By Alec Rosenberg

University of California medical centers had a strong year in fiscal 2009, increasing revenue and operating margins amid a challenging environment, but that success is fragile, health leaders told UC Regents today (Jan. 21).

UC medical centers increased their revenue 12 percent from $5 billion in fiscal 2008 to $5.6 billion in fiscal 2009. Margins rose from 4.6 percent to 7.2 percent during that period. This performance helped UC medical centers maintain their economic vitality and contribute $400 million to UC's health sciences training program, the nation's largest.

"The financial success of our hospitals and health professional schools are inextricably linked, and this success is fragile in these times," said Dr. John Stobo, UC senior vice president for health sciences and services. Those concerns include wage and capital commitments, restarting contributions to the UC Retirement Plan and the impact of health care reform.

As a marker of the medical centers' success, Regents approved $3.1 million in payments to 38 UC Health senior managers today under the Clinical Enterprise Recognition Management Plan. Overall, UC Health has 22,000 participants, including more than 17,000 union employees, in 21 clinical incentive plans, with a total fiscal 2009 payout of about $33.7 million. UC pays for these programs with clinical revenue — no state funds are used.

Expert panelists told Regents that such incentive plans are the industry norm and a key tool to help raise the quality of care, increase efficiency and compete for the best talent.

Incentive pay programs for hospital executives "are very common," said panelist Dan Schleeter, senior vice president with consulting firm Integrated Healthcare Strategies. At the average large, public hospital system, up to 25 percent of CEO pay is awarded only if they meet their performance goals, he said. At UC Health, up to 30 percent of CEO pay is based on incentives.

"I strongly believe that incentives are a very important part of doing well as an organization," said panelist Lee Domanico, CEO of the Marin Healthcare District, where up to 42 percent of his salary is based on incentive pay. "They will motivate high achievers and help retain high achievers." Without incentive pay, base salaries would have to be higher to attract the best talent, he said.

Panelist Lloyd Dean has led Catholic Healthcare West since 2000, helping turn around an organization that had lost $1 billion over the previous three years into one of the highest performing systems in the United States. Carefully constructed incentive pay plans "allowed us to refocus the organization" and attract and retain the necessary talent, he said.

Regents approved the incentive payments with only Regent Charlene Zettel abstaining. "I don't feel comfortable supporting this but won't vote no," she said.

UC Health runs five medical centers, 10 hospitals and 16 health professional schools, training 3 of every 5 medical students in California. Incentives helped focus the system to improve patient safety, achieve group purchasing savings and enhance clinical payment rates. "Our hospitals are acting very much like a system," Stobo said. "They work together."

This year, UC medical centers exceeded their systemwide incentive plan goals:

Patient safety goal: Decrease bloodstream infections by 10 percent.
Result: Bloodstream infections were reduced by more than 20 percent in the second half of fiscal 2009.

Purchasing goal: Achieve $4 million in savings from group purchasing related to pharmaceutical, medical supply, lab and IT expenses.
Result: $7.1 million in savings.

Contracting goal: Increase clinical payment rates achieved by systemwide contracts with insurance plans by 4 percent.
Result: Clinical payment rates increased by more than 5 percent, or more than $100 million.

At UCLA, for example, UCLA Health System's executive team exceeded targets in improving safety, compliance and patient privacy. Its efficiencies helped contribute to its most profitable year, allowing it to transfer more than $53 million to the UCLA David Geffen School of Medicine to support education and training programs as well as clinical faculty.

"Like all five University of California medical centers, the UCLA Health System set out very specific goals for executives to meet," according to a UCLA statement. "Dr. David Feinberg, CEO, UCLA Hospital System and associate vice chancellor, led initiatives that resulted in decreasing bloodstream infections by 20 percent and improving patient satisfaction, which is now in the 92nd percentile nationwide with many units at the 99th percentile at Ronald Reagan UCLA Medical Center."

While UC medical centers collectively had a $400 million margin in fiscal 2009, the margin is "really being stressed" going forward, Stobo said.

Of that margin, $200 million is a cash transfer to support health professional schools. Another sign of the financial fragility is that UC Retirement Plan contributions by the hospitals are scheduled to start in April — costs would total $300 million annually based on a 10 percent employer contribution. Also, UC medical centers, which avoided the UC furlough program this year by generating equal savings through an alternate plan, face wage and capital commitments. The medical centers, which are investing in projects from electronic medical records to state-mandated seismic-safety upgrades, have capital needs of about $4.5 billion over the next five years. In addition, UC is looking closely at the possible impacts of health care reform. For example, any reduction in federal support for charity care provided by the hospitals would hurt their financial vitality.

"We really serve the underserved," Regent Sherry Lansing said. "And we serve the underserved with the best quality."

Alec Rosenberg is the health communications coordinator in the UC Office of the President's Integrated Communications group.