B–1 BOARD OF REGENTS MEETING

B–1/205-17 5/10/17

Preliminary FY18 Operating Budget – UW Medicine and Research INFORMATION: This item is for information only. BACKGROUND This information item provides the Regents with the opportunity for more substantive updates and discussion on two significant components of the preliminary FY18 operating budget – UW Medicine and research. This “deeper dive” discussion is in response to regent request after the FY17 budget presentation. A discussion on the entire FY18 operating budget proposal, including tuition rates, will follow in the regular board meeting on Thursday. The attachments include the UW Medicine and Research sections of budget for ease of reference. This information is identical to information provided in the full budget item. UW Medicine and the Office of Research will provide a detailed overview of this information, along with any additional contextual information that might impact the final budget or anticipated financial performance for FY18. A significant portion of time is allocated to respond to comments or questions from the Board. Attachments

1. UW Medicine Preliminary FY18 Operating Budget 2. Strength of Ideas: Research Enterprise Preliminary FY18 Operating

Budget

Preliminaru FY'IS Oueralinu BudL]

UW MEDICINE

The FY18 budget for UW Medicine is currently in development. The starting point for determining targeted

margins is the long range plan coupled with current year performance. FY17 has been a financially

challenging year across the enterprise, but most notably for UW Medical Center (UWMC) and Northwest

Hospital & Medical Center (NWH). The negative financial performance in 2017 is primarily due to lower

realization of revenue due to payer mix degradation, higher than expected labor costs and, in certain of our

entities, lower than anticipated volumes. Concentrated efforts are underway to reduce expenses across all

eight UW Medicine entities and increase revenue moving into the next fiscal year.

Preliminary financial results for FY17, through February 2017, are included for information in Table 11.

Table 11: Preliminary

uwMedicine

Entity6

HMCUWMCNWH

VMCSUBTOTAL

UWNC

ALNWUWP**

SoM

TOTAL

FY17 financial results as of February, 2017, by UW

Month

Actual

(6,129) [

(9,731) |

(3,871) |

(2,952) |

(22,683) |

(898)(788) |

(264) [

(24,633) |

Margin %

-8%

-11%

-14%

-7%

-10%

-25%

-25%

0%

0%

-6%

Budget

(3,049)

(2,905)

1,638

93

(4,223)

(187)(321)

(2,195)

(6,926)

VarianceTo Budget

(3,080)

(6,826)

(5,509)

(3,045)

(18,460)

(711)(467)

1,931

(17,707)

Prior YrActual

(2,777)

(5,089)

(307)2,232

(5,941)

(57)79

(4,106)

(10,025)

k/ledicine Entity (in $l,OOOs)

YTD

Actual

2,818

(34,054)

(16,849)

(2,364)

(50,449)

(4,344)

2,252

1,189

(51,352) |

Margin %

0%

-4%

-7%

-1%

-2%

-14%

7%

0%

0%

-2%

Budget

776

1,495

(606)9,176

10,841

(2,504)

1,874

(18,266)

(8,055)

Variance

To Budget

2,042

(35,549)

(16,243)

(11,540)

(61,290)

(1,840)

378

19,455

(43,297)

Prior YrActual

(1,565)

(21,958)

(1,332)

10,595

(14,260)

(3,238)

3,375

(9,096)

(23,219)

**Results for UWP are shown after amounts available to the School of Medicine.

The work being done to improve financial performance includes the following:

• Management of staffing mix and schedules within patient care services to ensure most efficient use

of staffing resources. Expense reductions in all other areas in preparation for the FY18 budget,

including elimination of open positions and review of all non-labor costs

• Improvements to the revenue cycle at UWMC and Harborview Medical Center (HMC) to improve

revenue realization

• Enhancement of contract pricing and reduction of utilization through focused supply chain projects

• Care Transformation work, which is a partnership between our physicians and operational

leadership to identify ways to standardize and streamline care based on evidence based practice.

The production of this budget item requires that UW Medicine provide early projections of revenue, by

entity, for the Board of Regents to adopt with all other University revenues. After the annual budget item is

6 Each entity's name is spelled out in full in the Acronym Glossary on page 41.

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arij F/18 OL'eidl.inij Budc]yi.

adopted, leadership from UW Medicine provide a separate annual report to the Regents on the financial

performance of UW Medicine every January or February.

Each UW Medicine entity is developing FY18 budgets to meet their targeted margin goals to present to the

individual board committees of UW Medicine entities throughout the month of May, with final review at the

UW Medicine Board meeting in June, 2017.

