In Rebuttal / UPMC finances must remain strong

Let's not forget the collapse of AHERF, the largest nonprofit bankruptcy ever

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The Post-Gazette's editorial last week on UPMC's property tax exemption ("Profit Motive: The City's UPMC Suit Will Turn on One Key Factor," March 27) ignores the "elephant in the room," the issue that has haunted Pittsburgh health care for 15 years: the 1998 bankruptcy of AHERF, then the corporate parent of Allegheny General Hospital.

The AHERF collapse was the largest nonprofit bankruptcy ever. It badly damaged not just its bondholders and its employees, but Pittsburgh's reputation as well. UPMC critics of that era suggested UPMC's own expansion would lead to a similar failure. Indeed, when Shadyside Hospital considered the merger with UPMC in 1997, its board of directors conducted extensive and expensive due diligence on UPMC's business viability and prospects, using an independent accounting firm. We forget how recently the criticism of UPMC has shifted from "UPMC is the next AHERF" to "UPMC makes too much money."

The UPMC board takes the AHERF lesson seriously and pays close attention to the changing business risks inherent in health care. A decade ago critics worried about "growing pains" at UPMC. Today we see the baby boomer demographic tidal wave and the Affordable Care Act as challenges that could swamp some health care systems. If UPMC failed to meet these challenges, a second health care bankruptcy here would be bad for our region's reputation, for those we insure, for our patients and for our nearly 60,000 employees.

Our goal has been to maintain at least a single-A credit rating from the independent rating agencies, and we have done that. (The ratings go up to AAA.) Interestingly, the consistent comment from the rating agencies is that our 2.3 percent operating margin is low. The Mayo Clinic and the Cleveland Clinic, for example, have operating margins that are about twice that. Across American industry, 2.3 percent is a low number. Anything much lower would imperil UPMC's AA credit rating, increase borrowing costs and increase business risk. None of those outcomes is good for Western Pennsylvania.

UPMC's board has taken other steps to avoid an AHERF repeat. For example, UPMC voluntarily adopted the Sarbanes-Oxley accounting safeguards and governance disciplines that Congress imposed on public companies. It was the first nonprofit of any size to do so. UPMC's board also has organized committees to focus on specific issues and risks in health care, such as the development of a robust electronic health record.

Remember also that positive operating margins are important for other reasons. UPMC has had great support from local philanthropy, but operating margin ultimately provided almost all of the money required to build a new Children's Hospital and Hillman Cancer Center, to rescue Mercy Hospital, to expand and modernize St. Margaret's and Passavant, to install a cutting-edge electronic health record. How much of that would you give up to squeeze UPMC's operating margin to, say, 1 percent? How would that trade-off benefit the region?

So, at a thin 2.3 percent operating margin, does UPMC put too much emphasis on "profits" to the detriment of its charitable mission? Hardly. AHERF taught us that an organization running with little margin has no resilience to deal with unexpected shocks, and economic shock is very much expected in health care today.

Should UPMC aim for a lower rating? Should UPMC experiment with how close we can get to the AHERF experience? What operating margin would satisfy the editorialists?

Merely asking these questions demonstrates the unserious nature of the editorials we've seen. UPMC is balancing the imperative of affordable care against the need for an organization robust enough to give patients, insureds and employees stability during the coming travails in health care.


Mark Laskow, a managing director of investment advisory firm Greycourt, is vice chair of UPMC's board of directors. The views expressed here are his own.


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