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.