UPHS: Restructuring is key to stability

Even though Penn's Health System recently turned the tide of financial losses last year, officials say adjustments must be made to the structure of the organization. The Health System owns four hospitals in the Philadelphia area, including the flagship Hospital of the University of Pennsylvania. According to Arthur Asbury, interim dean of the School of Medicine, the $330 million deficit of three years ago was trimmed to a $30 million operating loss in Fiscal Year 2000. But "balance sheet issues and capital needs" are forcing the University to rethink its relationship with the Health System. "Change is ever present," Asbury said last night in a talk sponsored by the Medical Faculty Senate. "Adapting to change continuously is the way we preserve our academic mission." Phoenixville Hospital, Pennsylvania Hospital and Presbyterian Medical Center were all acquired in the 1990s to insulate the Health System against powerful health maintenace organizations. "The major strategy behind the acquisitions was... to establish a Delaware Valley network of sufficient size and robustness in order to deal on a level plain with the health care payers," Asbury said in an interview last week. But while Phoenixville and Presbyterian posted modest profits in Fiscal Year 1998, Pennsylvania Hospital recorded a net loss of over $8 million. HUP has been by far the biggest drain on Health System resources, hindered by Medicare losses from the Balanced Budget Act, enacted by Congress in 1997. While HUP's losses due to the BBA have been in the millions, Phoenixville was only impacted "somewhere between $300,000 and 500,000 a year," according to Kevin Mahoney, executive director of Phoenixville Hospital. "We're one of the lowest cost providers in the Delaware Valley," Mahoney said of Phoenixville, which was acquired in 1997 by the Health System. Mahoney attributed the hospital's success to its "community orientation, high quality medical staff and long-term employees." But in spite of its successes, Phoenixville may find itself on the auction block. Wharton professor Mark Pauly, who specializes in health care finance, sees Phoenixville as a potential bargaining tool in a deal with an outside company. "Universities don't like to be owners of risky businesses," Pauly said. Mahoney would not comment on any discussions involving Phoenixville Hospital and the possible break-up of the Health System. Robert Field, director of the Health Policy Program at the University of the Sciences in Philadelphia, noted that any divestiture should be based on some fundamental criteria. "Does a university have to own those components of its medical program?" Field asked, noting that for over 100 years, Harvard University has not owned the hospitals to which it sends its medical students for training. "Penn has to decide what elements it needs for the academic mission." Another factor in a decision to sell, according to Field, is whether an individual component of a health system -- such as Phoenixville Hospital -- is worth more as an integrated part of the health system, whether or not the system as a whole is sold. "Unloading a component that in the short-term is profitable could be a short-sighted strategy," Field said. Pennsylvania Hospital executive director Timothy Morgan could not be reached for comment. Capital spending is "necessary in order to meet requirements for annual reinvestment in the academic enterprise," Asbury said. "HUP needs to have further investments made," agreed John Kastor, a professor of medicine at the University of Maryland. "So do the other hospitals." Unfortunately for the Health System, that capital just does not appear to be there. "Large transfers... sometimes at the rate of $100 million per year are obviously no longer possible," Asbury said.

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