CEO Ora Pescovitz emails staff: U-M Health System needs to cut expenses

• FULL TEXT: Read the email to University of Michigan Health System employees on expense cuts

The University of Michigan Health System must cut its operating expenses for the next six months or face a growing negative budget margin, according to an email sent by CEO Dr. Ora Pescovitz and other top health system officials Thursday afternoon to her entire staff.

The Health System is not bringing in the amount of revenue it expected in the 2013 fiscal year, according to Pescovitz's email. The 2013 fiscal year extends from July 1 to June 30.

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

Pescovitz's announcement, which was also sent on behalf of Doug Strong, CEO of U-M Hospitals and Health Centers and Dr. James Woolliscroft, dean of U-M's Medical School, comes in the face of a positive presentation of the status of the health system at the one-year anniversary of the new C.S. Mott Children's Hospital last week.

At that time, health system officials said the new hospital was exceeding its targeted goals financially and for capacity. They did not provide specific numbers when asked.

The construction of the new children's hospital set the health system back at a negative operating margin of 0.5 percent for the 2012 fiscal year, but administrators were confident in June that they would be able to pull into the black in 2013.

The University of Michigan Board of Regents adopted the 2013 budget at the end of June for the Health System that included a 0.5 percent positive operating margin.

According to the email sent Thursday, that figure is no longer an obtainable reality without additional budget cuts across all departments.

In November, the Health System asked all of its department heads to figure out how to cut costs. Plans include attrition management, reduced appointments, reduced overtime, reduced temporary staff and contract labor, as well as "savings from improvements in supply chain efforts," according to the email.

U-M's Faculty Group Practice in the Medical School asked each of the medical directors of U-M's ambulatory care facilities to reduce its budget to fiscal year 2012 levels.

However, it appears even the measures submitted by the department heads are not enough to close the negative margin, the email indicated.

By the end of 2020, the Health System may be facing a $200 million annual gap in its clinical margin, the Health System officials said in the email.

In addition to the Health System's apparently struggling revenues, the approaching federal fiscal cliff that would mean a deluge of tax increases and spending cuts after Jan. 1 is worrisome for the Health System, according to the email.

If the federal government is unable to prevent its finances from hitting the fiscal cliff, the Health System 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," the email indicated.

Amy Biolchini covers Washtenaw County, health and environmental issues for AnnArbor.com. Reach her at (734) 623-2552, amybiolchini@annarbor.com or on Twitter.