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PRESCRIPTION FOR CHANGE Going private helps UM Medical System


When new managers at the newly privatized University of Maryland Medical System went looking for the source of the system's money troubles nearly a decade ago, they discovered a "Cost Overrun Approved" rubber stamp.

Astonished, they deposited the stamp with a historian and moved, successfully as it turned out, to change old habits. Last year the medical system -- University of Maryland Medical Center, Cancer Center and Shock Trauma Center -- reported net income of $5 million a year, about the same amount it used to lose annually in the rubber-stamp years.

In the eight years since the system went from public to private, non-profit status -- which freed it from state rules that hampered its competitiveness -- its cash flow has consistently increased, its patient volume has skyrocketed, and its facilities have undergone $130 million of long-overdue renovations the state couldn't afford.

Also in that time, the system has opened a new $43 million Shock Trauma building and and contracted with the state to manage Montebello Rehabilitation Hospital; it will take ownership Montebello, in Northeast Baltimore, July 1.

Construction on a more efficient and customer-friendly $85 million inpatient medical treatment center begins this summer. A second building for outpatient services is planned for 1996.

And the medical system and its public partner, the University of Maryland School of Medicine, embarked last week on a joint $125 million, five-year campaign to raise funds for more building improvements and new education and research programs.

"It is a very positive example of a state facility that the state government divested itself of and which turned around," said Del. Howard P. Rawlings, D-Baltimore, who led the 1984 fight in ** the General Assembly to privatize the then-failing hospital.

Despite the success of its turnaround, the future presents new challenges. As the hospital enters an era of fierce competition, it faces a growing bill for caring for the poor. In addition, it has built for itself a niche in specialties that are expensive to maintain -- trauma, cancer, cardiology, pediatrics and neonatal care.

"We are good at providing services at a very high level to very sick patients," said Roger Lipitz, chairman of the hospital's board, which is appointed by the governor. "My concern is, we have enormous capital needs because of the age of our buildings and, secondly, the uncertainty of where health care is going in the 21st century."

The 747-bed medical system in downtown Baltimore was hemorrhaging in the early 1980s when hospital regulators began arguing that a private institution would cost less.

Lawmakers took notice. At the time, the medical system was the most costly in the state. It remains one of the most expensive, partly because it treats a higher proportion of seriously ill patients than any other hospital in the state. But its costs have grown only about two-thirds as fast as other hospitals' in the state. (This year they are 3.4 percent above the state average, compared with a high of 8 percent above in 1988, when state regulators forced the system to slim down by denying it an annual rate increase for inflation.)

Except for the Shock Trauma Center, it pays its own way, saving taxpayers an estimated $49 million and increasing productivity 16 percent in the past five years, according to hospital estimates.

The medical system's historic mission of providing comprehensive care for the poor and elderly of West Baltimore continues. But the medical specialties it successfully nurtured over the past decade also have attracted more private-payment patients. From 1986 to 1990, a period when hospital admissions nationwide were unchanged, the number of patients admitted to the medical system grew 22 percent.

By going private, the medical system increased productivity in a number of ways. First, employees' paid holidays were cut in half, to seven from the 14 state workers get. A new patient billing and collection system improved cash flow.

"We invested heavily in computers," said Robert A. Crencik, senior vice president for finance. "The thinking was, if we can bill and collect more efficiently, it would reduce [the cost of] uncompensated care."

The cost of providing charity care, as a percentage of revenues, dropped more than 1 percentage point at the medical system from 1982 to last year, Mr. Crencik said, while the statewide bill in the same period increased 2.38 points.

In addition, a private structure left the system free to set competitive salaries to attract and retain nurses and other health professionals, to join consortiums that buy equipment at a discount and to renovate without waiting up to seven years -- when technology could have changed dozens of times -- for state approval.

"You can't run a hospital and keep it modern and up-to-date when you have to go through the state bureaucracy," said John M. Dennis, who retired in 1990 as dean of the medical school after 17 years.

"The hospital could no longer run as a state institution," he said. "I think that has been proven."

Mr. Lipitz, the medical system's board chairman, says that in addition to the system's restructuring, "one of the things we were lucky about was the medical school did a wonderful job recruiting physicians with clinical practices."

