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UAMS Fears More Red Ink, Eyes $34M Shortfall in Fiscal 2017

7 min read

As bad as the financial picture at the University of Arkansas for Medical Sciences is now, it could be a lot worse if the state’s hybrid Medicaid expansion plan isn’t continued by the state Legislature.

The state’s only academic medical campus is projecting a loss of $13 million for the fiscal year that ends June 30, and that number is projected to grow to $34.2 million in the next fiscal year. Dreams of a hospital expansion have bumped up against financial reality.

If the Medicaid expansion isn’t funded, losses could increase by tens of millions of dollars.

“We would have to cut programs” if the Medicaid expansion isn’t approved, Dan Rahn, the chancellor of UAMS, told Arkansas Business last week. “We would have no choice.”

In a special session last week, the Legislature approved Gov. Asa Hutchinson’s proposal for the Medicaid expansion, which is called “Arkansas Works.” But it faces a hurdle in the regular fiscal session that begins Wednesday. During that session, it will need at least a supermajority vote of 75 percent in the state House and Senate in order to receive funding, thresholds not met in the special session votes.

Rahn said he believes the legislation will pass and be funded, but he will be prepared if it isn’t.

In the meantime, UAMS in May will ask the University of Arkansas System board of trustees to approve a 10 percent tuition increase for the College of Medicine. If approved, a year’s tuition for doctors in training will rise to $29,204 starting with the fall semester.

While a boost in tuition revenue would help, most of UAMS’ funding comes from patient services. The Affordable Care Act expanded health insurance coverage, and Arkansas’ approach to the ACA’s Medicaid expansion — previously called the private option — brought insurance to approximately 270,000 Arkansans who previously were uninsured. That’s boosted the operating revenue of UAMS — which includes its hospital, colleges and Rockefeller Cancer Institute — by $100 million, for a total of $1.27 billion in the fiscal year that ended in mid-2015.

However, operating expenses also climbed by $100 million.

The financial outlook has the University of Arkansas board of trustees concerned.

UAMS is “running some pretty significant annual deficits, and the problem is that that can’t go on forever,” said Trustee C.C. “Cliff” Gibson III of Monticello, who is chairman of the joint hospital committee that oversees UAMS. “They’re not the federal government.”

Gibson said that while UAMS is not in danger of closing, state support needs to increase.

Revenue from state appropriation fell 11.3 percent to $106.6 million last fiscal year. Rahn said UAMS’ net state appropriation, however, was $21.3 million, because it had to use more than $85 million for Medicaid match payments required under various contracts between UAMS and the Department of Human Services. Just one year earlier, in the fiscal year that ended in mid-2014, UAMS’ Medicaid match was $68.6 million. The increase was almost 25 percent in a single year.

Hutchinson said last week, in an emailed response to questions from Arkansas Business, that the decline in state funding for fiscal 2015 was done under the administration of his predecessor, Gov. Mike Beebe. And he has approved a one-time additional appropriation of $7 million to UAMS during the current fiscal year.

“The need continues for additional support for UAMS, but this need cannot be addressed until the budget is established in the next fiscal session that begins [Wednesday],” Hutchinson said in the email. “Even with the approval of my balanced budget the need of UAMS has to be balanced with other needs in the state. I will continue to work with legislators to accomplish a long-term solution.”

UAMS, however, isn’t the only medical school that has seen a drop in state funding. States are spending more money on prisons, infrastructure or other debts, and not on their medical schools, said Dr. John Prescott, chief academic officer at the Association of American Medical Colleges, in Washington.

The medical schools are dealing with their states’ funding reduction in several ways, including raising tuition and slashing expenses.

The percentage of a medical school’s budget that comes from state government is “all over the board,” Prescott said. “There are some schools that truly get wonderful state support.”

The University of Mississippi Medical Center received $185.5 million in state funding in fiscal 2014, according to a UAMS report in January to the UA System board of trustees, while the University of Tennessee Health Science Center received $135 million. The University of Oklahoma Health Sciences Center received less in state support than UAMS — $97.7 million in fiscal 2014.

