UAMS Chancellor Dan Rahn Attacks Red Ink With Balanced Budget Plan

by Mark Friedman  on Monday, Feb. 17, 2014 12:00 am  

UAMS Chancellor Dr. Dan Rahn said he has a plan to slash expenses and increase revenue that should generate $40 million for the campus during the next 18 months. (Photo by Jason Burt)

The University of Arkansas for Medical Sciences had an operating loss of $27.8 million in the first six months of its current fiscal year, a dramatic downturn from an $8.5 million operating gain during the same period a year earlier.

Dr. Dan Rahn, the chancellor of UAMS, said he has a multi-point strategy to increase revenue and slash expenses that should generate about $40 million for UAMS during the next 18 months.

“We’re dealing with some fundamental changes,” Rahn told Arkansas Business last week during an interview in his office at the UAMS Medical Center. “The financial model that we’ve relied upon for the past decades is changing, and we’re going to have to change.”

Rahn said the UAMS campus, including components such as the hospital, the Winthrop P. Rockefeller Cancer Institute and the medical colleges, has enough money to pay its bills, but the balance sheet is “an indication that things need to change.”

He said it’s critical that the state Legislature continue funding the “private option” Medicaid expansion, which is being debated in the fiscal session that began last week.

Gov. Mike Beebe’s proposed budget sends $86.4 million to UAMS for the fiscal year that starts July 1, which is $7.6 million less than the current fiscal year.

“The reason for that decrease is … we think that will be made up and then some by the private option,” the governor’s spokesman, Matt DeCample, said.

But if funding for the private option isn’t extended beyond June 30, “it’s obviously one of the many things we’ll have to revisit,” DeCample said.

If the private option isn’t funded, UAMS’ Chief Financial Officer William Bowes said, UAMS will have to brace for a 3 percent cut in funds starting July 1.

More than 100,000 Arkansans had been insured under the private option as of last week.

UAMS had previously estimated that about 75 percent of its previously uninsured patients would have health insurance during the second half of its fiscal year because of the private option and the Affordable Care Act’s individual mandate. But now, Rahn said, “I think it’s probably overly optimist for the first year.” He said probably about 60 percent of the previously uninsured patients would have health insurance this year.

Still, Rahn said, UAMS expects to receive about $28 million in revenue from newly insured patients in the second half of the current fiscal year.

The operating loss in the first six months was due in part to a continued increase in the amount of charity care that UAMS provided in the months leading up to the official start of the Obamacare era. Charity care reached $86.2 million, a 28.1 percent increase from the same period a year ago.

“We do think it’s going to be significantly less” in the second half of the current fiscal year, Rahn said.

If Rahn’s strategy to improve the bottom line doesn’t work, however, UAMS will be forced to consider layoffs.

“We are not planning layoffs,” Rahn said. “We’re not preparing for layoffs. But it’s always a possibility. We cannot run a deficit.”

UAMS currently is one of the state’s largest employers with 10,177 workers.

Financial Hits

For the fiscal year that ended in mid-2013, UAMS had, after adding in state money, gifts and investment income, $12.8 million in income, compared with a loss of $7.99 million the previous fiscal year.

UAMS’ finances, though, would have looked worse in fiscal 2013 had it not been for an IRS refund of $13.5 million, a one-time rebate for taxes UAMS paid on services performed by medical students between 1996 and 1999. Also during the fiscal year, UAMS removed a $6.7 million liability tied to non-classified employees receiving sick leave pay when they retire.

Those two items kept UAMS in the black last year. Otherwise, the bottom line — including operating losses and all offsetting revenue — would have been negative $7.3 million, according to its audited financial statement.

Rahn said that in the first half of the current fiscal year, UAMS — like other health systems around the country — has had to deal with Medicare reimbursement rates that weren’t what administrators had hoped for. To help pay for the Affordable Care Act, the growth rate in federal Medicare reimbursements took a hit. For Arkansas hospitals, that means missing out on $2 billion to $2.5 billion in Medicare revenue during the next decade.

Another blow came to UAMS’ financial statement from the National Institutes of Health, which lowered the payment to UAMS in the first half of this fiscal year by 7.6 percent to $45.9 million.

Part of the decrease was tied to the government shutdown in October and a drop in NIH’s budget as a result of the federal budget sequestration.

