REPUBLICANS, TEA PARTIERS and malcontents have blamed Obamacare for the rise in health insurance premiums. Republicans in Washington complain that Obamacare will result in soaring costs for health care providers. Progressive Washington DC think tank Think Progress offered a different explanation for the rising cost of health insurance premiums. In August 2012, Think Progress published a piece titled, “Rising Health Costs, Not Obamacare, Are Increasing Insurance Rates…” In that piece we read: “It’s true that health insurance rates are rising, but data from Connecticut suggests it has nothing to do with Obamacare. Filings from Connecticut’s two largest health insurers, which both applied for double-digit rate increases this year, show that the insurance companies are not driving up their prices because Obamacare is leading them to do so. Rather, the rate increases are due to increasingly expensive health costs that are unaffected by the implementation of the health care law….Providers are raising their prices.”

Obamacare is designed to make health insurance more affordable by reforming payment models and reducing payments to hospitals—companies that have raised prices exponentially, costs that health insurance companies have passed right along to business owners, their employees and other consumers in the form of higher premiums.

The University of Michigan Health System earns around $2 billion dollars per year, and has operated at a profit since 1997. It’s an enviable track record, but one that has contributed to the dramatic rise in the cost of health care premiums in Michigan. According to research by the Washington, DC nonprofit  Families USA, “Over the past 10 years, Michigan’s working families have seen their health care costs go up significantly faster than their earnings. As a result, health insurance premiums now place a greater burden on family budgets than ever before. Premiums for job-based health insurance have risen rapidly over the past 10 years: Health insurance premiums for Michigan’s working families have risen by 76.5 percent—12.9 times faster than median earnings in Michigan.” According to research by the Kaiser Family Foundation, between 2000 and 2011, the cost of employer-provided health benefits in the state jumped a whopping 75 percent, on average to between $6,900 and $12,000 per family covered per year. Meanwhile, the cost of health insurance for individuals doubled from an average of $2,400 per year to $4,800.

In June 2011, Doug Strong, who oversees the University Hospital, C.S. Mott Children’s and Women’s Hospital, 30 health centers and 120 outpatient clinics told University of Michigan Regents that the construction of the new C.S. Mott Hospital and Von Voigtlander Women’s Hospital would “squeeze” the UMHS budget. Strong told U of Regents he expected a $23.5 million budget shortfall in 2012. In June 2012, when Regents again approved the UMHS budget, they were told by UMHS administrators that increased patient demand would help move the UMHS back into the black by 2013. Over the next four months, however, the UMHS experienced “expenses…greatly exceeding our revenue.”

Six months after Doug Strong assured Regents that strong patient demand would help move UMHS “back into the black,” in December 2012, UMHS staffers were told that without cuts to the lowest paid workers (temp workers and part-timers), among others, administrators projected a $200 million annual gap in its budget by the end of 2020, or an almost 10-fold increase in the organization’s project 2013 deficit.

In 2009, the UMHS instituted a wage freeze. It was, in part, in response to a profit margin that dropped from 3.9 percent in 2007 to just 1 percent in 2009. Below, is a table of the UMHS annual revenues and operating (profit) margins:

In December 2012, Pescovitz sent out this email to all UMHS staff:

A message from Dr. Pescovitz, Doug Strong and Dean Woolliscroft

There is much political conversation about the country being at a fiscal cliff – a precipice of tax increases and spending cuts that will occur Jan. 1 unless the federal government gets its financial house in order.

We also find ourselves at a significant crossroad for our Health System, where larger-than-expected deficits now require us to focus intently on ensuring we have a positive margin for this year so that we have a solid foundation to weather expected financial pressures in the years ahead.

Our expenses after the first four months of our current fiscal year, which began July 1, are greatly exceeding our revenue, which leaves us with a much larger than expected financial challenge. Both the Hospitals and Health Centers and the Medical School need to considerably reduce operating expenses for the remainder of this fiscal year to offset this deficit.

One month ago, we asked leaders of each unit of the HHC and each academic and administrative area of the Medical School to consider how best to reduce expenses. The approaches were different for those two parts of our Health System, given how different the business and operations are for each.

HHC leaders were asked to develop detailed expense management plans to adjust to new revenue realities. Those plans included attrition management; reductions in appointment effort, overtime, temporary staff and contract labor; and savings from improvements in supply chain efforts.

