Payments to Fairview offset merger costs

Melanie Evans

Rent is due.
With the ending of February, another $1 million transfers from the University to boost Fairview Health System’s bottom line. The monthly payment is the 14th of 32 the University agreed to pay Fairview following the sale of the former University Hospital to the Minneapolis-based nonprofit organization.
Earmarked for Fairview’s operating budget, the cash infusion is a Band-Aid measure intended to cover the health system’s increased costs related to the University research and education performed within Fairview’s walls.
But the payments are only the beginning.
One of the many tools created to ease Fairview and the University’s growing pains as the two forge an economic relationship, the monthly transaction buys time as the partners wrestle a broader question: What are the costs of a medical education?
The question, plaguing academic health centers across the nation, has been a thorn in the side of the University-Fairview partnership since its commencement.
The answer continues to evade a task force established at the merger’s inception to wade through the hospital’s budgets and bills.
Eight months past their original deadline, the eight committee members — four from Fairview, four from the University — remain undecided.
For both University and Fairview, the question is more than an academic exercise. The result determines how many resources will be allocated for the University’s practice within the hospital.
The process requires more than attempting the tricky business of balancing the books, said Peter Mitsch, a task force committee member, and finance director for the Medical School. The team must also reconcile two dissimilar health care cultures.
For example, an additional night in a teaching hospital might not be the direct result of the University, said committee member Roby Thompson, the Medical School’s associate dean of clinical affairs.
Inefficient operating procedures or a patient with a more complex health problem can contribute to costs as well. In 1996, the University Hospital Medicare patients ranked third in the state for complexity of health care problems.
These additional factors must somehow be tabulated, Thompson said.
Staff hours and salaries are easier to allocate, said Gail Klatt, committee member and director of the University audits department. But questions linger over costs associated with items like light bills, supplies and the use of hospital space.
The group’s job clarifying what can be attributed to education and what is operating procedure is extremely complex, said Peter Rapp, Fairview senior vice president and administrator.
Although he has worked with four academic health centers during his 24-year career, Rapp said he has never participated in a similar examination of a hospital.
Changing pressures in the marketplace have landed the long-elusive costs of education and research front and center in the debate over health care, said Bob Dickler, senior vice president for the Association of American Medical Colleges.
“This is not a solution where their is any cookbook methodology,” Dickler said.
Dickler, former general director of University Hospital, said administrators at Fairview and the University face a complex problem, which is difficult to solve.
“There have been several attempts over the past decade that have uniformly failed,” he said. A successful product could draw considerable interest from the industry, he said.
Overwhelmed by the complexity of the task of identifying costs, the committee hired the consulting firm Ernst and Young International Ltd., in November to guide and mediate the process. Written into the contract with the firm are the University’s proprietary rights to the process.
“There are 400 to 500 teaching hospitals that may need to do this at some point,” said Mitsch. “If they aren’t currently looking at this issue, if they don’t have the incentive that we do here, they are going to look at it pretty soon.”
One of a handful of academic health centers in the nation to sell their teaching hospital, University administrators waded into uncharted territory January 12, 1996 by signing a Memorandum of Understanding with Fairview to sell the school’s teaching hospital.
Losing patients in a fiercely competitive managed care market, the University turned to the health system as a source of patients to fill their beds. Hoping to add the high-end services other competitors in the Twin Cities offered, Fairview saw the opportunity to buy the sophisticated medical practices ingrained in the University’s curriculum.
In an unexpected move during preliminary negotiations, the health system approached the bargaining table with an estimated research and education cost between 15 percent and 45 percent of the former University Hospital’s annual operating budget of $300 million. Fairview demanded compensation.
Looking to shed the deficit-riddled hospital, the University refused, unwilling to bankroll the hospital’s operating budget.
Tensions rose as neither side yielded. At one point, conflict over the reimbursement process halted all negotiations concerning the hospital’s sale for a week.
In an effort to move the negotiations forward, both sides agreed to an eventual series of compromises that split payment of any research and education costs without a clear source of revenue. All such costs would be tossed into a “bucket” for the partners to share.
But the work of nailing down those costs was put off for the committee — known to its members as the “bucket brigade” — to decide.
But Mitsch said tensions no longer run as high, though the stakes remain significant.
“They are substantial, probably equal in terms of making the relationship work,” he said.