works to the advantage of the price-cutting
HMOs, insurance companies and other market giants; but it works to
weaken the UC medical centers' position in the market.
___
The first strategy of the UC medical centers, facing this new
era of health care financing, was to tighten up their internal
operations, seek out local alliances to bring in more patients and
generally try to become an effective competitor in the tough new
marketplace. That brave attempt has, in most cases, been a failure.
The new strategy of "partnering" seems to be based more upon a
romantic wish for salvation than upon any sound economic analysis of
how the academic style (mis-)fits with current market demands. The
new data and ideas presented in this report offer an alternative
which, while surely distasteful to UC's medical establishment,
should be considered.