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HEALTH ECONOMICS

Rx for Health System:
Keep Hospitals and Take a 501(c)(3)

 

Following months of speculation about the future of the University of Pennsylvania Health System (UPHS), a joint committee of medical faculty and University trustees presented its formal recommendations to the board of trustees at their February meeting. Before posting a profit for the first six months of the 2001 fiscal year, the Health System had lost some $350 million from 1997 to 2000, and is carrying nearly $800 million in long-term debt. As a result, the University has been considering all options, including selling off some or all of its hospitals and clinical-care practices.
    Penn President Judith Rodin CW’66 made it clear that the recommendations constitute a “direction,” not a final decision, and that “much hard work” remains before the trustees vote on the matter. But, she noted, “simply maintaining the status quo, in this situation, is not an option.”
    The committee’s main recommendations are that:
The University will not sell any of its hospitals, since Penn is “committed to maintaining an integrated Health System.” (The four hospitals owned by Penn are the Hospital of the University of Pennsylvania, Pennsylvania Hospital, Presbyterian Hospital and Phoenixville Hospital.)
A new, not-for-profit, 501(c)(3) organization, wholly owned by the University, will be established for the Health System, its hospitals, doctor’s practices and walk-in treatment centers. While the new corporation will be owned by the University, it will have its own CEO and governing board, “allowing it the flexibility it needs to compete in a challenging marketplace,” in Rodin’s words.
The University, said Rodin, will “continue to be open to joint ventures on capital projects and potential alliances with partners who share our commitment to academic medicine and vision of a tripartite commitment to teaching, research and patient care.”
    All of those steps, she noted, “will position UPHS in a way that will protect and enhance the academic mission of the School of Medicine, allow UPHS to compete effectively in the commercial marketplace, and enhance its ability to raise capital.” Given the Health System’s “very sizeable debt burden,” Rodin added, “it will need additional capital over the next several years to support our academic and clinical missions, reinvest in our fixed assets, and cover debt service.”
    Although the creation of a separate 501(c)(3) corporation does not automatically shield Penn from the Health System’s debts, it will allow the Health System to restructure its debt at some point without obligating the University. In addition, the 501(c)(3) classification will permit the Health System to make its budgetary decisions without going through the University’s relatively cumbersome budget process, noted Penn spokeswoman Lori Doyle.
    Dr. Alan Wasserstein, chair of the Medical School Faculty Senate and a member of the joint committee which issued the recommendations, said that one reason for creating the 501(c)(3) was to make the Health System “more nimble in the marketplace, more capable [of] doing a deal.”
    The faculty is “relieved and satisfied with this outcome,” Wasserstein added. “We were afraid that sale of the Health System in whole or in part would compromise the academic mission.”
    But, he warned, “Now is not the time for us to become complacent,” noting that reorganizing the Health System as a separate corporation “does not infuse it with capital. Capital is desperately needed to improve clinical services, support the medical school, and attract and retain first-class researchers. The president and the trustees are therefore obliged to continue to look at joint ventures, foundations, fundraising and other sources of capital.
    “Many of the faculty feel that the need for such a deal could be lessened if only the Health System reached its economic potential,” he added. “Working here every day we are painfully aware of inefficiencies in clinical operations. These involve not only high-profile items like billing and collections but subtler things like time of [patients’] discharge.” He suggested that faculty and administrators need to work together better to improve efficiencies.
    “Medical faculty—doctors in general—are conservative and averse to change,” Wasserstein said. “This recent crisis may make us more amenable to it. We’ve had a wake-up call, and we have to respond or face a similar crisis down the road.”
    The Health System’s future was the subject of a medical Faculty Senate symposium on January 29, attended by about 300 employees. Four scholars from other universities who have studied or participated in the sales and mergers of academic health centers offered their perspectives. Dr. Arthur Asbury, interim dean of the School of Medicine, highlighted the Health System’s financial challenges, noting that “capital spending last year and this year has been relatively spare” and that more expenditures will be needed in the future for “replacement, renewal and new technology.” Another responsibility to consider, he observed, is the “care and feeding of the academic programs.”
    And that, as Rodin noted, is a core priority. The decision not to sell the Health System, she told the trustees, “reaffirms what we hold most dearly: that is, the central academic mission of this institution.”


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Copyright 2001 The Pennsylvania Gazette Last modified 3/6/01