AAMC Reporter: March 2009

In Tough Economic Times, Medical Centers Take a Hit

The rocks and dirt had been cleared away. Workers were ready to dig into the earth and begin construction on the facility that would house the only proton beam therapy center in the state of Michigan. Cancer patients at the center would have access to an advanced form of radiation treatment.

But as the U.S. economy plunged, so did any hope of erecting the center, at least in the near future.

"We had prepared the site—it was set and ready to roll," said Beaumont Hospitals CEO and President Kenneth Matzick. "But the tight credit markets prevented us from borrowing the necessary funds."

With the national economy in turmoil, Beaumont officials do not know when they can restart the project. Plenty of other medical centers are in the same boat. Even though Beaumont may be particularly vulnerable because of its geographic proximity to the foundering auto industry, medical institutions across the country are struggling to build new facilities and provide comprehensive patient care in the difficult economic climate. The high unemployment rate, large number of home foreclosures, and faltering credit markets are taking their toll on medical schools and teaching hospitals—and causing much unease within the academic medicine community.

"In every conversation I have had with a medical school dean over the past two months, the subject of the financial challenges that they are facing comes up," said AAMC Chief Academic Officer John Prescott, M.D.

An AAMC survey of chief financial officers (CFOs) found that teaching hospitals had a 25 percent loss in operating margins (a measure of operational efficiency) from the third quarter of 2007 to the third quarter of 2008. An American Hospital Association survey analysis of more than 550 hospitals found that their 2008 third-quarter investments had a combined loss of $832 million, down from a $396 million gain a year earlier. During this quarter, the same hospitals had a 1.6 percent average loss, compared with a mean 6.1 percent profit the year before.

Layoffs may soon become an unavoidable option for a growing number of academic medical centers. More than 50 percent of hospitals surveyed are planning hiring freezes and eliminations or reductions in programs. More than 35 percent of teaching hospitals are planning furloughs and cutbacks in non-clinical staff. News reports indicate that at least 10 medical schools and teaching hospitals have had to eliminate a total of nearly 3,300 positions.

Lower returns on investments, higher costs of borrowing money, and less support from state governments all contribute further to medical centers' financial predicament, according to AAMC Chief Health Care Officer Joanne Conroy, M.D. Medical schools are also suffering, Prescott said. The schools rely in part on support from their endowment, their state legislature, and affiliated hospital revenues, all of which are diminishing in the difficult economic times.

And of course, the economic woes of patients are also causing financial sickness in hospitals. Medicaid patients, which normally generate less revenue than those who have private insurance, are on the rise. More patients are putting off paying medical bills or foregoing the doctor entirely.

According to Matzick, Beaumont lost money in 2008 for the first time ever.

"People in Michigan are suffering, and that is in turn hurting our institution," he said. "People are deferring filling prescriptions, and women are deferring getting mammograms."

Financially strapped Michigan physicians, he said, are buying medical technologies and opening up freestanding surgical and imaging centers to increase their own bottom line, which can take patients and business away from Beaumont.

As a result, the hospital is determined to increase revenue and reduce costs. Beaumont is eliminating 500 positions, and enforcing pay cuts for executive staff, including Matzick, and salaried physicians. The hospital is also negotiating with medical product companies to cut costs on supplies, Matzick said.

Although Vanderbilt University School of Medicine has not been forced to lay off employees, the medical facility is making other financial sacrifices, said the school's dean, Jeffrey Balser, M.D., Ph.D. In an effort to lower spending by 3 percent to 5 percent in each department, Vanderbilt leadership is hiring very judiciously in the nonclinical arena, and reducing employee perks like business travel. The school hopes to at least maintain its philanthropic revenues, but Balser said now is the time to tread lightly.

"People are not in a position to give right now," he said. "This is a relationship-building period, where you stay close to your grateful patients and alumni, rather than a time where you actively solicit donations."

Others, however, say that faculty should be focusing on philanthropy now more than ever. Data from fundraising consulting firm Grenzebach Glier and Associates show that over the past 40 years, philanthropy has grown consistently regardless of the larger movements of the market.

"There is a greater need for philanthropy now," said Miami-based Mount Sinai Medical Center President and CEO Steven Sonenreich, M.B.A. "We are placing more of a focus on the growing number of 80-somethings, people who are not as affected by the economy and are in a position to make a major contribution."

More philanthropic dollars could help schools as they contend with dwindling endowments. Yale University is projecting a 25 percent drop in its endowment in fiscal year 2009, from $22.9 billion to approximately $17 billion. To make up for the reduced endowment income, the medical school is creating cost-savings strategies that include limiting salary increases for faculty and possibly delaying construction projects, said Robert J. Alpern, M.D., Yale's medical school dean, in a statement.

How are medical students faring in these difficult times? Some medical schools have publicly stated that they will not disrupt financial aid and other support for their students, but keeping this promise may be difficult. The Cleveland Clinic Lerner College of Medicine of Case Western Reserve University, for example, offers students free tuition with funding generated from the Cleveland Clinic Health System. But in today's difficult economic climate, spending changes may be necessary to keep this scholarship program afloat.

"We are carefully and aggressively evaluating other expenditures that might be decreased or eliminated in the overall budget to ensure that these scholarships are preserved," said James Young, M.D., dean of the Lerner College of Medicine.

The school's endowment has traditionally helped students with the costs they incur in medical school, such as living expenses, but with this source of revenue dropping, endowment spending must also be curtailed to make sure students have the same amount of financial support, Young said.

To trim expenses,Young said that the university will reduce its spending on commodities like office catering, computer equipment, and faculty travel. He said there would be no layoffs.

Karen Antman, M.D., dean of Boston University (BU) School of Medicine, said her top priority is ensuring that all BU students still have access to loans. She said that financial aid officers are taking more time to educate students on how to borrow money most economically, so they graduate in the best financial shape possible.

"We are specifically asking our students about their financial aid,"Antman said. "We certainly want them talking to us about their problems with borrowing rather than dropping out of school."

BU medical students' education, Antman said, could potentially be either helped or hurt by the financial climate at BU's affiliated hospital, Boston Medical Center (BMC). Because of the hospital's problems, there are fewer staffers to help BMC physicians (who are also BU medical school educators), meaning that clinicians must manage more aspects of their patients' care. On one hand, doctors may be too rushed to fully discuss their patients' situations with the BU students on hospital rotations. On the other hand, fewer hospital resources may encourage doctors to give students greater clinical responsibilities under supervision, Antman said.

While institutions are finding ways to rework their own budgets, the AAMC and the University Health Consortium (UHC), an alliance of academic medical centers and their affiliated hospitals, have recently developed the CFO Sentinel Network to collectively examine teaching hospitals' economic problems. The network consists of approximately 30 CFOs who are engaging in monthly phone calls to share their experiences and generate ideas on how to survive in the financial crisis.

"We are hoping to give people a chance to share their challenges, and hopefully their success stories," Conroy said.

—By Elissa Fuchs