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Stanford Report, February 10, 1999

Q & A: UCSF Stanford management explains budget crisis

On Thursday, Feb. 4, UCSF Stanford managers met to discuss the organization's current financial situation in light of results from the first quarter of fiscal year 1999. Peter Van Etten, UCSF's chief executive officer, reported that despite increased patient volume and reduced costs last year due to the merger, the organization has recorded an operating loss for the first quarter.

The following is a summary of points that were discussed with managers and an explanation of what UCSF Stanford plans to do to get back on track. The article was adapted from the Feb. 5 issue of Faculty Focus, a publication of UCSF Stanford Health Care.


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Q. What was UCSF Stanford's financial results for the first quarter (Sept.-Nov. 1998)?

Despite strong patient activity, our operating revenue, which included inpatient, outpatient and professional fees, was slightly below last year. At the same time, our operating expenses were 2.6 percent higher than last year. Revenue was significantly under budget and expenses were significantly over budget.

Our operating loss for the quarter was $10.7 million. Including investment income, our bottom line for the quarter was a $1.8 million loss on $385 million of revenue.

Although UCSF Stanford's financial challenges are real, the organization is still financially sound.

Q. How did UCSF Stanford get into its current financial situation? Why are the financial results worse than expected?

The principle reason for the loss is that the organization did not meet budgeted revenue and expense targets. Differences between what was budgeted and actual performance have been identified and immediate steps are being taken to bring all revenue and expense accounts to budgeted levels.

Despite strong patient activity, flat or falling prices and rapidly rising costs are expected. About half of the organization's patients are insured by two government programs, Medicare and Medi-Cal, and payments to UCSF Stanford from these programs in aggregate are falling.

As a result of the federal Balanced Budget Act of 1997, UCSF Stanford has begun to experience reduced Medicare payments. There was no net increase in the organization's state Medi-Cal contract this year, and private insurers and HMOs are rigorously holding down their payments to doctors and hospitals.

At the same time, the costs of drugs, materials and supplies are rising rapidly. Many new drugs and medical devices benefit patients, but purchasers, such as employers and government agencies, are unwilling to increase their health care premiums to keep pace with these new costs.

Q. Is UCSF Stanford's situation unique?

No. It's important to recognize that UCSF Stanford is not alone. California's Office of Statewide Health Planning and Development reports that the average 1997-98 operating margin for all California hospitals was negative 2.6 percent.

Q. Is the merger the cause of the problem?

No. The merger has provided and will continue to provide opportunities to improve both financial performance and patient care. Because of the organization's stronger market position, it has been able to increase patient activity (patient days were up 6.5 percent in the first year of the merger) and make a stronger case when negotiating with private payors than would have been possible without the merger. It has also allowed for significant reductions in purchasing and some administrative costs and improved care by employing best practices throughout the organization. On the other hand, administrative costs need to be significantly reduced in the future to meet the organization's ongoing budget requirements.

Q. Have the Candlestick Point offices driven up administrative costs?

Most administrative functions at Candlestick Point have simply been relocated from other rental space such as Laurel Heights, Mission Center and various Palo Alto office buildings. As a result, space has been freed up to support expanded clinical activities. For example, significant space in the Hoover building at Stanford is being converted from administrative to clinical program space.

Some combined offices, such as contracting and marketing, have fewer people since the merger. Finance has about the same number of employees. Other offices, such as compliance and audit, have grown in response to external demands. As part of the budget process, all administrative functions will receive rigorous scrutiny and challenging budget targets.

Q. Did this news catch UCSF Stanford officials by surprise?

Organization officials were surprised by the large budget discrepancies. The financial crisis that was expected next year is happening sooner than anticipated. While the current pressures were anticipated, management believed that with high volumes and the expense reductions made so far, the organization could meet its financial goals.

In fact, the cross-site functional budget process that many of the organization's managers have participated in over the past several months was being conducted in anticipation of these pressures.

Q. What is UCSF Stanford's revised financial goal for this fiscal year?

The goal is to exceed breakeven on operations for the entire year. This will require an $11 million operating gain in the fourth quarter and breaking even for the combined second and third quarters. Meeting these goals will provide a base from which to achieve profitability in fiscal year 2000.

Q. How does the organization plan to improve its financial situation?

UCSF Stanford officials are creating a revised plan with new budgets for all departments that will be put into effect in the next few weeks. In addition, beginning in March, managers will receive twice monthly reports that will show how personnel expenses are meeting the new plan.

Reductions will not be made across the board. They will be based on the evaluation of individual departments and industry benchmarks.

Q. Will there be staff reductions?

Although the plan is to focus first on eliminating open positions that are viewed non-essential to fill, some staff reductions are anticipated. All vacant positions will be reviewed first in an attempt to make staff reductions as limited as possible. Maintaining high-quality patient care is top priority and all changes will reflect this.

In the event that there are staff reductions, individuals will be given at least 30 days notice or pay in lieu of notice and outplacement support. Details of a severance policy will be provided to managers in the coming weeks.

Beginning immediately, all new hires, including those that are meant to fill existing hospital vacancies, will need to be approved by the hospitals' chief operating officers, or in central services, senior vice presidents.

Q. How will physicians be involved in the budget reduction process?

The chairs of the clinical departments have been fully briefed on budget issues. They and other physician leaders will work with Bruce Wintroub, UCSF Stanford's chief medical officer, to convey to the medical staff the urgency of the financial situation.

The medical staffs will play a critical role in identifying opportunities to reduce costs while maintaining high standards of patient care. They will focus on accelerating implementation of best practices and helping to choose the most cost-effective devices, drugs and supplies.

Q. What is the Hunter Group and how is it involved in this process?

The Hunter Group is a national health care consultant practice that was originally brought in to assist with long-term planning, but will now support the current process.

The Hunter Group is expected to provide managers with benchmarks so that UCSF Stanford can compare its operations to those of other hospitals.

Q. How will the current financial situation impact the capital budget?

Despite the current financial situation, UCSF Stanford will continue to invest in the future. Critical Year 2000 computer issues must continue to be addressed through capital expenditures. In other areas, proposed spending will be rigorously evaluated to ensure that the project or purchase is essential to maintaining quality patient care or that it will lead to revenue enhancement or cost savings in the future. In addition, the needs of the communities served by the organization will continue to play a key role in determining capital investment decisions. SR