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January 9, 2012

Market Pressures Hit UMass Memorial | Leaders weigh changes after disappointing fiscal year

The financial performance of UMass Memorial Health Care Inc., the largest employer in Central Massachusetts, fell well below expectations in its recent fiscal year, raising the possibility of layoffs and cost-cutting in 2012.

John G. O’Brien, the system’s CEO and president, acknowledged that the results have him and his executive team analyzing the business model, a process that could include the elimination of some full-time positions, shedding of some ventures and pursuing changes to employee pension plans.

He said there are no immediate plans for layoffs and executives are just beginning to evaluate pension options (any change must be worked out with 20 bargaining units). But he acknowledged that UMass must evolve to stay sustainable in the face of declining reimbursements, steeper competition and pressure from payers.

UMass remains in the black, posting a surplus of $27.9 million in the fiscal cycle that ended Sept. 30. But that’s well below the $85.6 million surplus it had in 2010 and lower than tempered expectations of $62.6 million for the 2011 fiscal year.

The system averaged an annual surplus north of $81 million between 2007 and 2010, so the recent performance could be a troubling sign for one of the region’s largest economic drivers. UMass employs more than 13,000 and generates more than $2 billion in annual revenue.

The declining surplus comes at a time of major transition in the health care industry.

Dr. Andrew Epstein, a Needham-based consultant with Navigant, a services and consulting firm with offices around the world, said hospital executives face an uncertain future for their business models.

With major public and private payers pushing for a slowdown of quickly rising health care costs, the solutions could leave hospitals facing fiscal challenges as the focus shifts from expensive hospital stays and the fee-for-service model and toward prevention and tracking of health outcomes.

“It de-emphasizes the hospital, to be quite honest,” Epstein said. “I think what really concerns many hospital executives and health system executives is what does the health care picture of the future look like and how many hospital beds of what types do we really need?”

Hospitals also face a contraction in reimbursement rates that once showed consistent growth, as well as economic conditions that are causing some patients to put off health care decisions.

One big wild card will be the aging “baby boom” population, Epstein said. It’s not clear to what extent the health care needs of that age demographic (those who are around 50 to 65 years old) will offset margin-squeezing shifts in the industry.

Side Income

Though hospitals are facing pressure from insurers, government and businesses to reduce costs, the UMass system’s five hospitals were not the problem in 2011. For the most part, they met or slightly exceeded revenue projections while trimming spending on expenses and supplies.

UMass Medical Center in Worcester accounts for more than half of the system’s revenues. And while it posted its lowest surplus in years, it met budget projections.

For UMass, the problem was a $29.7 million swing in its investment portfolio, which ended the year down $10 million the first such loss in years combined with a deficit in its formerly profitable health ventures arm. UMass Memorial Health Ventures provides lab testing, imaging and other services to hospitals and medical groups in several states, O’Brien said.

Partnerships with Fairlawn Rehabilitation Hospital, imaging centers and other facilities are a part of the ventures portfolio, which earned $27.8 million for the system in 2010, but lost $1.1 million in 2011.

O’Brien said UMass had been able to command premium prices for such ancillary services, but that recent scrutiny of price variations among providers has put pressure on the venture arm.

“What’s happening with some of the ancillary services, like lab and imaging, you’re seeing that the business community and insurers no longer want to pay that premium,” O’Brien said.

O’Brien said he understands that sentiment, but said profits from the venture arm helped subsidize operations such as the system’s behavioral health division, which barely broke even on $57 million in revenues in 2011.

“If everyone paid equitably for services, if public payers paid their fair share, if people paid for behavioral health services what it actually costs us, you wouldn’t have this cost-shifting game,” O’Brien said.

He added that competition for ancillary revenues from for-profits and other providers, such as Quest Diagnostics and LabCorp, has also created a challenge for UMass. O’Brien said private companies are realizing they can offer some of those services more competitively than large hospitals, which have a more burdensome cost structure.

Todd A. Keating, the UMass system’s CFO, said the ventures arm is sure to change in the coming years.

It has changed before, he noted, shedding three nursing homes in the past five years when they were no longer profitable for UMass to run.

He said system executives will evaluate new business models in the coming year to look for opportunities, potentially even as partners with for-profit clinics.

“The ventures won’t go away per se, it will evolve,” Keating said.

Keating said UMass is aiming for a surplus this fiscal year of between $58 million and $60 million, a number that falls between the previous two years’ results.

While the side businesses have taken a hit, O’Brien said it wasn’t a big surprise. Administrators could see the changes coming and tempered expectations as a result, just not low enough.

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