Cost fears lead to health cuts

Health care organizations, bioscience companies prepare for murky future

Portland, March 8, 2013 – By Ben Jacklet; Business Journal staff writer – Portland Business Journal

The hiring freeze at Oregon Health & Science University foreshadows a new era of uncertainty and caution for the state’s health care and bioscience industries.

OHSU last week said it would freeze salaries and adopt other cost-saving measures due to a daunting combination of federal research cuts, health care belt-tightening and skyrocketing pension costs.

“We looked closely at the signals, and they indicated a need for prudent belt-tightening,” said OHSU Chief Financial Officer Lawrence Furnstahl.
Similar challenges are threatening the balance sheets of health care providers throughout the state, as well as businesses in Oregon’s fast-growing biotech sector.

Between Medicare and Medicaid reductions and sequestration cuts, the Oregon Association of Hospitals and Health Systems is forecasting a $1.8 billion impact to health care providers statewide over the coming decade.

“It’s a big deal, and our members feel it every day, especially with the extra pressure of health reform,” said Andy Van Pelt, the hospital system’s chief operating officer.

Cuts began last year
OHSU isn’t the first health care organization trying to get ahead of what some health care executives have called the perfect storm. It likely won’t be the last.

Legacy Health System laid off several hundred people last year, and Providence Health & Services is $156 million into a $250 million cost-cutting initiative.

Federal cuts are particularly damaging to OHSU, which collects about 40 percent of its revenue from the federal government in research grants, Medicare and Medicaid reimbursements. OHSU received $359 million in research awards in 2012, ranking the institution No. 19 out of 140 research universities nationally. That amount represents an eight-fold increase over research dollars collected in 1990, helping to explain OHSU’s hefty long-term growth.

But those research dollars are at risk as warring parties wrestle over sequestration in Washington, D.C. A disproportionate amount of federal cuts have come from items labeled “discretionary spending,” including health and science research. All told, $85 billion in spending cuts took effect March 1.

“We are significantly impacted by the work of the federal government,” said Furnstahl. “And the only thing that is clear is that there is very little clarity. They are essentially producing a budget a few weeks at a time. There is no forward visibility.”

Widespread concern
That complaint is shared by Dennis McNannay, executive director of the Oregon Bioscience Association. The state’s bioscience companies are heavily dependent on federal grants to fund research, especially grants from the National Institutes of Health. Oregon ranked No. 21 among all states in NIH funding in 2011. The Oregon bioscience cluster employ almost 40,000 people.

Potential layoffs in the Food and Drug Administration could create delays in the approval process for new devices or drugs.

“Our lead in biomedical innovation as a nation is eroding quickly,” said McNannay. “We are not keeping up with the rest of the world.”

And then there is the unknown impact of health care reform. Its cost is impossible to forecast with certainty, but even its biggest supporters expect it to result in lower payments to health care providers.

That financial reality leaves institutions such as OHSU simultaneously supporting reform philosophically and fearing what it will do to their business model.

“It’s like we have a foot in two canoes,” said Furnstahl. “We’re still largely paid on fee for service, yet we know in the future we will be paid based on value. As we work to reduce the cost of care, the canoes start going in opposite directions.”

Still a growing industry
The health care industry has outperformed the economy in recent years with 7.5 percent annual growth. Furnstahl and other experts expect that rate to drop to about 4 percent with health care reform.

That will leave less money for OHSU to cover costs beyond its control, such as Public Employees Retirement System payouts, which grew from $36 million in 2011 to $57 million in 2012 and are expected to rise by another $21 million in 2013.

It also leaves less money for salaries and benefits, which add up to about 60 percent of OHSU’s expenses.

Furnstahl said the hiring freeze will last at least through the end of OHSU’s budget cycle, which ends June 30. Beyond that, the future is uncertain.

“We’ve shown an ability to outperform the market trends at OHSU,” Furnstahl said, citing huge philanthropic gifts from Phil Knight and major grants earned by researchers. “But I don’t want to assume that will continue. I want to start out cautious and then be nimble going forward as a business strategy.”

It’s an approach that makes sense to many health care providers.

“Reform is changing the business model for health care significantly,” said Van Pelt. “We’re shifting the model from inpatient care to outpatient care, and the finances of the new model are yet to be determined.”

Fast Fact
Since becoming a Quasi-public university in 1995, OHSU has grown from 6,600 employees and an annual budget of $499 million to more than 14,000 employees with an annual budget of more than $2 billion.

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