Losses put OHSU at crossroads
Expenses - University development, including a waterfront campus, will not go forward until finances stabilize
Tuesday, October 30, 2007
TED SICKINGER
The Oregonian
Oregon Health & Science University's losses on laboratory research and doctor education are growing far faster than anticipated and are projected to reach $50 million this year.
Those losses mean tough choices for the university, which has ambitious plans to treat more patients, expand its scientific research and build a world-class medical school that will train new doctors for Oregon.
OHSU President Joe Robertson told The Oregonian that the university has sufficient resources for the next 20 months, but that its current financial course is "not sustainable."
Robertson declined to speculate how the university might address the growing losses or say whether cost-cutting alone could close the gap. OHSU will complete unfinished space in its new hospital wing, he said, because that will bring additional profits. But the university will not go forward with other plans, including a medical school campus on Portland's waterfront, until it stabilizes its finances.
"We cannot embark on development that will strain our finances," said Robertson, president since September 2006. "Our university has to be self-sustaining."
At a board meeting today, Portland's largest employer is set to unveil results of a yearlong strategic planning process undertaken when Robertson succeeded longtime President Peter Kohler last year. The detailed plan includes 170 "tactics" intended to enhance OHSU's ability "to contribute to the health and well-being of Oregonians."
It calls for increased efficiencies but does not specify cuts or savings.
Five-year plan
The university could sharply pare expenses to end the losses, and Robertson said the administration intends to present a five-year financial plan to the OHSU board in December that targets higher profit margins, partly by cutting $45 million in operating costs by 2011.
"Hitting those numbers and getting those efficiencies is the key to making the reinvestments we need to make," Robertson said.
But he acknowledged that such cost-cutting is a delicate balancing act. OHSU has already been tightening its operational purse strings for years, even while expanding. The risk, Robertson said, is losing the top-shelf scientists and clinicians that OHSU has worked so hard to recruit. "They're highly mobile," he said.
Such departures could lower patient revenue and research grants, leaving OHSU even less money to provide cutting-edge care and increase the supply of doctors.
Financially, OHSU divides its operations into two parts -- the hospital, or clinical operations, and the university, which includes research and medical school operations. Although the hospital is profitable, the university is not.
This year, the hospital is projected to make $36 million, even after it transfers $35 million to subsidize the university's medical school and research.
Even so, the university is projected to spend about $50 million more than it takes in. That might not sound like much for an institution with an overall budget of $1.2 billion. But such a loss would wipe out all of the hospital's operating profits plus an additional $15 million.
Research loses money
University losses have plagued OHSU for years, so much so that its former chief financial officer, Jim Walker, repeatedly warned board members about the potential for a financial meltdown.
Research provides many downstream benefits to OHSU. It helps attract patients, philanthropy and doctors with profitable practices. It also can create profits if researchers come up with an invention that is licensed to a company.
Yet viewed strictly as a business, on its own, research loses money. Typically, the more research is done, the bigger operating subsidy is needed from philanthropy or clinical revenue.
Two and a half years ago, OHSU was at the tail end of a research and clinical expansion that saw taxpayers inject $100 million to build a research building and another $75 million to recruit scientists and provide them with multiyear support packages to re-establish their labs and grant support. Donors chipped in another $360 million.
At the time, then-President Kohler predicted that the university could continue growing its research funding at a brisk pace. Kohler also forecast that OHSU could drive its internal research subsidy to close to zero by boosting researchers' productivity and reducing administrative costs.
So far, the expansion hasn't panned out that way.
OHSU saw a 3 percent rise in federal grant awards last year, a performance it touts as impressive at a time when grants from the National Institutes of Health have been flat or, in inflation-adjusted dollars, declining. But even as that money begins flowing, expenses on OHSU's university side are projected to grow almost 10 percent this year.
OHSU Chief Financial Officer Brad King said the university's portion of research costs not covered by grants has increased from about $20 million in 2005 to between $40 million and $55 million this year.
Parcel of land sold
To balance its books, OHSU sold a parcel of land on the South Waterfront to a retirement community developer and the former campus of Oregon Graduate Institute to an investment group. A combination of those sales, plus its planned sale of another parcel of its West Campus this year, are projected to bring in a one-time gain of about $30 million.
Land sales are hardly an ideal way to finance current operations, Robertson conceded, but "the good news is that was available at the time we needed it."
The university will need a lot more cash in the near future.
Its near-term capital plans call for spending $30 million to build out additional floors of its new hospital wing, $35 million to install a costly electronic medical records system, and some $65 million to cover new equipment, technology and maintenance in the university.
By 2010, OHSU is committed to begin construction on a new parking garage on the South Waterfront that is expected to cost at least $40 million. OHSU already renegotiated a development agreement to delay construction as it searched for ways to finance the garage.
OHSU has some excess borrowing capacity. It is hoping that Standard & Poor analysts who recently visited the campus will upgrade OHSU's credit rating to investment grade, which would reduce borrowing costs.
Revenue from the 1,200 to 1,500 parking stalls, however, would likely be insufficient to service the debt, said Mark Williams, director of the South Waterfront project for OHSU.
Finally, the university is planning an all-new medical campus on 19 acres of land below the Marquam Bridge that was donated by the Schnitzer family in 2002. The campus is likely a multidecade, multibillion-dollar undertaking that would require massive philanthropic support and an expensive expansion of city roads and sewers.
OHSU received an anonymous $40 million donation earlier this year toward its first building there, but it's doubtful construction will start anytime soon. OHSU won't even launch a feasibility study on the capital campaign until later this year.
"For the academic expansion, we'll have to raise the money or expand with another capital partner," Robertson said.
Even as OHSU starts the process of identifying efficiencies, it faces outside financial threats.
The Oregon Supreme Court is considering whether to uphold a lower court decision that removed a tort cap on employees of state agencies. The cap limited medical malpractice damage awards against OHSU to $200,000. If the decision is upheld, it could cost OHSU $18 million a year in additional insurance premiums.
OHSU also is worried about a federal proposal to eliminate Medicaid payments for graduate medical education. The proposal, shelved for one year under heavy lobbying from academic health centers, could cost OHSU up to $30 million a year.
Either situation would be a serious hit.
Robertson said the university has the time to get its financial house in order. He calls 2008 "a transition year." The new strategic plan, he said, will provide a manifesto to drive detailed financial decisions.
"We have excellent data that suggest we're stable for the next 20 months," he said. "We have 20 months and we have a roadmap."
Ted Sickinger:
tedsickinger@news.oregonian.com; 503-221-8505
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