The regents of the University of Kansas are proposing to unleash their university hospital from the medical school and let it float a little freer on the market's choppy waters.
All the same, the rope won't be cast off entirely. The university is drafting legislation to create a public authority that would govern the hospital on behalf of the state.
The Kansas regents are thinking along the same lines as public university hospital owners around the country. Collectively, they are trying to figure out how to make their hospitals more viable without surrendering them to the private sector entirely.
In Richmond, Va., for example, Virginia Commonwealth University handed control of its hospital to the newly created Medical College of Virginia Hospitals Authority. Less than a year after the spinoff, the authority has entered business arrangements with competing for-profit and not-for-profit hospital systems in Richmond (Jan. 20, p. 14).
Despite some community opposition, University of Cincinnati Hospital converted into a private not-for-profit facility last month in order to participate in a joint operating arrangement with several other Cincinnati-area private not-for-profits (Jan. 6, p. 13).
Kansas officials also have looked to Oregon Health Sciences University in Portland and University of Colorado Hospital in Denver for advice on making the transition to an authority.
Over the course of the past year or so, the University of Kansas and its medical center in Kansas City have undergone a head transplant. The chancellor, the executive vice chancellor for the medical complex, the hospital chief executive officer and the medical school dean are all new to their jobs.
University leaders hired Lash Group, a Maryland consulting firm, to analyze how the hospital should respond to local marketplace changes.
In a report to the Board of Regents delivered on Jan. 22, Lash Group described Kansas City as an early "stage III" market, characterized by provider consolidation, declining admissions and deep payment discounts. It noted that KU Hospital's "lack of market share, minimal geographic reach and limited service differentiation" placed it at considerable financial risk. It also observed that as the market consolidates, the hospital's financial weakness would jeopardize its relationship with its teaching faculty, who now comprise one large practice group.
KU's market share is declining, and its patient mix is shifting. KU's admissions declined 8.4% since 1993 in a stable market. Even aggressive expense management couldn't prevent the operating margin from declining. By 2000, the Lash Group estimated, the 456-bed hospital will face severe financial problems.
That the hospital's livelihood is threatened hasn't taken public officials by surprise.
"It has been discussed numerous times since I've been in the Legislature," said state Sen. Sandy Praeger, a Republican and chairman of the Public Health and Welfare Committee. "I'm not sure the time was right before now. I'm not sure the Legislature would have been favorably disposed."
Today, managed care is exerting such torque that it's clear the hospital will break down unless it's run more efficiently. "That's difficult to do in a state bureaucracy," Praeger added.
All parties agree that regulatory barriers must be removed for the institution to thrive. Approval for a capital project takes 42 months compared with 12 months for a private hospital, according to Lash Group's report. KU must get legislative approval to incur bonded indebtedness. Personnel matters get wrapped up in the state's Byzantine rules and handbooks. State-mandated purchasing policies hamstring operations, and information systems are designed around the state's needs but not necessarily the hospital's.
"The University of Kansas Hospital is not going to be able to compete very effectively if it retains status as a state agency," Chancellor Robert Hemenway said. "We've proposed that it become a public authority, which would recognize its commitment to the people of Kansas but would also give it the flexibility to operate with the discipline that comes from free-market competition."
The Lash report briefly considers selling or leasing the hospital but then dismisses it.
There are at least two entities in the Kansas City area that would possibly be interested in the university hospital: Columbia/HCA Healthcare Corp. and Health Midwest.
Praeger responded: "We don't want to lose the ability to determine what services need to be offered at that hospital for that teaching mission. Which means keeping some programs on which perhaps are not cost-effective but are necessary to teach. It's not just teaching physicians but allied health professions, nursing and med techs, physical therapy, a lot of other programs. I don't think it's in the state's best interest to sell it."
Officials are determined not to lose sight of KU's primary mission of medical service to the people of Kansas. More than 60% of the state's primary-care physicians were trained there. Although the sprawling medical complex presses against the Missouri line in grungy Kansas City, its physicians are intimately involved in caring for patients in small towns and on wheat farms hundreds of miles away.
Hemenway added that KU wouldn't be a very attractive sale prospect because of how it's been funded over the years. "In contrast to most other teaching hospitals and academic medical centers," he said, "KU Hospital has never been able to retain reserves. For years any revenues in excess of expenses simply were given back to the state."
Lash Group considered in passing the option of closing down the facility and letting other hospitals with excess capacity absorb the patient base, but it determined again that too much control over the education programs would be lost.
Also, KU provided $22.7 million in care to the uninsured over the past two years, without a direct state subsidy for that line item.
"KU Hospital has been the safety net for people all across Kansas," Hemenway said. "It's the one place people knew they could be treated even if they didn't have health insurance."
But if the demands for indigent care increase, Hemenway said, the Legislature may have to consider whether it's fair to expect the hospital to absorb the load without some extra compensation.
Nashville-based Columbia recently signed an agreement to buy Bethany Medical Center, the other major hospital that treats the poor in Kansas City (Feb. 3, p. 17).
Bethany slipped into financial quicksand because it gave away so much charity care. Columbia has pledged to maintain the same level of charity care. KU officials will be watching very carefully to see that they do, Hemenway said.
Converting to 501(c)(3) status has been thought about but isn't the preferred course right now. That's the Internal Revenue Service's designation of a tax-exempt public charity under the federal tax code.
Praeger said people in the state are familiar with the public authority mechanism from the turnpike authority.
"This would be set up similarly, with legislative members and medical school members," she said. Hemenway said the draft authority bill will probably ask the governor to appoint the authority board.
The medical school and allied health schools will remain under the Board of Regents system.
The regents have tentatively approved the public authority plan. Once it is finalized, a draft bill will be introduced in the Legislature. They hope it will come up for a vote this session and pass.
"Right now the mind-set is positive for privatization," Praeger said. The state has recently privatized some of its social services and knows that oversight and accountability are critical to their success.
"It's for the right reasons," she said. "We're doing it for the hospital for the same reason we're doing it for social service programs: to provide a more efficient use of state dollars."