The environment in the health care industry nationwide is experiencing significant payment pressure.

Payment rates are continuing to decline, which further highlights the need for expense reduction. This trend

is challenging as labor represents the most significant portion of UW Medicine expense and it is anticipated

that salaries and benefits will rise in FY18. Concurrently, drug inflation is projected to run near 8% in the

next fiscal year. UW Medicine continues to be focused on expense reductions and strategies for providing

care more efficiently without sacrificing quality, patient safety or experience.

Additionally, the Seattle market is facing a significant new competitor in the market with Kaiser's acquisition

of Group Health. This new entrant as well as the competitive threat from Providence St. Joseph Health

makes it imperative that we continue to provide high quality care in the most efficient manner possible

while improving access and the patient experience.

Preliminary projected revenues and margins for the R^17 and FY18 budget are as follows in Table 12:

Table 12: UW Medicine Budgets and Operating Margin Estimates (excluding the uw School of Medicine)

UW Medicine

UW Medical Center

Harborview Medical Center

Valley Medical Center

Northwest Hospital

UW Physicians*

Airlift NW

UW Neighborhood Clinics

UW Medicine

(excluding School of Medicine)**

FY17UW Regents

Adopted

1,160,000,000

950,000,000

568,000,000

392,000,000

304,000,000

48,000,000

49,000,000

3,471,000,000

FY17Subsequently

AdoptedRevenues

1,167,000,000

944,000,000

602,000,000

401,000,000

302,000,000

49,000,000

51,600,000

3,516,600,000

FY18Projected

Revenues

1,224,000,000

965,000,000

603,000,000

366,000,000

350,000,000

56,000,000

50,000,000

3,614,000,000

FY18Target

Margins

32,000,000

9,600,000

0

(3,700,000)

0

2,200,000

0

40,100,000

FY18Target

Operating

Margin

2.6%

1.0%

0.0%

-1.0%

0.0%

3.9%

0.0%

1.1%

* Note that UW Physicians targets a zero margin as cash generated from UWP is intended for use by the clinical departments tofund salaries and operations.

** Also note that UW School of Medicine projections are included within the Auxiliary/Self-Sustaining and Core Operating BudgetAreas of the campus budget, so are excluded here. The UW School of Medicine projeded budget for FY18 includes projectedrevenues of $1,420,000,000. Thus, the total projected revenues for UW Medicine for FY18 are $5,034,000,000.

As work progresses and assumptions are better defined, the numbers above are subject to change.

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PrLJ[iminanj FY18 Ouefaunu BLidci^i

STRENGTH OF IDEAS: RESEARCHENTERPRISEThe UW's record securing federal research funding is truly exceptional - it is one of the few universities in

the United States with total research expenditures exceeding $1 billion. Since 1979, with the exception of

only one year, 2009, the UW received more federal research funding than any other U.S. public university.

Since 1969, the UW placed in the top five for total funding for all public and private universities. Continued

success in securing research grants and contracts translates to consistently high scores in national and

international rankings. The National Taiwan University ranks the UW sixth overall (fourth nationally) and first

in public universities worldwide for the quality and impact of research endeavors; last year, Reuters ranked

the UW the most innovative public university in the world.

Another measure of success in research competitiveness is in terms of the UW's share of federal

expenditures compared to other higher education institutions. As Table 14 shows, the UW's ability to

maintain its share of total federal and non-federal research expenditures has remained consistent over the

last four years, despite increasing competition for limited funds.

Table 14: UW Research Expenditures - Federal and Non-federal Market Share (in $l,OOOs)

Total expenditures

Total UW

Market share (percent)

2012

52,096,000

1,040,000

2.00

2013

52,029,000

1,121,000

2.15

2014

51,412,000

1,111,000

2.16

2015

51,956,000

1,121,000

2.16

Source: National Science Foundation Higher Education Research & Development Survey (HERD), 2015.

Total funding reached $1.3 billion in fiscal year 201 6 (FY16), with federal funding making up 73 percent of

the total. There are almost 5,000 grants, with over 1 80 funded at over $1 million each.

Four major grants from FY1 6 include:

• $5.5 million for five years for the Washington, Wyoming, Alaska, Montana and Idaho (WWAMI)

regional medical education program Practice Transformation Network from the Centers for

Medicare and Medicaid Sen/ices to improve health outcomes and reduce hospitalization and

unnecessary healthcare utilization.

• $4.5 million for five years from the National Science Foundation's National Nanotechnology

Coordinated Infrastructure (NNCI) program to advance nanoscale science, engineering and

technology research in the Pacific Northwest and support a new network of user sites across the

country.

