UCLA Medical Center’s Income Drops $50 Million

Once regarded as the hardiest UC medical campus in a punishing health care economy, UCLA Medical Center in two years has seen its net income plunge $50 million and bottom out at close to zero.

A decade of ever-slimmer payments from managed care plans, a Medicare crash diet prescribed by the federal government and the rising costs of labor and drugs have taken an ugly toll on one of the nation’s premier medical institutions, administrators say.

UC officials insist that patient care has not been compromised and that they regard the downturn as temporary. They forecast improvement as early as next year--a margin of $10 million--and stress that neither UCLA nor any of the other UC medical campuses is in danger of closing.

But some physicians worry that the medical center has sustained just about all the fiscal starvation it can stand. “The fat is gone and we’re into muscle and bone,” said Dr. Linda Demer, UCLA’s chief of cardiology.

“It’s quite horrible to watch,” Demer said. “This [is] an intellectual environment that leads to discovery. It’s hard to put a price on it, hard to quantify. But it’s like the rain forest that evolved over years--easy to chop down and hard to replace.”

UCLA is just the latest in a long line of teaching institutions nationwide to watch its fortunes dive. The University of Pennsylvania, for example, reported a $200-million deficit in 1999. Duke, New-York Presbyterian, Mount Sinai of New York and many others have instituted substantial layoffs. UC San Francisco disentangled itself just this spring from a disastrous merger with Stanford and this fiscal year faces a $25-million loss.

Even when the hemorrhaging at UC San Francisco is excluded, the rest of the campuses collectively lost $90 million in net income since 1997.

“It’s a common saga across the country,” said Mark Laret, a former UCLA and UC Irvine administrator who signed on as chief executive of UC San Francisco this year.

The UCI Health System made $6.4 million last year, but that does not mean it is without financial problems.

While the UCI Medical Center, or hospital, ended the fiscal year with a profit of $14.3 million, the medical group of 400 university faculty lost $7.9 million. In the 1996-97 fiscal year, the medical center made $51.4 million, while the medical group lost $13 million.

To lessen the impact of the current shortfall on the medical group side, the health system is canceling contracts with health maintenance organizations that do not cover the cost of patient care, said Susan Rayburn, the vice president of external affairs at the medical center.

The Secure Horizons HMO, which was canceled July 1, has cost the health system $800,000 the last fiscal year, Rayburn said. UCI also has canceled Health Net, except for its own employees.

“If we find out a contract is not making costs, we will cancel the contract,” she said.

Until recently, UCLA, which takes in more than $700 million in revenue annually, fared better than most. Just three years ago it was among the top five most profitable academic medical centers in the nation.

It adapted early and swiftly to managed care, making cutbacks of about $40 million in 1994-95. It expanded its patient base by aggressively building primary care networks in the community.

But by last summer, it was forced to make additional cuts of more than $60 million. It laid off the equivalent of 300 employees.

“We have cut so significantly that if we have [to make] any more . . . we think it will have a significant negative effect on our ability to continue to be one of the nation’s cutting edge institutions,” said Dr. Gerald Levey, UCLA’s provost for health sciences.

The medical center took a huge blow with the federal Balanced Budget Act in 1997, losing $25 million in reimbursements over three years. That act--aimed in part at forestalling bankruptcy of the federal Medicare program--was designed to reduce federal payments to hospitals nationwide to the tune of $110.5 billion. In fact, however, that was a “gross underestimate” of the losses hospitals sustained, Levey said.

UCLA and UC San Francisco were hit particularly hard among the UC campuses, because they depend more heavily on Medicare funding and do not receive the extra compensation that the Davis, Irvine and San Diego campuses do for providing care to the poor. UCLA serves a significant number of Medi-Cal patients but not enough to get the extra payments.

In addition, West Coast medical centers are geographically disadvantaged. They historically have received far less federal reimbursement for their residency programs than hospitals in eastern states such as New York. California now receives about 70% of the national average per resident.

“We’d like to get to at least the average,” said Maribeth Shannon, UC’s head of clinical services development, who noted that at least two legislative remedies are pending.

Adding to the pressure is California’s tumultuous health care economy. The number of uninsured patients has soared to 7 million; key members of the labor force are in short supply and demanding change; doctor groups are going belly up; health plans want more for less; and more than 60% of hospitals statewide have plunged into the red.

The UC campuses--UCLA included--are not sheltered from the storm.

“You ask, ‘How do you move so quickly from such a heavy bottom line to almost nothing?’ ” says Robert Dickler, senior vice president at the Assn. of American Medical Colleges.

“Historically you often see a major change in one payor segment, Medicare would make big changes . . . or Medicaid or . . . private payors. Now, everybody is making big changes and everybody is putting enormous pressure on reimbursements. You really have no relief valves. . . . It’s led a number of [medical centers] to very precipitous changes.”

Levey says UCLA and other academic medical centers are especially challenged in this unforgiving economy, because “our mission is more complicated.” Such institutions actually have three missions: patient care, research and education of future clinicians--all of which are tremendously costly and labor intensive.

As Levey puts it, if just one leg of that three-legged stool is weak, it becomes destabilized. In UCLA’s case, he contends, both medical education and clinical care are underfunded.

Research is thriving--UCLA gets $231 million a year from all sources, second highest in the nation. Yet, substantial sums are needed to bring research and technology to the bedside and to train the clinical experts of the future.

“We have to bring the system back into balance,” Levey said.

Critics have suggested that many academic medical centers spent their way lavishly through the last half-century, and when their fortunes changed, they did not make the most compelling case for financial rescue. Even some insiders who value the centers’ mission admit that their message hasn’t been clear to the public and politicians.

“A big part of the problem is that in past decade, we never delivered a message of what we were doing,” Demer said. Getting that message across “takes some public relations and in the past, we never had to do that.”

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Staff writer Jeff Gottlieb in Orange County contributed to this report.

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Falling Income

UCLA Medical Center net income in millions of dollars

‘95: $12 million

‘01: $10 million*

* Projected

Source: University of California office of the president

Losing Revenue

UCLA Medical Center, once considered resilient in a turbulent health care economy, is showing lower net income than three other UC medical campuses.

UC medical centers’ profit margin* (through May)

Note: UC San Franciso figures not available.

* UC medical centers are nonprofit. Money that might be considered profit is put back into center operations.

Source: University of California office of the president.