Rahn said that he would like a “one-time jump” from the state and then a commitment to keep pace with costs.

“We’re doing everything we know how to do, and we’re projecting a decline in net assets of $34 million” in fiscal 2017, which starts July 1. “That gap needs to be closed. In the long haul, that needs to be closed somehow,” Rahn said.

Private Option

The Affordable Care Act has created so much additional demand and revenue that UAMS talked last year about possibly expanding the 10-story, 450-bed UAMS Medical Center.

Beginning Jan. 1, 2014, the centerpiece of the legislation known as Obamacare required individuals to have health insurance and offered assistance for those who couldn’t afford it on their own.

The U.S. Supreme Court did throw out the ACA’s requirement that states expand Medicaid, primarily with federal money, making that part of the law optional, and many states opted not to participate.

Arkansas, however, accepted the federal funds to create the “private option.” Under the private option, the state uses federal Medicaid expansion money to buy private health insurance for Arkansans who earn too much for traditional Medicaid but not enough to be eligible for federal tax credits on health insurance. That cutoff is 138 percent of the federal poverty level.

The federal government will pay all of the cost of the expansion through 2016 and then will gradually decrease its share to 90 percent, leaving the state to pay 10 percent.

Hutchinson’s “Arkansas Works” makes modifications to the private option, but it still uses federal money to buy private insurance for the poor.

The private option has been apparent in UAMS bookkeeping. In December 2013, about 13.5 percent of the Med Center’s patients were uninsured. In fiscal 2015, that rate plummeted to 2.4 percent, according to the UAMS financial report.

The UAMS Medical Center reported net income of $9.9 million on net patient revenue of $649.2 million for fiscal 2015.

“So our clinical enterprise, as a standalone, is doing fine,” Rahn said.

The profit from the clinic side of UAMS is needed to subsidize the academic portion of UAMS, but is “not big enough and strong enough to carry the whole load,” said Gibson, the UA trustee.

Plans for expanding the hospital, however, have been shelved as a result of the financial struggles at UAMS.

Still, UAMS is full most days and is considering renovating a wing of its old hospital to add 28 beds. The entire building, which is about 60 years old, needs to be brought up to fire code by 2021 or it will be shut down by the state fire marshal. The cost to bring it up to code is $13 million.

The cost of adding the 28 beds isn’t yet known, because the project has to be finalized and put out for bid, Leslie Taylor, a spokeswoman for UAMS, said last week in an emailed response to questions from Arkansas Business.

Operating Expenses Up

While the revenue increased in fiscal 2015, so did the expenses. The operating expenses were $1.33 billion in fiscal 2015, up 4.5 percent from the previous year.

One of the biggest jumps in expenses was for UAMS’ compensation and benefits, which increased 3 percent to $878.6 million in fiscal 2015. UAMS has about 10,300 employees. UAMS said in its financial report that it gave the raises in fiscal 2015 to “address mounting concerns about the competitiveness of current compensation at UAMS and its impact on staff retention.”

The staff at UAMS had not received raises in three years, while other UA schools were giving raises, the financial report said.

Rahn told Arkansas Business that UAMS had planed to give 2 percent raises in the upcoming budget, but that’s now in danger.

“We do believe that we’re going to have to fund raises of some amount, but we don’t think we’re going to be able to afford 2 percent across the board in this upcoming budget,” he said.

UAMS Cutting Costs

Rahn said UAMS is taking a knife to expenses across the board.

At the end of October, the Partnership for a Healthy Arkansas was formed as a shared services organization. It’s owned equally by Arkansas Blue Cross & Blue Shield, Baptist Health and UAMS, all in Little Rock, St. Bernards Healthcare in Jonesboro and Washington Regional Medical System in Fayetteville.

The partnership expects to save UAMS and others millions of dollars through sharing administrative and support services and other cost-saving measures.

The partnership could save UAMS 1 to 2 percent in expenses, Rahn said.

That won’t be enough to stem the red ink.

“Someday, there’s a reckoning on the money,” Gibson, the UA trustee said. “We don’t have a blank check.”

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