In the Medical School, each of the departments underwent a “stress test” by looking at expenses should there be an additional 10 percent reduction in revenue to each unit. Each of the department leadership teams considered hard choices about what programs and projects could be reduced or cut to remain solvent, including support for unfunded research and targeting clinical areas where revenue could be enhanced. The Faculty Group Practice asked each of the Ambulatory Care medical directors to bring their margin back to at least the level of FY12; their detailed plans exceeded this goal.

All of our leaders have responded with plans that will significantly reduce our negative margin. But more work remains. We have not closed the gap between our expenses and our revenue for this fiscal year, and our challenges moving forward are growing.

By the end of the decade, the Health System may be facing a $200 million annual gap in our clinical margin. In the Medical School, the challenge to secure research funding will continue. The fiscal pressures on our federal and state governments are very real, and the actions taken by government will hit our Health System – and all hospitals and medical schools – hard.

Across-the-board cuts to reduce the federal budget deficit (also known as budget sequestration), could be the path our legislators take. If this happens, we will see a decrease in National Institutes of Health and medical education funding, potentially significant reductions in payments for hospital outpatient services and decreases in physician reimbursement.

These external forces make it more important than ever that we take meaningful and sustainable actions now to improve our operations and financial performance to prepare us for the financial pressures that will continue. The work we do now to create a positive margin for this fiscal year is the first phase of our cost-reduction efforts and will position us well, but we know that we must continue to look for more ways to improve processes, throughput and efficiency across our Health System, as we are doing through reductions in length of stay, improving capacity and access, expense management and revenue growth. In research, we are consolidating service contracts to reduce expenses, streamlining repairs to laboratory equipment and are using lean thinking to reduce the post-award management of externally-sponsored research.

Our strategic plan continues to be our roadmap: a combination of investing in growth in key areas and recognizing what we must stop doing to help improve our operating performance. Our rich history, excellence across each part of our mission and abundant assets afford us an opportunity that few other academic medical centers have to weather this period of financial uncertainty. But it will require diligence, hard work and undeterred focus to ensure we never stop seeking ways to improve.

We are committed to moving our Health System forward – strategically, strongly and effectively. We appreciate all you are doing to ensure The Michigan Difference continues to be more than words, but the palpable result of our commitment each day to make a lasting impression on all who come here for care, research and education.

Ora H. Pescovitz, M.D.
Executive Vice President for Medical Affairs, U-M CEO, U-M Health System

Douglas L. Strong
CEO, University of Michigan Hospitals and Health Centers

James O. Woolliscroft, M.D.
Dean, Medical School
Lyle C. Roll Professor of Medicine

While the 2012 salary information of these administrators might be interesting, it wouldn’t tell the real story. Below, is a graph that charts the increases in salary given to the four top administrators. The graph shows that in the case of the Dean of the Medical School James O. Woolliscroft, M.D., between 2003 and 2011 his annual salary was tripled from $166,704 to $524,509. Doug Strong, CEO U of M Hospitals, saw his salary rise from $294,295 in 2003 to $612,000 by 2011. In contrast, the UMHS Senior Administrative Assistant’s salary (the purple graph line in the chart below) rose from $42,188 in 2003 to $53,921 in 2011, an increase of about 3 percent per year:

While the reduction in salary of any one or even all of the UMHS administrators who signed the email would not close the projected budget gap, focusing cuts, as Pescovitz writes, on “…attrition management; reductions in appointment effort, overtime, temporary staff and contract labor” is a strategy that targets the lowest paid employees—the most economically vulnerable, if you will. This strategy, combined with the immense increases in the compensation of top-level administrators over the past half a dozen years, and it’s a move that smacks of Wall Street-like business practices. The UMHS top-level administrators plan to squeeze revenues and savings out of lower- and middle-class workers to balance their budget. In light of their own pay and salary increases (even in the face of falling profit margins) Pescovitz, Woolliscroft and Strong’s strategy to return the UMHS to profitability “smacks of white-shoed hubris and crass entitlement,” says a low-level whose pay was frozen.

“While we can congratulate the administrators for ‘freezing’ their salaries in 2009, it’s also important to note that in 2010 Strong and Woolliscroft received 10-15 percent raises—helping them ‘catch up’ on income lost during what critics call a ‘sham pay freeze,’ one imagines,” said a UMHS Senior Administrative Assistant, whose $51,324 salary was frozen, as well, and who received a 2 percent pay increase in 2010, or about $1,000, before taxes.