UPMC sees a drop in operating income [Pittsburgh Post-Gazette]

Aug. 23--Despite increases in patient volume, operating revenue and health plan membership, Pittsburgh health system UPMC saw its operating income drop to $187 million in the fiscal year that ended June 30, its lowest total since 2008.

CFO Robert DeMichiei said the downward pressure this past year was due to four primary factors: a $22 million reduction in state and federal payments; a $28 million increase in depreciation expense; a $62 million increase needed to recruit and retain physicians; and overall inflation.

As a result, UPMC saw its operating margin fall from 3.6 percent in fiscal 2012 to 1.8 percent, which Mr. DeMichiei described as "adequate for reinvesting, but it's not optimal."

In a changing health care environment, "This is the new normal," he said, adding that "we're on a constant quest for productivity and cost efficiencies. It's a quarterly rhythm, it's a daily rhythm."

The actual operating income amount was even lower -- $132 million -- because UPMC took a $55 million non-cash expense in the fourth quarter when the health system agreed to meet its full $100 million over 10 years commitment to the Pittsburgh Promise scholarship fund, regardless of whether annual fundraising targets are met.

PG graphic: Lowest profit in 5 years

(Click image for larger version)

The region's largest health system has been making adjustments, reducing positions in administration and finance while adding jobs in growth areas such as its health plan and information technology.

UPMC Health Plan saw a 15.6 percent increase in membership in fiscal 2012 and now has 2.22 million members. That includes 469,000 commercial members, an 11.1 percent increase over the previous year. "It's almost all coming from Highmark," said UPMC spokesman Paul Wood.

Pittsburgh-based Highmark is the region's dominant health insurance provider.

"We think the employers get it. They are offering alternatives to Highmark," said Mr. DeMichiei during the health system's quarterly financial statement announcement Thursday at its corporate headquarters in the U.S. Steel building, Downtown.

UPMC's internal analysis shows that Highmark now has a 40 percent market share in Allegheny County while UPMC Health Plan is at 30 percent. For the southwest Pennsylvania region, the numbers are 47 percent for Highmark and 28 percent for UPMC Health Plan.

Highmark spokesman Aaron Billger on Thursday said the insurer has "maintained strong enrollment. In the recent renewal cycle of small- to mid-sized business alone, we maintained a strong 90 percent renewal rate. In addition, several larger group customers have agreed to multi-year contracts."

The war of words will continue as both Highmark and UPMC have scheduled more local advertising air time in coming weeks.

Mr. DeMichiei reiterated on Thursday that UPMC will not renew its contract with Highmark when it expires in 2015 because Highmark would have to steer its members to its own Allegheny Health Network at a cost of $400 million or more in revenue to UPMC and community hospitals.

He cited Highmark's current strategy in Central Pennsylvania where the insurer includes the major health system, Geisinger, in its network but in a tiered structure that would make treatment there more expensive. Geisinger President and CEO Glenn Steele said in newspaper ads there that the Highmark approach is "inappropriate, inconvenient, insensitive and simply wrong."

Mr. DeMichiei said they expect a similar situation would happen here if UPMC renews the Highmark contract -- that Highmark would entice members with in-network access to UPMC, but make it so much more expensive that Highmark members would go to an Allegheny Health hospital instead.

"What we're saying here is, 'We're not going to let them 'Geisinger' us.' "

Mr. Billger countered that "the idea of tiered products provides members health care choice and increased transparency, which is being encouraged by the business community, as well as state and federal governments."

Steve Twedt: stwedt@post-gazette.com or 412-263-1963.

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