New UAMS Chancellor Attempts to End Losses

by Mark Friedman  on Monday, Nov. 30, 2009 12:00 am  

Dr. Daniel Rahn says UAMS has "to operate within available resources, and in the recent past we have had expenses outstripping revenue in a number of arenas."

Accounting at public hospitals and medical schools can be complicated, but no matter how you slice it, the University of Arkansas for Medical Sciences had a rough year.

Chief Financial Officer Melony Goodhand says the state's medical school and public hospital managed to squeak out "a positive bottom line of $4 million" for the year that ended June 30. But to get to black, Goodhand had to include more than $47 million in earmarked capital gifts, money that can't be used for salaries or utility bills and which UAMS has not traditionally included in its "bottom line."

While Goodhand puts the best possible spin on last year's numbers, UAMS' new chancellor, Dr. Daniel Rahn, is coldly candid about the current state of affairs.

Confirming information that had been shared with certain employees in recent weeks, Rahn said the hospital unit, UAMS Medical Center, has been losing money in the current fiscal year, which began July 1, and had lost about $2.8 million in October alone.

UAMS has "to operate within available resources, and in the recent past we have had expenses outstripping revenue in a number of arenas," Rahn said. "We're now correcting that and getting back on track. Our commitment is to do that without adversely affecting our continued forward progress as an academic health center."

Rahn, who succeeded Dr. I. Dodd Wilson as UAMS chancellor on Nov. 2, said he had several plans to turn the campus' finances around, and he hasn't ruled out layoffs.

Within days after he was installed as chancellor, UAMS Medical Center froze wages for about 3,300 employees and rescinded raises given to employees whose employment anniversaries rolled around in July through October.

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Fiscal 2009
In fiscal 2009, UAMS had about $1 billion in revenue and an operating loss of $78.7 million, which was $32 million worse than projected.

Administrators tend to dismiss the operating loss figure, which had been $12.9 million just four years earlier, because it doesn't include state government subsidies or donations that can be used for general expenses. But even when those things are included, UAMS had a net loss of $43.1 million last fiscal year, when a net income of $1.5 million had been projected.

Even granting that $14.6 million of that $43.1 million came from investment losses during the stock market swoon, the net loss was still $28.5 million - a $30 million negative swing from a projection UAMS provided to Arkansas Business just nine months earlier.

A financial statement for the past two fiscal years was completed on Oct. 15, and it predicts that "at best" UAMS will break even in the current fiscal year.

"Additionally it may be necessary for UAMS to liquidate investments to meet operating cash flow needs and/or to provide funds to complete the construction of the Winthrop P. Rockefeller Cancer Institute Tower," the financial statement said.

The first phase of the 300,000-SF, $150 million Cancer Institute is scheduled to open in the summer.

Goodhand, the CFO, said that the Cancer Institute needed about $28 million to be complete. That represents a quarter of UAMS' reserves, which stood at about $110 million as of last week.

"With the market coming back so nicely, I hate to sell our reserves, but we certainly have them there," Goodhand said. "We planned to use some of [the reserves] for the cancer center. So we're just trying to avoid [liquidation], if possible.

"We're going to see if we can get by without selling any of the investments," she said. "But it's possible we may have to."

Bad Timing
By the second half of 2008, most university hospitals were slashing costs because of the downturn in the economy, said Dr. Joanne Conroy, chief health care officer for the Association of American Medical Colleges of Washington, D.C.

"Many of them had hiring freezes or delayed capital investments in order to keep themselves in the black," she said.

UAMS, however, was in a growth mode. It added 300 employees to staff its new hospital and Psychiatric Research Institute, which were being completed at the end of 2008. UAMS has about 10,000 employees and is one of the state's largest employers.

For fiscal year 2007, which began in mid-2006, UAMS spent $600.5 million in compensation and benefits. Two years later, the number had jumped to $707.1 million.

UAMS had projected an operating loss of $46.25 million for fiscal 2009 and a net income of $1.5 million after the state funds and gifts were counted. (Last fall, Goodhand and Wilson never included capital gifts when discussing income projections.)

