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


      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?  


     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 

     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 

     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.


     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 
**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 
* 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.

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

-                                                           x x 
-                                                         x
-                                                     x x
-                                             x   x x
30%                                     x       x
-                               x x x x     x
-                             x           x
-                         x x                  ALL FUNDS - x
-                       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
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.


     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.