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Operating loss at U. of Illinois health system widens

Despite demand for services rising to its highest level in three years, University of Illinois health system's operating loss widened to about $146 million in fiscal 2012, as expenses for everything from retirement benefits to supplies climbed.

The University of Illinois Health Services Facilities System's operating loss stretched to $146.4 million for the 2012 fiscal year that ended June 30, a 21 percent jump, from a $121.0 million loss in fiscal 2011, according to a new annual financial statement released this month.

The operating loss for the health system, part of the U of I, includes fringe benefits of nearly $170 million, which are mostly covered by non-operating payments from the state of Illinois. Including those payments and other non-operating revenues, net assets increased $14.4 million in fiscal 2012.

The operating performance is likely to put further strain on a health care system that is already tied to the state's own fiscal woes. Last week, Moody's Investors Service placed the ratings of all eight Illinois public universities, including the U of I, under review, citing their “significant dependence” on the cash-strapped state for revenue and benefits.

The Near West Side health system's operating loss was fueled by an 11.7 percent increase in expenses, totaling $731.6 million in 2012, from $654.9 million in 2011, while revenues only climbed 9.6 percent, to $585.2 million in 2012, from $533.9 million in 2011.

“It's critical for any hospital to keep its revenues ahead of its expenses,” said Allan Baumgarten, a Minneapolis-based independent analyst. “It's obviously a bigger challenge for an academic medical center, one that serves an important role in terms of the safety net.”

About 30 percent of U of I Hospital's patients are on Medicaid, the federal-state health insurance program for the poor and disabled, while another 6 percent are self-pay.

Hospital executives attribute the increase in services, called utilization, to more attention to patient care and a renewed focus of expanding market share. But rising demand has also brought new challenges, said Mike Jonen, associate vice president for enterprise strategy for the U of Illinois Hospital and Health Sciences System.

“What we'd like to be able to do is to drive utilization while at the same time reducing costs,” he said.

For example, a specialized blood clotting drug for a Medicaid patient cost the system $8 million in 2012, an expense that couldn't be passed on to the federal-state health insurance program for the poor.

The system is looking for efficiencies, such as reducing the number of agreements it has for medical devices and implants from 10 to two contracts.

Expenses related to retirement and insurance benefits, as well as administrative services and supplies, had some of the largest increases. Fringe benefits soared nearly 19.6 percent, to $165.9 million in fiscal 2012, from $138.7 million in fiscal 2011.The state covers all but about 4 percent of those costs.

Employees are a “No. 1 asset,” Mr. Jonen said. The workers are heavily unionized and cost more than some of U of I's rival hospitals, he added.

The hospital system plans to issue about $85 million in bonds early next year to continue to modernize the hospital. That includes upgrading electronic health records, adding a new 12-bed unit mostly for post-surgical patients, and converting a portion of double-bed patient rooms to single-bed rooms, Mr. Jonen said.

“There's a lot of potential here,” Mr. Jonen said. “It's our job to … deliver the type of improved operating performance I think we can.”

The U of I Hospital is the 10th largest medical center in the Chicago area, according to a Crain's annual ranking, published on Nov. 19. In 2012, the hospital treated its highest volume of patients since 2009, including in emergency room visits and inpatient admissions.

In August, Moody's noted the medical network's relationship with the University of Illinois and expectations of “good patient demand.”

U of I also is in a dispute over Medicaid payments with the Office of the Inspector General of the Illinois Department of Health and Family Services. The Inspector General alleges that the health system received a $14.8 million overpayment from the Medicaid program, which HFS administers, for services provided from May 2004 through April 2006, the annual report said.

The system estimates its liability will be $8.5 million, which includes a provision for subsequent audits.

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