UAMS Operating Loss May Top $46 Million

The University of Arkansas for Medical Sciences, which will unveil its new $150 million hospital in January, is projecting a $46.25 million operating loss for its current fiscal year, a figure that has almost quadrupled in four years.

The new hospital features 234 adult beds and 64 neonatal beds and is the centerpiece of several construction projects on the campus. A new five-story, $26.3 million Psychiatric Research Institute with 40 inpatient beds will open about the same time as the hospital.

It is unclear, though, exactly how much the new hospital and the related projects have contributed to the escalating operating loss at the university.

For UAMS fiscal years 2010 and 2011, which end on June 30 of those years, the operating loss is projected at $41.21 million and $43.08 million, according to an internal forecast provided in response to a request by Arkansas Business.

The state's medical school and its affiliated hospital anticipate making up the operating losses through "nonoperating" revenue – primarily appropriations from the state Legislature, donations and interest. Indeed, UAMS is projecting overall net income of $1.5 million for fiscal 2009, which started July 1, and $4.6 million and $5.1 million for the next two fiscal years.

Still, the projected operating deficits have raised some concerns with Dr. Carl Johnson, a member of the University of Arkansas Board of Trustees and chair of its hospital committee.

"I have a lot of issues with the budget situation," Johnson told Arkansas Business last week. "I think that we did a bigger undertaking of approving an increase in their building of a new hospital.

"And I'm sure the new hospital being built may have some impact on the $40 million deficit," he said. "But it hasn't been made clear to me where this big loss is coming from."

There was no way to determine how much the new hospital was contributing to the operating loss, said Melony Goodhand, vice chancellor for finance and chief financial officer.

"The campus does the human resource function and marketing function, facilities maintenance and accounting [for the hospital]," Goodhand said. "We look at it all rolled up."

She attributed part of the rise in the operating losses, though, to an increase in the number of students enrolled at UAMS and a rise in indigent care.

UAMS provided about $101 million in charity care for the fiscal year ending in 2007, which was up 25 percent from its 2006 fiscal year, according to the University of Arkansas System's financial statement for the fiscal year ending in 2007.

UAMS Chancellor I. Dodd Wilson said the operating loss doesn't have anything to do with the new hospital.

"If anything, it's a positive," said Wilson, who is planning to retire in June.

Wilson said UAMS has had an operating loss for years and has always needed money from the state of Arkansas.

"We couldn't run [UAMS] without state money," he said.

He said he doesn't consider UAMS operating at a loss because of the revenue stream from the state of Arkansas. For fiscal year ending in 2007, the state's nonoperating appropriation to UAMS was $47.3 million. In the fiscal year ending in 2005, it was $41.5 million.

The operating loss, though, has been steadily rising since the end of UAMS' fiscal year in 2005, when it was $12.9 million. In 2006, the operating loss was $21.9 million. The operating loss jumped to $51.9 million in 2007 and then fell to $17.9 million in 2008.

(Wilson said the operating loss was higher in 2007 than it should have been because UAMS didn't receive a federal payment until 2008, which was why the 2008 numbers are lower than they should be. But the average for the two years was nearly $35 million.)

Wilson did tie part of the projected operating loss this fiscal year to the number of additional employees needed to staff the buildings. UAMS recently added about 300 employees, and more than 200 were health care staff for the new hospital and the Psychiatric Research Institute, said UAMS spokeswoman Leslie Taylor.

"We're probably going to have more people on our payroll for a while before we start getting more income [from] the hospital," Wilson said.

The university's compensation and benefits expense line has jumped from $600.5 million in fiscal 2007 to a projected $696 million in the current year, fiscal 2009.

In the upcoming General Assembly, UAMS will not ask the state Legislature for more money because it built a new hospital, said Richard Pierson, vice chancellor of Clinical Programs and executive director of UAMS Medical Center. "It will be a normal year with our interaction with the Legislature," he said.

Wilson said he plans on asking the Legislature for its annual amount, which is about $100 million, plus a 3 percent increase, which will be an additional $3 million. He also said he would eventually want another $3.5 million to run UAMS' northwest campus, scheduled to start teaching students in 2009, but he said the first year would require less.

New Hospital

In 2004, Wilson asked the University of Arkansas Board of Trustees to approve construction of a new hospital and a massive facelift for the campus.

The old UAMS hospital, built in the 1950s, was getting old. For one thing, the patient rooms were too small for modern medical equipment, Wilson said. The price tag in 2004 was just under $170 million for the new hospital, a 1,000-space parking deck and a new dormitory.

