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UPMC’s cost cuts pay off

Competitive pressure is forcing health giant UPMC to be more efficient to maintain profitability — a strategy that worked in its most recent quarter as profit from operations rose by 69 percent.

Patients have more choices for medical services in Western Pennsylvania as rival Highmark Health invests in its Allegheny Health Network system of hospitals and doctors. And UPMC Health Plan is one of five insurance companies locked in a fierce battle for customers, which is squeezing profits.

UPMC’s response is to wring costs out of its system, particularly with a relentless focus on reducing administrative expenses, and by using technology to make its clinical operations more productive. For example, it recently began an initiative to track medical procedures across its system to find the least expensive treatment necessary for a successful outcome.

“Every day is cost-containment day at UPMC,” Chief Financial Officer Robert DeMichiei told reporters at a meeting to discuss financial results for the July-September quarter.

The hospital business used to be able to raise prices at will and simply demand more money from insurers, DeMichiei said. But those days are over because national spending on health care — which now accounts for about 18 percent of the nation’s gross domestic product — has reached unsustainable levels.

“There’s no more money,” he said.

Some people have lost jobs at UPMC as administrative functions are consolidated to gain efficiencies. But spokesman Paul Wood said the state’s largest private employer hasn’t reduced its total work force of 62,000 because it is also hiring doctors, nurses and other clinical and technical staff.

The biggest hospital system and second-largest health insurer in the Pittsburgh region boosted profit from operations to $90.7 million in the July-September period, the first quarter in UPMC’s fiscal year. In the same quarter last year it had operating profit of $54.3 million.

The gains came primarily from UPMC’s medical services, which contributed $69 million to operating profit, despite seeing a 1 percent decline in total patient volume.

“We’re delivering that same level of care but more efficiently,” DeMichiei said. “That’s why profit is up.”

West Penn Allegheny Health System, the five-hospital system at the core of Allegheny Health Network, on Monday reported a $72,000 loss from operations in the July-September quarter, compared with an operating loss of $13.1 million a year earlier. Allegheny Health officials cited higher revenue and better control of expenses for the improvement. Its net income was $4.5 million — its first profit under Highmark ownership — compared with a net loss of $10.7 million a year earlier.

UPMC’s insurance membership rose 5 percent in the quarter to 2.35 million subscribers. But because competition from Highmark, Aetna Inc., Cigna Corp. and United Healthcare are pushing UPMC Health Plan to reduce premiums and fees, the division’s contribution to operating profit was $11 million.

The system’s international and commercial businesses also added $11 million to operating profit.

UPMC’s total revenue rose 3 percent to $2.9 billion, compared with $2.8 billion a year earlier.

Net income dropped 83 percent to $49.3 million. A year earlier UPMC had net income of $293.7 million, which was boosted by one-time gains of $119.9 million from the acquisition of Altoona Regional Health System and investment income of $119.1 million.

UPMC posted a loss on investments of $39.7 million in the most recent quarter. Its investment portfolio was valued at $4.2 billion at the end of September, down from $4.3 billion at the end of June.

DeMichiei said the pressures from government efforts to control health spending along with greater competition are pushing UPMC and other health systems to improve medical outcomes, better manage spending and give patients a higher level of service. UPMC has the size, systems and expertise to do all three, he said.

“We know people have choices,” he said. “We are working to have them choose UPMC.”

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or [email protected].


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