"In spite of a trouble economy nationally, I feel very good about our financial outlook for the current fiscal year and beyond," Wilson said in letter to Arkansas Business in response to an October 2008 story about UAMS' growing operating losses. "Even if our investment income fails to meet expectations, we have reserves from previous years to offset potential investment losses."

At the end of 2008, Wilson was preparing to open the centerpiece of the new campus: A 10-story, 540,000-SF hospital. Wilson had lobbied for a new hospital for years because the one UAMS had was built in the 1950s and was becoming outdated.

The new $200 million hospital opened in January, just as the full brunt of the worst recession in decades was being felt. It featured the latest medical technology, larger all-private patient rooms and neonatal intensive care units.

The emergency department also had been expanded to 31 private exam rooms and three trauma rooms.

Also in December 2008, the six-story, 110,000-SF, $32 million Psychiatric Research Institute opened.

'Hard to Swallow'
Goodhand said last week that UAMS had braced itself for an operating loss because of the additions to the campus.

"It's not unusual to have an operating loss the year you build, equip and hire a staff for a new hospital," she said. "We planned for ... those extra expenses. That's why we had built up our reserves in order to cover that."

But not even UAMS could project how bad the economy would become.

The fiscal 2009 investment losses of $14.6 million weren't expected, Goodhand said. Its investments had earned $10 million in the previous fiscal year. 

Also, the state's subsidy to UAMS fell from $45.8 million in fiscal 2008 to $44.4 million last year, and a cut of $2.2 million in the current fiscal year was part of the $100 million in budget reductions ordered by Gov. Mike Beebe.

UAMS also projected that the Psychiatric Research Institute would have a $1.8 million loss for fiscal '09. Instead, its loss was $2.7 million, according to the financial statement.

Although the financial statement breaks out the Psychiatric Research Institute's loss and Rahn was able to pinpoint the monthly loss at UAMS Medical Center, Goodhand told Arkansas Business that there was no way to tell exactly where all the net losses are coming from.

And that lack of financial detail has been a point of frustration for Dr. Carl Johnson of Little Rock, a member of the University of Arkansas Board of Trustees.

"To have a corporation as big as UAMS and you cannot tell where your money's coming from, or where you're losing money, is a little bit odd," Johnson said. "That's hard for me to swallow."

Rahn said he was looking "right now" at trying to improve the financial accounting of the campus. 

Still, Johnson said he was not shocked that UAMS was having financial trouble because most hospitals are in a similar situation. 

Seeking an Operating Margin
After 23 years at UAMS, Wilson retired at the end of October. Rahn, who had been president of the Medical College of Georgia, said he has plans to stop the bleeding.

He has asked all sections of the campus to "constrain spending to the extent possible to create some operating margin."

Rahn said no pay cuts were planned, but overtime would be reduced.

Rahn also said UAMS was going to take a hard look at medical tests that are ordered, such as X-rays, to see if they're really necessary.

He projects cost-cutting moves could save the hospital $3 million a month.

"I think it's possible to both reduce the costs and to improve the performance at the same time," Rahn said.

He will be on the lookout for more revenue streams, which might include the growth of its clinic program and securing more grants.

Just before Rahn arrived, UAMS received its largest award ever - a $19.9 million grant from the National Institutes of Health for a Clinical & Translational Science Award. It will be paid out over five years and will help push basic science discoveries into speedier treatments and cures for patients.

At the end of October, UAMS' internationally known multiple myeloma program announced it would receive a $19.5 million grant over five years from the National Cancer Institute. The money will allow scientists to continue working on treatments for multiple myeloma, a type of blood cancer.

Johnson said he thought UAMS would rebound and improve under Rahn's leadership.

"Even though we're having a difficult time, we have to continue to try and progress in the right way," he said. "The Med Center is the premier hospital in the state. We have to take care of a lot of indigent patients.  ... At the same time, we have to be prudent with taxpayers' [money] and even with the money the Med Center makes."



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