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July 21, 2006

A decade in the black: U-M Hospitals and Health Centers end 2006 with 5.5% operating margin

10th straight year of positive operating margins; hospital prepares for more difficult times ahead

ANN ARBOR, MI – The University of Michigan Hospitals and Health Centers has finished its 10th straight fiscal year in the black and has completed its fifth consecutive year of increasing its operating margin, a sign of the medical center's strong financial health as it prepares for an increasingly difficult health care finance environment. A positive operating margin is essential to fund continued advances in patient care, education, research, and the facilities needed to support these functions.

In a presentation today to the U-M Board of Regents, Health System leaders reported that the UMHHC unit of UMHS has had another strong year financially, with an operating margin of 5.5 percent ($79.4 million) on revenues of about $1.44 billion. That exceeds the previous year's margin of 5.4 percent. UMHHC officials had budgeted for a 4 percent margin for the current year.

“Our faculty and staff performed at consistently high levels to produce these results,” says Robert Kelch, M.D., U-M's executive vice president for medical affairs and CEO of the U-M Health System. “We take great pride in the fact that the Hospitals and Health Centers have experienced a decade of solid finances, while also improving the quality of the care we deliver to patients.”

As a nonprofit institution, the hospital uses its operating margin to reinvest in facilities and resources that ensure the highest quality of care for its growing patient population.

The Regents also approved the budget for fiscal year 2007, which includes an operating margin goal of 4 percent ($62.2 million) on revenues of $1.55 billion. One of the goals and targets outlined in the UMHS Strategic Direction is that the UMHHC achieves an average operating margin of at least 3 percent per year during the next 10 years.

The next several years will be exciting as UMHS adds clinical space, says Doug Strong, interim director and chief executive officer of the Hospitals and Health Centers. But they also will be challenging due to the expenses of building projects and government reimbursements for health care.

The new Cardiovascular Center is projected to add operating expenses of $8.7 million in 2007, mostly due to hiring and training of staff in advance of the June 2007 opening, plus utilities and depreciation costs.

Also, the Orders Management Project – which will allow employees to enter, process, fill and carry out all hospital-based orders for medications, procedures and other care – is expected to add operating expenses of $9.4 million in 2007, due to training, maintenance and other expenses. The project is a major contributor toward the Health System’s goal of improving efficiency, safety and quality.

Additionally, Strong says, reimbursements from Medicare and Medicaid will affect the bottom line in the coming fiscal year. Both are expected to increase at a level far below the rate of inflation – a 1.1 percent increase in revenue per case from Medicare and a 0.2 percent increase from Medicaid. The inflation rate is assumed to be 3.4 percent.

“The reimbursement levels present us with a distinct challenge,” Strong says. “That is a large part of the reason we are projecting a lower operating margin for 2007 than we have experienced in recent years.

“Nonetheless, we are prepared to serve our patients with the highest quality of care. We will continue to increase efficiency, and increases in our capacity in coming years will assist us in our ability to meet financial challenges,” he says. He also notes that philanthropic gifts are helping to fund many major projects.

The Hospitals and Health Centers’ will add capacity with the opening of the new Cardiovascular Center and other expansions in 2007 and later. “Demand for our services remains very strong,” says Tom Marks, interim chief financial officer for the Hospitals and Health Centers. “Until more physical capacity is added in coming years, we will continue to work hard to accommodate the demand through length-of-stay initiatives and improved patient flow in our existing facilities.”

Other efficiency efforts are underway as well, most notably the Michigan Quality System, which builds on the lean-thinking approaches of Toyota Production and GM’s Global Manufacturing System. Numerous projects around the Health System are focused on improving efficiency.

The three U-M hospitals – University Hospital, C.S. Mott Children's Hospital, and Women's Hospital – had 44,113 patient discharges in fiscal 2006, up from 43,345 in the previous year. Another 40,932 surgical cases, both inpatient and outpatient, took place in U-M operating rooms. Meanwhile, the many U-M outpatient clinics and health centers in three counties handled more than 1.6 million visits.

A master plan for UMHS provides a framework for long-term expansion opportunities. The plan lays out approximately 3 million gross square feet of potential buildings, including approximately 1.1 million square feet of space for the women's and children's replacement hospital project, which is scheduled to break ground in October and be completed by 2011.

Other facilities that are currently under construction or were completed recently include:

  • The Biomedical Science Research Building, which opened earlier this year 2006 at the southern edge of the current medical campus, and providing 470,000 square feet of research laboratories, life science support facilities and a 300-seat auditorium.
  • The six-story Cardiovascular Center, scheduled to open in 2007 at the heart of the medical center with a 350,000-square-foot clinical building and adjoining 465-space parking deck.
  • The East Ann Arbor Ambulatory Surgery and Medical Procedures Center, a 46,000-square-foot outpatient diagnostic and treatment facility on the East Ann Arbor medical campus opened in April 2006.
  • The Rachel Upjohn Building on the East Ann Arbor medical campus, which will house the U-M Depression Center as well as outpatient psychiatry and substance abuse clinics, and is scheduled to open in late 2006.
  • The Kellogg Eye Center expansion and Brehm Diabetes Center building, a 220,000-square-foot expansion scheduled to be completed in 2010.

UMHHC's financial stability also is reflected in its excellent bond ratings with both Moody's Investors Service Inc. and Standard & Poor's. This bond rating is among the highest in health care systems across the industry and reflects a strong and sustainable financial position.

Written by Katie Gazella

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