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The University of Pennsylvania Health System will become a separate non-profit organization -- owned by Penn, but more financially independent. Unfortunately, it didn't have to be. Money to pay off the Health System's losses could have been obtained primarily from Medicare, or from the more than $400 million in tobacco settlement funds allotted to the state. The Hospital of the University of Pennsylvania, the historic Pennsylvania Hospital, Presbyterian Medical Center and Phoenixville Hospital will remain one creature with a single CEO, Robert Martin. The move protects the University from creditors. The Health System fell deeply into debt after the Balanced Budget Act of 1997 cut Medicare reimbursements to all hospitals -- especially academic medical centers. States individually receive federal funds for Medicare programs, adding their own funds if necessary. As noted health care economist John Iglehart states, "The federal government is divided over how and at what level it should support graduate medical education and care for indigent patients in a market-oriented health care system." Medicare, the largest single provider of medical care in the nation, is an important single source of revenue to the beleaguered Penn Health System. Yet Pennsylvania Gov. Thomas Ridge recently unveiled health care proposals in his fiscal year 2001-2002 budget that favor marginal programs over Health System debt. For example, Ridge delineates $16.9 million for a venture capital fund and $16.9 million for an endowment fund from the tobacco settlement according to the Delaware Valley Healthcare Council. The $400 million in state tobacco settlement funds could settle the Health System's debt, excluding bond repayment. Not a cent would come from taxpayers. Health System debt spun out of control when the Balanced Budget Act of 1997 substantially reduced payments to hospital teaching centers. And a slowdown in Medicare spending takes academic centers into irremediable debt that other revenue sources -- such as joint ventures or deep staff cuts -- can't begin to touch. For example, in 1998, Medicare direct reimbursement for residency training was $2.2 billion. Between the years 1998 to 2002, the BBA will reduce residency payments by $700 million. Indirect education reimbursement at teaching hospitals totaled $4.1 billion in 1998, but the BBA reduced payment over the period from 1998 to 2002 by a whopping $5.6 billion. The BBA acts against the Health System in other ways. It dramatically increases the average time needed for processing Medicare claims. And studies show that increasing processing time of Medicare claims by even a single week decreases claim payment by 2.3 percent. Skilled nursing care facilities are turning away Medicare patients, according to a 1999 Wall Street Journal article. But no health provider should resort to such unethical means of self-preservation. In 1996, Medicare's payment to HUP was $29,716 per resident on average, but the total amount per resident that the hospital would have received if all insurers paid their share of costs to HUP was $103,931 per resident, from Medicare's 1996 calculations. HUP had over 500 residents in 1996. Managed care no longer wants to accept prices that include reimbursement for graduate medical education. If the Health System maintains its agreement to provide education with the Penn medical school -- as it is expected to do -- it must do so below cost, in an environment created by managed care and the BBA. But Medicare Payment Advisory Commission Chairwoman Gail Wilensky testified before the Senate Finance Committee that she was unaware of any empirical data showing that the Balanced Budget Act of 1997 is wrecking havoc in academic medical centers. Clearly, the University has not been able to persuade federal and state allies that the debt accrued by the Health System is a legitimate public cost of educating first-rate doctors and caring for government-insured clients. Perhaps doctors will revert to the system used in Philadelphia during the colonial era, when residents paid tuition and the hospital for their training. There are losers in the partial divorce of the University and the Health System. And those who depend on the government and doctors-in-training must carry the new costs of the market.

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