Back from the Brink

In the fall of 1998, the University announced a $380 million redevelopment plan that focused on the area near the high rises. The plan called for the additions of retail space and low-rise dormitories with housing for 1,000 students.

But the financial volatility of the Penn Health System, which would lose close to $100 million that year and twice as much the next, forced officials to scale back the project.

"There was no denying the fact that the very great problems of the medical system did keep us from fulfilling some of the vision that we had," then-Director of the College House System David Brownlee said. "The general sense was that there was $100 million or so that wasn't available for capital projects" as a result.

But after a long fight out of the red, the Health System is now a big spender. Last November, top University officials gathered to celebrate the groundbreaking of the Health System's Center for Advanced Medicine, a $232 million undertaking.

The event marked a milestone in the history of the system, which only six years ago lost millions of dollars a week.

The high and mighty

In the early and mid-1990s, officials in the Health System had good reason to be optimistic. The system turned a profit every year and the Hospital of the University of Pennsylvania was the state's most profitable both in 1994 and 1995.

At the same time, the Health System's components -- HUP, Presbyterian Medical Center, Pennsylvania Hospital and Phoenixville Hospital -- were making significant capital improvements and hiring more employees.

"No one reined in the [Chief Executive Officer] who led those strategies," Health System Management professor Lawton Burns said, referring to the system's spending spree.

That CEO was William Kelley, a powerful figure in health care who had overseen the Health System for a decade.

Kelley was investing heavily in the hospitals in anticipation of a significant change in the way health care is delivered in America.

This shift never occurred. Kelley had bet that patients of 270 primary-care practices, which the Health System had purchased, would eventually become clients of the Health System. Instead, patients were left free to choose other providers. The Health System's investment had turned sour.

According to Kelley and then-President Judith Rodin, the Balanced Budget Act of 1997 delayed reimbursements from insurers and increased the burden of providing care to those without health insurance. In the year 2000, a high-ranking Health System official estimated that, in 1999, treating uninsured patients drained $66 million from the Health System.

"I think [the Health System] overexpanded," said Alan Zuckerman, president of Philadelphia consulting firm Health Strategies and Solutions. Zuckerman added that many health care systems were following Penn's path of expansion and vertical integration. The region's pre-eminent player at the time, Allegheny Health Research and Education Foundation, boasted a total of 14 hospitals and 600 physician practices at its peak in 1997. It was also saddled with $1.3 billion in debt. The following year, it filed for bankruptcy.

By the late 1990s, economic difficulties, Medicare billing fraud and a gene-therapy experiment that resulted in the death of a teenager in a Penn clinical trial and brought federal sanctions down on the University compounded to destroy the Health System's profits.

In 1998, the system lost $98 million. The next year, it fell $198 million further into debt. In those two years, Moody's Investors Service -- which gives ratings based on how secure an investment in a company or organization is -- lowered the Health System's credit rating twice and did the same to the University, once citing the Health System's "volatile operating environment" as the cause.

The lower ratings scared off people who otherwise might have entrusted their money to Penn. In just a few years, the Health System had become a huge fiscal liability for the University.

Turning the tide

But Kelley was not inactive in the face of the expanding crisis. In 1999, the Health System had hired the Hunter Group, a management consulting firm specializing in health care systems. Hunter was charged with the task of making timely and objective decisions such as layoffs and the selling of capital.

The firm wasted no time. While the Hunter Group was employed by the Health System, officials agreed to cut 1,700 jobs. When these were added to 1,100 firings made earlier, the Health System had reduced its workforce by about 20 percent.

Meanwhile, however, in February of 2000, President Rodin fired Kelley and installed in his place Peter Traber, then-chairman of the department of medicine, who outlined a plan to reduce costs without cutting staff but resigned only five months after his appointment to take another job.

In July, Health System Chief Operating Officer Robert Martin took Traber's place, and two months later the Health System reported an operating loss of $30 million -- $168 million less than the previous year's loss.

Despite the vast improvement, the Health System was still saddled with close to $800 million in debt. According to Martin, the University would have been ultimately responsible if the Health System defaulted on its obligations.

Executive Vice President of the University Craig Carnaroli confirmed this. The University could have been held liable for the Health System's debt if the system could not pay the interest on its debts by itself.

The trouble in the Health System could have spilled over into the entire University.

Worried over the future of the school and the Health System, the University considered putting the hospitals up for sale.

But in a climate of improving finances, this option was eventually forgotten.

In 2001, Arthur Rubenstein was appointed executive vice president of the Health System and dean of the School of Medicine, creating an extra level of oversight between the Health System CEO and the University's president and provost and affirming Penn's intent of holding on to the system.

A board of trustees was created to oversee both the Health System and the Medical School, now incorporated as Penn Medicine.

That same year, for the first time since 1997, the Health System turned a profit.

"The situation that occurred in '99 [and] 2000 should not repeat itself," Carnaroli said. "That's probably the most important thing."

Clear skies ahead

The Health System has been seeing black since 2001 and new projects are in the works.

Ralph Muller took over for Martin as CEO in 2003, and he and Rubenstein have led the Health System since.

"We have great confidence in Arthur and Ralph," University Trustee Chairman James Riepe said. "They are leaders ... who are changing the landscape of Penn."

Today, the Health System is by far the region's premier health care system in terms of rankings, National Institutes of Health funding and region market share of patients.

Penn Medicine now represents a $2.7 billion enterprise that has continued to grow financially and academically over the past several years.

And the new partners have something to gain from each other as well. According to Michelle Volpe, chief operating officer of the Presbyterian Medical Center, the Health System provides an alternative clinical site for the Medical School's teaching.

Over the last few years, the Health System has continued to show improved revenues and to pass milestones, among them the recent Raymond and Ruth Perelman $25 million donation to the Health System and the newly constructed Center for Advanced Medicine.

For Health System Chief Operating Officer Garry Schieb, the groundbreaking of the Center for Advanced Medicine marked the most significant improvement that he can remember.

"This is the most exciting project we have had in the six-and-a-half years that I have been here," Schieb said.

As to what it took to accomplish the turnaround, Rubenstein said that all parties must realize that "we are all in this together."

And both Riepe and University President Amy Gutmann are impressed by the amount of progress that has been made.

"The reason we are here today ... is because of leadership," Reipe said at the CAM groundbreaking ceremony. "Those of us who were here four or five years ago will find it an even more remarkable fact that we are standing [at the site of the CAM groundbreaking] today."

Gutmann praised the recent success of the Health System as helping to redefine Penn as the eminent university, a theme of her initiatives here.

"Thrift and innovation are among the great virtues of Ben Franklin's University," Gutmann said. "We take pride in doing more with less."

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