By 2006, the cost of the project has increased to more than $200 million as more floors were added to the hospital.

"The first estimate was very low," Wilson said, according to a Jan. 27, 2006, article in the Arkansas Democrat-Gazette. "It was done internally on campus."

Wilson expressed the urgency of the project to the trustees at a January 2006 meeting.

"If we don't do [the project], UAMS will deteriorate over the next few years," Wilson said at the meeting.

And Wilson also said, "I do believe we can pay it back."

The board unanimously agreed to allow UAMS to issue about $200 million worth of bonds to pay for the project. UAMS pledged the hospital's income against the bonds.

Johnson, the UA trustee, said he doesn't recall if a report was presented on the financial impact of the new hospital. 

He said when he has tried to get financial information out of UAMS, such as breakdowns for different departments, he has come away frustrated. 

"It's very difficult sometimes because you have to read between the lines and ask certain question to get basic answers," Johnson said. "That's been one of the frustrations that I feel, being a member of the board, not getting true information."

UAMS CFO Goodhand said she didn't recall giving the board a financial plan on the new hospital.

"We talked strategically about how we have to have a new hospital to continue to train residents," she said.

Johnson said he relies on the experts at the school to relay vital information for a project.

"I, for one,  ... just feel after six years on the board that all pertinent information is not being shared, and that I stand by that," he said.

Wilson said it is almost impossible to break down the finances of one department in UAMS because so many revenue streams are connected and aren't earmarked for one particular department.

Still, Wilson said, UAMS has always tried to give the UA trustees everything they need to make decisions and UAMS' books have always been open for inspection.

John Ed Anthony of Hot Springs, a member of the UA Board of Trustees, said he wasn't on the hospital committee, but that from the reports he has seen, the UAMS budget is sound.

"In the early stages of start-up ... there will be increased costs, [but] we will be able to cover them without undue stress," Anthony said.

The financial implications of building a new university hospital are difficult to project, said Robert Dickler, chief health care officer for the Association of American Medical Colleges of Washington, D.C.

"When that new facility comes on line, the depreciation has to be expensed and that typically adds fairly large increases in expense in the early years," he said. "These are expensive facilities, and that's a cost you didn't have up to that point in time."

Whether the hospital will make or lose money depends on a variety of factors, including the mix of patients and how they pay for health care, he said.

But the trend is for university hospitals to find a way to be profitable over time, Dickler said.

"Because no organization can lose money forever unless they have a subsidy that covers them," he said. "And even if they have a subsidy, it may not be sufficient."

More Students

Goodhand said part of the operating loss could be tied to the increase in the cost of educating more doctors. UAMS has tried to respond to the doctor shortage in Arkansas by turning out more graduates.

In 2006, UAMS increased the class size for its M.D. program from 150 to 160. And to train even more doctors, UAMS will open its northwest satellite campus in the fall of 2009, which will bring the class size to 180. Costs associated with the northwest satellite campus are included in UAMS' operating numbers.

But the cost of educating students has increased the operating loss, Goodhand said.

"We need state support for every student that comes through [the campus]," Goodhand said. "And the support doesn't go up as fast as the number of students we're trying to add."

Johnson said he didn't think teaching students accounted for a large part of the operating loss because students pay tuition.

"If that's the case, we shouldn't have increased enrollment to 180 students," he said.

Johnson also said he opposed the expansion in northwest Arkansas.

"I just did not think that it was a very good idea for a small state such as Arkansas to have a satellite school, but, be that as it may, it passed," he said.

2010 and Beyond

Goodhand said the projections of operating losses of $41 million in 2010 and $43 million in 2011 are only estimates and that UAMS uses a conservative "worst-case" philosophy to make those projections.

She said the revenue will probably grow faster than the projections anticipate.

Wilson said he also couldn't predict what fiscal 2010 will look like.

"The revenue figures may turn out to be too high or too low, and the expense figures maybe too high or too low," Wilson said. "If [expenses are] too high, we have to reduce them because we will manage to [attain] a positive bottom line in total."

When fiscal 2010 begins on July 1, 2009, Wilson is expected to be retired. Johnson said the trustees are discussing whether Wilson's successor as chancellor should be a medical doctor, like Wilson and his predecessor, Harry Ward, or someone with a business background to manage what has become a business with annual revenue of $1 billion.

"You've got a major economic engine for central Arkansas and for the state," Johnson said. "And I think the days that doctors can run a hospital or be a chancellor may be a thing of the past."