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After reporting spiraling losses over the past three years, the University of Pennsylvania Health System cut its annual operating deficit to $30 million, down from $198 million last year but still twice what administrators had earlier signaled they were expecting. Interim UPHS Chief Executive Officer Robert Martin said he is projecting a profit of $10 million next year, which would be the first time the system turns a profit since Fiscal Year 1997. Martin, who took on his interim post in July, said the system's turnaround can largely be attributed to cost-cutting measures. "We had a focused commitment throughout the institution, among all of the leadership, to improve our financial performance and we reached our expectation because we were resolved to do so," Martin said. "We were committed that we were going to be successful." To improve the financial performance of UPHS, approximately 2,800 positions -- about 20 percent of the workforce -- within the four-hospital system were eliminated in two rounds of layoffs last year. Martin said that no doctors and few nurses were laid off as most reductions occurred in the administrative staff. Those cuts were followed by the firing of longtime Health System CEO William Kelley. He was replaced by Peter Traber, who resigned after just five months on the job to take a high-paying research position with a top pharmaceutical company. The $198 million deficit in FY99 was preceded by a $90 million deficit in FY98. These massive losses came after years of the Health System being a virtual cash cow, with much of its profits funneled directly to the School of Medicine. Penn officials have repeatedly denied that the Health System's financial mess would impact the rest of the University. But major investment firms lowered the University's bond rating last year, and large capital projects -- including the $378 million dorm-dining renovation plan -- have seen delays. While the Health System was able to report better financial results this year, the staff cuts have come with their own costs. "We've had some delays, and we've not been able to accommodate the patients as quickly as we would like, but we'll work through that," Martin said. UPHS also saved money by delaying several long-term projects, like refurbishing the intensive care unit at Pennsylvania Hospital and renovating the emergency room at Presbyterian Hospital. And the Health System tried to cut overhead and supply costs by outsourcing food provision and increasing clinical efficiency at the patient bedside, among other things. Also, the purchasing, accounting and central building administrative departments were all merged to help save money. "What we've had to do is find other ways to do the work," Martin said. Fortunately, Martin added, there have been few problems with staff members and faculty leaving, and he said he was pleased with the response of Health System employees. "Have they had to work hard? Yes. Have they done it willingly? Yes," Martin noted. "I couldn't be happier about the response we've gotten from the faculty." However, despite next year's projected profit, the system will continue to face financial challenges. The difficulties of UPHS have been partially attributed to the Balanced Budget Act of 1997. The heralded budget-cutting law has led to federal budget surpluses but at the same time dramatically decreased Medicare payments to academic hospitals. Penn seemed to be the most hard-hit of any academic institution in the country. And each year, Martin said, the Health System loses about $65 million in treating patients without health insurance -- which is essentially work for no payment. Martin said the system was seeing less in reimbursements for research and teaching than in past years. "We are getting paid less now then we used to for a lot of the things we do," he explained.

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