Plans to spin off the Penn Health System into a separate not-for-profit entity have been put on the back-burner as the University Board of Trustees has instead opted to create a new, unified governing board, known as Penn Medicine.
Penn Medicine will assume oversight for the Health System, including the Clinical Practices of the University of Pennsylvania, the Medical Center and the School of Medicine.
In February, after months of speculation, it was announced that the University would convert the Health System to a separate 501(c)3 not-for-profit entity. This plan, among other things, was designed to insulate the University from the massive bondholder debt the health system had accrued during the late-1990s.
"There was the belief that it would be a good idea to separate the Health System from the University," said Arthur Rubenstein, executive vice president and dean of the Medical School. "Number one, it could protect the University from the vagaries of the finances of the Health System and, number two, it could allow the Health System to respond to the marketplace without going through the University hierarchy."
After further investigating the spin-off option, however, the administration and the Board of Trustees decided that the process was too complicated, at least for the time being.
"Previously, there had been a greater sense of urgency about creating a 501(c)3, but, upon further reflection and the fact that the finances of the University and UPHS are so intertwined, we've taken our foot off the accelerator on this issue," Health System spokeswoman Rebecca Harmon said in an e-mail statement. "Discussions about moving forward in creating a 501(c)3 entity will be the responsibility of the new Penn Medicine Board."
The Penn Medicine Board has not met yet and the date of their first meeting is uncertain, Harmon said.
Several University officials expressed the belief that unifying the various governing structures of the Health System and Medical School under the Penn Medicine Board would ensure a more efficient decision-making process.
"We had several objectives and one of them was to simplify the governance structure," Board of Trustees Chairman James Riepe said. "We wanted to have a structure that basically would help the governance process rather than hinder it and that would provide a single point of oversight."
"From the point of view of the management of the Health System, it's much easier if you can give them one point of focus," he added.
Some industry observers say that failing to separate the Health System, however, leaves the University with its prior liability of the Health System's debt.
Creating a unified board for the Health System "will be less effective than spinning it off as a corporation and it will require that future bond financing will have to be more carefully structured to protect the University," said Robert Field, director of the Health Policy Program at the University of the Sciences.
According to Rubenstein, though, the Health System's recent financial success is allowing them to explore options other than a spin-off.
In 1998, the Health System experienced a $98 million loss and its poor performance led Moody's Investor Service to lower the University's bond rating.
In the last two years, however, it has experienced a major turnaround. The June 2001 positive bottom line was $25.1 million, according to Rubenstein.
"This year's projection is at least as good," he said. "I think we can do all these things because the finances of the Health System have turned around."
Riepe added that the Penn Medicine Board would provide marketplace flexibility to the Health System, one of the goals of the spin-off plan.
"The whole academic health care area has changed dramatically in the last 10 years and we don't know how it's going to change going forward, so we wanted to set up a structure... that would be flexible and respond to changes going forward," he said.
University President Judith Rodin said, additionally, that integrating the governing boards would allow for flexibility in decision making.
"Every structure that we worked on for the prior six or eight months that didn't have them closely integrated created a set of tensions that we thought would actually be destabilizing," Rodin said. "So the goal was to create integration leverage and the opportunity to systematically articulate trade-offs in decision making that either were not made before or at least were not made manifest."
Riepe added, however, that continued success will still be in the hands of the individual actors within the University and the Health System.
"The financial success of the Health System will be determined not by the governing structure but by the actions that the management and the school of medicine take, and the clinical practices take. The governance structure is not meant to do that. It is meant to provide a better... form of oversight."
