System must grow independently

For two months, a committee of medical faculty and University Trustees debated the future of the Health System, and on Friday the Board of Trustees and University President Judith Rodin approved the committee's recommendations. But the fate of the new non-profit entity that will be the Health System is now in the hands of a skilled group of non-medical professionals -- lawyers. "I think there's going to be a lot of questions that are going to be on hold in terms of governance and management," said Robert Field, director of the Health Policy Program at the University of the Sciences. "To a sense, it depends on how good of a job the lawyers do." When the Health System's finances took a turn for the worse three years ago, Moody's Investor Service responded by lowering the University's bond rating. Just how the University will fare, should history repeat itself, has left both the experts and the University administration guessing. Penn is betting that the recent financial success of the Health System -- which has posted modest profits in the first half of this fiscal year -- coupled with the added flexibility that a new entity brings will enable the Health System to grow from its own revenues. "We're going to grow with organic growth, not just with cutting," Rodin predicted, noting that last year, Presbyterian Medical Center -- one of the four hospitals owned by the Health System -- grew by almost 30 percent. But whether the new arrangement of the Health System will encourage investment is a question that will be answered ultimately by the investors themselves. "It's all in the perception of the bond-rating agencies," said Wharton professor Sean Nicholson, an expert in health care management. "If they believe in the insulation, it will work." Legal teams are now in the process of ensuring that Penn's insulation from the Health System will succeed, without eliminating ultimate University control. "The important thing is that, over the next week or two, what we're going to try to do is work out what [the] bridging mechanism means in practice," Rodin said. But some stressed that concerns of liability are unfounded. "The size of the debt you have is not important," said Bernard Bloom, a Wharton professor of health care management. "What is important is your ability to service the debt." According to Rodin, the Health System has been effectively managing its debt. "We're paying down principle every month from the revenue generation of the Health System, as well as interest," Rodin said. Bloom, who is also a professor in the School of Medicine, said that the Health System is in a good position to be self-sufficient. "We're no longer losing money, we're making money," he said. "It's not as fast as we were five years ago, but we're making money." But whether or not financial difficulties lie ahead -- given the fact that an influx of desperately-needed capital will most likely be put off for a year -- the Health System will have few lifelines left should times turn sour. "There will be more pressure on the Health System to be self-sustaining," Field cautioned, echoing a statement from Rodin that the Health System is "going to have to make it on their own." "If it does well, it will benefit," Field said. "If it has trouble, the University would be less willing to bail it out." Interim Health System CEO Robert Martin is confident that the new entity will be able to survive in the ever-changing Philadelphia marketplace. "The main difficulty is that in a world of constrained resources we have to have a disciplined approach in allocating those resources among legitimate claims that [each division] has," Martin said. "I think we'll be able to effectively do that."

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