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U-M Hospitals & Health Centers Weathers Tough Economic Climate, Plans for Growth

Fiscal year ends with positive margin after midyear cost-cutting efforts, but new fiscal year presents fresh challenges

ANN ARBOR, Mich., June 18 /PRNewswire-USNewswire/ -- Despite a very challenging economic environment, the University of Michigan Hospitals and Health Centers will end the fiscal year in the black later this month, according to preliminary results presented today at a meeting of the U-M Board of Regents. It is the thirteenth year in a row that the UMHHC has had a positive operating margin.

Also today, the Regents approved UMHHC's budget plan for the next fiscal year. It renews the challenge to end in positive territory, despite an economic climate that will continue to include declining revenue growth for care provided at U-M's three hospitals and 40 outpatient locations.

Positive margins are needed to fuel the growth and renewal -- in both physical facilities and human resources -- that will allow the U-M Health System to meet the rising demand for its nationally known patient care.

UMHHC is expecting to end fiscal 2009 with a margin of $14 million on operating revenues of $1.8 billion - a 0.8 percent margin that's smaller than a 3 percent goal set last spring. The target for 2010 is a 1.7 percent margin on revenues of $1.91 billion.

What kept the fiscal 2009 operating margin in positive territory was the diligent effort at all levels to use teamwork, collaboration and integration to contain costs while also serving more patients, says Doug Strong, MBA, the director and CEO.

"The collective efforts of our faculty and staff and administration, both those in direct patient care and the rest that support that care, made it possible for us to achieve a positive margin at a time when many of our peer institutions regionally and nationally are struggling," says Strong. "The coming year will likely be even more challenging. But the strength of our organization, and the willingness of our people to innovate in ways that both conserve resources and serve patients, put us in a good position."

Says UMHS CEO Ora Pescovitz, M.D., "I am confident that we can weather the current environment if we continue to harness the ingenuity of our faculty and staff, and to build on the factors that have produced the high quality of care we provide."

Pescovitz, Strong and UMHS chief financial officer Dave Morlock, MBA, presented the preliminary year-end results and the new budget to the Regents today. They noted that UMHHC has experienced a 15 percent rise in uncompensated care in just the past year, with increases in both the number of patients who qualify for charity care, and those who cannot pay bills for care they've already received.

At the same time, a higher percentage of UMHS patients are covered by Medicare, Medicaid, and county health plans, which do not reimburse at the same rates as private insurers. In fiscal year 2008, UMHHC was reimbursed $153 million less by these plans than it would have been if the same patients had been covered by private insurance. UMHHC is a major part of UMHS.

To help UMHHC meet these challenges, many units have poured tremendous effort into collaboration and teamwork aimed at improving efficiency, including boosts in labor productivity and reductions in supply cost growth. By redesigning processes and workflow, and consolidating or integrating related functions, these groups are improving quality while containing costs.

Strong points to the success of projects that have transformed operations in clinical and non-clinical areas using a "lean thinking" approach called the Michigan Quality System.

"Lean projects in a broad variety of areas have helped us add value and serve more patients with the same number of staff, reduce wait times, cut financial waste, improve safety and eliminate re-work," says Strong. "As a result, patient care quality has improved during this challenging time."

At the same time, the non-clinical areas of UMHHC have used attrition management and a hiring freeze to minimize layoffs while reducing staff levels. Some areas have had a reduction in force (RIF), affecting 60 employees. The majority have found other positions in the organization, and the remaining ones are receiving transition assistance.

Building for the future

A number of expansion projects now under way at UMHS show why positive operating margins are so important. All will help UMHHC and its partners in the Medical School's Faculty Group Practice serve even more patients in coming years. And all are paid for out of UMHS reserve funds - the "savings account" that comes from years of positive operating margins. Some borrowing is used for large projects, but U-M's excellent bond rating ensures interest rates are as low as possible.

Among the projects: an 18-bed Medical Observation Unit that will open next month in University Hospital. It will accommodate patients who do not need a regular inpatient hospital bed but need to be observed to determine their other care requirements. Such care is on the rise, and helped account for the 3.2 percent rise in adjusted hospital discharges that UMHHC experienced in fiscal 2009. Outpatient visits were also up by 3.1 percent.

In fiscal year 2010, an additional 21 beds in renovated space at University Hospital, and three new intensive care beds in C.S. Mott Children's Hospital, will be available for use as needed, based on rising demand. New medical imaging facilities will also go on-line for patient care.

Another major project now under way is the Brehm Tower, an expansion of the Kellogg Eye Center named for donors Bill and Dee Brehm. It will open in less than a year and will replace and expand Kellogg's existing clinics and operating rooms while also adding to U-M medical research space.

In less than three years, a new children's and women's hospital will open, with 1.1 million square feet of inpatient and outpatient space, featuring all single private rooms in the Children's Hospital.

U-M's purchase of the former Pfizer complex adjacent to North Campus will also offer UMHHC an opportunity for more efficient use of financial resources. Although the bulk of the buildings on the campus will be used for research, some space may be used for administrative functions that now occupy leased space elsewhere. The new campus will also help the Medical School attract more research funding that will in turn spur job growth and new ideas to aid human health. The U-M Medical School already has the seventh-highest total of research grants from the National Institutes of Health, and its researchers brought in $412 million in funding from all sources in federal FY2008.

SOURCE University of Michigan Health System
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