Health Sys. forced to make cuts amidst financial crisis

Having lost $150 million last year, the Health System has cut staff and hired a firm to review its books. After several years of large deficits --Eincluding a staggering $150 million in the just-ended fiscal year -- the University of Pennsylvania Health System began a series of drastic moves over the summer aimed at bringing its costs under control. In May, UPHS officials announced 450 layoffs and the elimination of 1,100 positions across the $2 billion system. But administrators didn't stop there. Two months later they hired the Hunter Group, a St. Petersburg, Fla.-based health care consulting firm known for eliminating positions and restructuring hospitals, to assess the system's financial situation. In the fiscal year that ended in June 1998, the Health System posted a $90 million deficit, even after the University -- as the parent company -- covered $123 million in costs. In the fiscal year which ended this past June, various estimates put the system's deficit at $150 million. The problems stem mostly from rapid expansion of the system in an environment of decreased federal funding. Health System Chief Executive Officer William Kelley said the layoffs -- which amount to 9 percent of the system's total workforce -- will not affect patient care. "Our intent is that patients wouldn't know that there are 1,100 fewer people around here," Kelley said in May. The layoffs will be felt at the flagship Hospital of the University of Pennsylvania, as well as at the Health System's three other wholly owned hospitals. None of the cuts affect academic employees of the Medical School, of which Kelley is also the dean. The cuts will save $50 million in the long run, officials said, though there will be significant short-term costs because of severance packages. Several Hunter executives began a 10-week on-site visit in early August, according to Jim Houy, a senior vice president of the company. They will review day-to-day operations and make specific recommendations about containing costs some time this fall. "We're the outsiders and we can be the bad guys," Houy said in July. The Health System makes up more than half of the University's total annual operating budget, and its fiscal troubles caused the Moody's bond-rating firm to downgrade the University's rating last spring. Over the summer, though, Standard and Poor's, another rating agency, downgraded the Health System's own bonds while maintaining the rating of the University's bonds. Despite the Health System's recent financial turmoil, it has won numerous major health care awards over the past year. And over the summer, HUP was named the 10th best hospital in the nation by U.S. News & World Report. Health System officials say that the financial difficulties mostly stem from the 1997 Balanced Budget Act, which dramatically decreased Medicare payments to academic hospitals. "Most of our financial difficulties are due to market forces that are out of our control," spokesperson Lori Doyle said. In response to federal funding cuts, Kelley and University President Judith Rodin have personally lobbied government officials to restore funding to academic hospitals that have been hit hard. Other academic institutions have suffered similar losses because of the law, though Penn's deficit is among the largest. Health Care Systems Professor Mark Pauly called the Heath System's cuts "inevitable" considering the current financial crisis. "The costs were running way ahead of their revenues," he said in May. "You can't lose money forever."