The number of doctors with clinical practices at the hospital rose 24 percent from 1986 to last year, the chief reason for a corresponding increase in patients. Before the 1980s, faculty members received their salaries from the state and were discouraged from practicing. Today the state pays only 15 percent of the medical school's budget. Doctors' salaries come chiefly from their practices and research grants.

The growth of the medical system parallels growth at the medical school, which in 1990 was No. 1 in garnering the most new grants from the biggest grantor in medicine, the National Institutes of Health.

In the space of a few years, the medical school has doubled its research grants, now about $80 million annually. The result is that the 400,000 square feet of new space that opened in 1977 to attract faculty members was filled years ago. This summer, the medical school breaks ground on a $47 million health-science building. That is likely to trigger another round of growth.

The medical system was able to nurse itself back to financial health in no small part by keeping costs down at a time of explosive growth. Now, with patient volume expected to stay steady or even drop, hospital managers will have to find new ways to remain economically viable.

The state contributes about $5 million a year to the system, which had an operating budget of nearly $300 million last year. A large chunk of the state contribution, $3.3 million, pays for a deficit at Shock Trauma. (More than 20 percent of the bills for victims who come through Shock Trauma are unpaid, a much higher percentage than at any other hospital.)

The remainder of the state contribution pays pension benefits for about 1,800 former state employees who kept their state pensions when the hospital became a private corporation.

And the state continues to help with capital costs. The state set aside $50 million in its capital budget to pay for part of the new inpatient treatment center being built this summer.

Teaching hospitals and academic medical centers always cost more to run than other hospitals, Mr. Lipitz said, so "they have to manage the changes in an even more aggressive way than community hospitals might. The uncertainty is an industry phenomenon: Who will pay us, what types of illnesses will they allow us to take care of?"

"We've reduced costs significantly in the past five years, and now we have to do more," said Dr. Morton I. Rapoport, president and chief executive officer of the medical system.

For instance, Dr. Rapoport said, hospital managers are now reviewing each step a patient takes once inside the hospital to see whether they can make the process more friendly and more efficient and shorten a patient's stay.

Mr. Rawlings, a member of the hospital's board of directors, said the hospital's future will continue to be bright as long as the state retains its unusual waiver from federal Medicaid reimbursement rules. The waiver is the result of the state's own successful system of keeping increases in health-care costs well below national averages. It is expected to continue as long as the increases remain lower than average.

The medical system's bad debt from treating the poor accounted for 11.3 percent of its bills last year, a level reached by only five or six other hospitals in the state. It is expected to rise to more than 16 percent, or an additional $15 million, next year as the result of the state's decision to cut its supplemental medical care program for the poor from the budget beginning Nov. 1.

In Maryland, hospitals are allowed to include the cost of uncompensated care in their rates. It ranges from 21 percent at Shock Trauma, for instance, to a low of 3 percent at St. Joseph's Hospital, state regulators say. The gap is expected to widen so much in coming years that regulators say insurance companies may steer patients away from University, Johns Hopkins and other hospitals that treat large numbers of poor people, leaving these further burdened with medical assistance patients. Some steering already is happening, and as a result, the General Assembly set up a task force this year to examine alternatives to funding such care.

Going private has not been accomplished without pain. In the mid-1980s, clinical chairs and the hospital administration faced off in a battle over the way the hospital's new direction was being implemented. Today, both sides agree, the tensions are the normal ones, usually over requests for more money.

"There has been a maturing of the hospital in terms of its identity as a private institution separate from the medical school. Now there is the desire and the need to really . . . pull us back together," said M. Carlyle Crenshaw, chairman of the Department of Obstetrics and Gynecology.

Nowhere has the transformation from public to private more pronounced than in his department, which grew to 30 doctors and a $10.5 million budget from eight doctors and a $1 million budget in less than a decade. In that time, the department moved from the bottom rung to the top 10 percent of NIH grantees for high-risk pregnancies and saw the state contribution of its budget drop to 10 percent from 75 percent in 1980.

"I think the long-term planning and implementation of that plan and the growth of clinical programs has been superb," Dr. Crenshaw said.

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