“Those two combined have had a negative impact on us of about a little bit more than $10 million,” Rahn said.

Still, the UAMS hospital isn’t the biggest source of UAMS’ operating loss, Rahn said.

The UAMS Medical Center’s operating loss was $1.6 million in the first six months of its fiscal year, compared with an operating loss of $418,800 in the same period a year ago.

“It’s the campus expenses, … the research expenses and this depreciation issue that’s tipping the institution as a whole into negative territory,” he said.

Electronic Health Records

One of the ways UAMS hopes to generate more revenue is through its electronic health records system.

In 2012, David Miller, chief information officer for UAMS, told Arkansas Business that he estimated the implementation of an electronic health record system would cost UAMS $87 million to $90 million.

Since then, the total price for the system from Epic Systems Corp. of Verona, Wis., has increased by more than 10 percent, to $99 million.

In July, UAMS started using the Epic system in limited areas such as its clinics, outpatient registration and professional billing for doctors, UAMS’ audit said.

It was supposed to be rolled out to the entire UAMS campus on March 1, but the date was pushed back to May 1, which caused the price to rise.

That two-month holdup resulted in additional contract and resource costs, UAMS spokeswoman Leslie Taylor said in an email to Arkansas Business.

“We made the decision to delay Epic implementation in order to provide more intensive training for physicians and staff and allow them more time to practice on the system,” she said.

When Epic goes live, it will generate a single bill for UAMS patients, which will be better for them and for UAMS, Rahn said. With the various billing systems now, some procedures aren’t properly recorded and don’t get billed, he said.

“We think there’s been a certain amount of leakage by being on different billing systems,” he said.

He said he hopes that, by capturing more billable procedures, the system will generate another 1 to 2 percent in revenue, the increases that other health systems have seen after implementing similar systems.

Another target, Rahn said, will be a push toward more clinical trials. UAMS received $889,061 in the first six months of the current fiscal year, a decrease of 68.3 percent from the same period a year ago.

Funding for clinical trials mainly comes from the NIH and private industry, Taylor said.

In addition to the cuts from the NIH, “the overall economic slowdown that the country has been experiencing, we believe, has resulted in reduced support from private industry for clinical trials,” Taylor said in her email.

Expense Savings

In addition to the new revenue, UAMS plans to continue to take a knife to expenses.

Four years ago, UAMS hired Navigant Consulting Inc. of Chicago, to comb through UAMS’ revenue and expenses to improve the bottom line.

Rahn said Navigant’s suggestions for cutting expenses and improving revenue have resulted in $62 million in financial improvements for UAMS. Another $18 million in combined expense reduction and new revenue is projected to come through a variety of projects, including the supplies UAMS buys and how it manages its nurses’ schedules at its hospital, Rahn said.

“We did a lot of work on purchasing contracts,” he said.

Bowes, the CFO, said UAMS is “constantly looking at the supply chain” to trim costs.

In addition to focusing on being more efficient, UAMS will adjust the way it cares for patients.

Most of the time, UAMS’ hospital is full. Last year, Rahn said, hospitals from around the state wanted to transfer about 500 patients to UAMS that the hospital was too full to accept at the time of the request.

“So we want to create that capacity, and we’re working on that” by managing patient flow, Rahn said.

Through better coordination with families, patients can often be sent home earlier in the day. “Several hours of earlier discharge makes a big difference in our bed capacity in the course of a day,” he said.

Another area for savings is the energy bill. In 2012, UAMS completed a $22 million equipment upgrade to its existing central energy plant. For UAMS, the new plant and plant upgrades have led to an annual energy savings of $5.5 million, Taylor said.

With all of UAMS’ expense-saving measures and additional revenue, it has a target “of basically breaking even on the second six months and ending up the year going down about $13 million to $14 million in net assets,” Rahn said.

The net asset amount includes investment gains, federal grants for capital projects and capital expenditures, which aren’t calculated for operating gains or losses.

“I think it’s in some ways a miracle that our finances are as strong as they are, given the combination of our low tuition rates, the breadth of our educational programs, the research, … and the large number of uninsured patients that exist in Arkansas,” Rahn said. “When you put all of that together, this is pretty remarkable.”



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