Interim Dean Reports on Medical School's Budget Challenges

By Lisa Cisneros

Sam Hawgood, MB, BS, interim dean of the UCSF School of Medicine, recently gave a sobering assessment of the financial state of the top-rated school – which faces a $170 million impact from revenue reductions and expense increases over the next three years – but remains confident that the budget problem can be solved.

“I want to distinguish between challenging times and gloomy times,” said Hawgood, noting that the School of Medicine continues to rise in various national rankings, has attracted outstanding, diverse students, and wins honors such as five faculty members’ recent election to the National Academy of Sciences.

The school’s finance advisory working group that he assembled is at the midpoint of its deliberations on how to cope with expenses that are outpacing revenues, Hawgood said, welcoming suggestions from the campus community. “You have a chance to influence our thinking,” he told an audience at Laurel Heights, one of five stops he made as he conducted town hall meetings at each of UCSF’s major sites in San Francisco.

Hawgood was extremely candid about the school’s $1.25 billion operating budget, part of a campuswide movement toward greater transparency about UCSF finances, as recommended in the UCSF Strategic Plan. He pointed out that the financial vitality of the medical school is critical to the campus at large as the School of Medicine accounts for 42 percent of the total UCSF budget.

Forecasting Financial Health

The forecast for the medical school’s fiscal health is challenging through the year 2012, according to the projections that Hawgood presented at the town hall meetings. Like other schools at UCSF and across the nation, the School of Medicine is facing pressures from decreasing revenues which are simultaneously occurring with increasing expenses.

Of the sources of revenues, Hawgood said, only 6 percent of the school’s budget comes from the state. “Although we are a state school, part of the University of California, we very much depend on resources other than state funding – such as philanthropy, sponsored research and clinical income – to maintain our programs.”

Each of these three sources of revenues is threatened over the next three years, he said.

In fact, the UCSF School of Medicine is expecting state funding, which was $77 million in 2008, to be cut by 25 percent by 2012. This could be reduced further if California’s financial situation continues to deteriorate.

The largest source of revenue to the school is contracts and grants for research. But a cause of concern is the relatively flat budget proposed by the Obama administration for the National Institutes of Health (NIH) – meaning fierce competition for every research dollar. The federal economic stimulus package, approved by the Obama administration, is providing some short-term relief, but lasts only two years, Hawgood said.

Currently, the school’s clinical volume and revenue is remaining steady. However, the weakening economy—with rising unemployment and reduction in family incomes—may signal a change in payor mix and in overall compensation for patient care services delivered. On top of that, the national discussion about health care reform means that the clinical services market will be in flux until a clear direction has been set and decisions have been made. Already the school also faces substantial cuts in its contract for providing medical services at San Francisco General Hospital, as the city faces budget shortfalls.

Philanthropy in the form of gifts and endowment income represents close to 10 percent of the school’s annual revenue. The national economic crisis is also decreasing this revenue stream as the market value of the endowment funds is down. As of June 2008, the medical school had net assets of nearly $1 billion in endowments. Since that time, however, the global financial crisis has deflated the value by about 28 percent, Hawgood said. The available spendable income from the investment and interest returns from these funds is projected to decrease by $2.5 million for fiscal year 2010-2011. In addition to this decline, annual giving to the programs of the school is lower.

Meanwhile, the School of Medicine also faces increasing expenses, including employer contributions to the UC Retirement Plan, employee benefits and new recharge fees to help finance improvements to the UCSF data network.

Planning in Progress

To prepare for the total impact of these revenue reductions and expense increases, the UCSF School of Medicine is developing a plan to absorb $170 million over the next three years if the scenario continues to unfold as projected, Hawgood said.

“We have a $170 million problem to solve,” he said. “We have to figure out collectively how to meet this challenge while maintaining the quality and momentum of our programs. It’s not going to be without some significant pain, but good decisions now will allow us continue at the forefront of academic medicine.”

Initially, Hawgood’s team has reviewed planned expenses related to new programs or initiatives that have not yet begun. Some of those plans are being modified or delayed.
As for the next steps in the budget process, Hawgood says that he and medical school leadership will study a number of expense reduction strategies, including the feasibility of consolidating certain administrative functions across several smaller departments or organized research units. He also will review where discretionary dollars available to him are most critically needed to support the core academic mission, which could mean modifying or deferring expenses for new and existing programs.

Importantly, the School of Medicine has cash reserves of about $515 million, of which about $100 million are reserved for the Dean’s Office and $415 million are reserves for medical school departments, Hawgood said. Like interest income from the school’s nearly $1 billion in endowments, most of these funds are either restricted or committed, and therefore can’t be used to fill gaps in funding elsewhere. Restricted funds are those that are to be spent only for specific programs or projects, as designated by external sources such as donors. Committed funds are more discretionary, but have been set aside internally by the dean, a department head or division chief for a specific purpose.

Many of these reserve funds were established for the proverbial rainy day, which Hawgood believes is here. These funds can cushion the cutbacks and will allow for core programs to be maintained and selected new programs to be developed at the discretion of those that control the funds.

For example, while the state’s financial crisis worsens with no end in sight, causing the UC Regents at their last meeting to raise student fees again, Hawgood said he has shifted additional dean’s discretionary funds to increase student financial aid. The school currently provides about 90 percent of its students with some financial assistance, but the average debt of its graduates now exceeds $100,000.

As the school moves forward, it must develop new regenerative financial plans which will enable the necessary investment in key areas to ensure its continued growth and excellence, Hawgood explained. 

In an era of reduce resources, this will require more than isolated strategic decision and include a formal strategic plan to enable appropriate choices between competing compelling priorities. Hawgood has asked the leadership of the school to engage in such a planning process.

Hawgood remains optimistic because new facilities, such as the Helen Diller Family Cancer Research Building at UCSF Mission Bay and the stem cell building at the Parnassus campus, create the opportunity for the school to attract more than 100 new faculty. Even if programs must be delayed or modified, the medical school is well positioned for further growth in the next decade, he said.

Related Links:

UCSF School of Medicine

Interim Medical School Dean Cites Significant Budget Challenges Ahead
UCSF Budget Website, March 26, 2009