• $11 million for five years from the National Institute of Diabetes and Digestive and Kidney Diseases

for the University of Washington Center for Nuclear Organization and Function.

• $1.3 million from the National Oceanic and Atmospheric Administration (NOAA) to support ocean

scientists and developers who are investigating new technologies and modelling techniques to

improve tsunami monitoring and forecasts.

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cifu FY'18 Operatinu BudL]et

ECONOMIC AND EDUCATIONAL IMPACT

The University of Washington's research enterprise has a deep impact on the economy and education in the

state of Washington and the Pacific Northwest.

In FY16, UW launched 21 start-up companies based on UW research advances, bringing the 11 -year total to

136 technology start-ups. UW technologies generated over $15 million in licensing revenue. More than 7,400

students worked under the guidance of UW faculty mentors devoted to research. Sponsored projects

supported over 5,700 employees during FY16.

Based on economic multipliers provided previously by the Washington State Higher Education Coordinating

Board, UW research funding generated about 25,000 jobs statewide. Currently, more than 2,800 graduate

students and 1,463 post-doctoral fellows are being supported on research grants and contracts. Graduate

and undergraduate students contributed to 41 percent of the 652 patent applications that the UW filed.

FEDERAL OUTLOOK

As noted, at the time of publication, the UW administration analyzed available information from President

Trump's budget, but had little knowledge about potential congressional action. Significant uncertainty

regarding federal policy towards higher education is the new norm, specifically pertaining to research and

financial aid funding. The highly politicized nature of federal appropriations fuels this uncertainty, which will

persist until Congress passes appropriation bills and builds out the national discretionary budget.

At this time, all that we know about the future of federal research funding is that it is uncertain and the UW

administration is both monitoring the situation and developing plans to quickly respond to any changes in

federal funding. The UW administration believes that National Institute of Health (NIH) funding will not be

cut significantly, but it is half of our total funding; we are monitoring developments closely. The

Administration expects that Environmental Protection Agency (EPA), climate change, and some fetal tissue

research may be reduced, which would put $15-20 million of research funding at risk.

PROJECTED RESEARCH EXPENSES

Table 15, below, shows a breakdown of projected sponsored research expenses in FY17 and FY18. Please

note that direct (and indirect) research expenditures do not necessarily align when comparing them to

expected revenue streams. Typically, grants are not fully expended in the year in which they are received.

Further, federal and state fiscal years have different calendars. As seen below, the vast majority of the

University's research expenses are associated with federal grants, which means they are often received and

expended in alignment with the federal fiscal year. The projected decline in federal research expenses is

reflective of the uncertainty noted above (under "Federal Outlook").

Table 15: Projected Sponsored Research Expenses

Federal

State & local grants

Non-federal

Total

FY17

1,024,523,000

95,618,000

232,017,000

1,352,159,000

FY18

985,477,000

95,384,000

243,545,000

1,324,406,000

Percent Change

-3.80%

-0.20%

5.00%

-2.10%

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PreliminarLj FY'18 Opefdting Budget

Figure 6, below, provides a historical look at the UW's total grant and contract awards by year.

Figure 6: Total Grant and Contract Awards by Year (1995-2016)

$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0

0^ ^fP ^ ^> ^0°> ^0 ^- „€?- ^ ^ ^ ^<0 ^ ^ ^?) ^ -.\N ^ -.\b ^ ^ -'\<0^J^^'^^'^^'^^^^^^'^^'^J^^^^V~^^V

1/1c0

l Total Awards nARRA

As the figure shows, the UW's grant and contract awards have steadily increased with time, and are now

roughly flat. Note that FY13 numbers are artificially low because of delays in awards due to sequestration.

39

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UW MEDICINE │ TITLE OR EVENT

UW MEDICINE BUDGET

PAUL RAMSEY, M.D., CEO, UW MEDICINEJACQUELINE CABE, CFO, UW MEDICINE

MAY 10, 2017

1

BOARD OF REGENTS

ATTACHMENT 3B–1.3/205-17 5/10/17

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2017 Highlights

• CMS 5 star rating• Magnet Nursing Recognition• Leapfrog Grade A for patient safety• Health Grades Patient Safety Excellence

Award• AHA Stroke Gold Plus Award

QUALITY OF CARE

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UW MEDICINE FINANCIAL OVERVIEW

Healthcare Funding Environment Challenges

• Research funding – NIH budget threatened• Education funding – supported by clinical funds• Clinical reimbursement – flat or declining

reimbursement for clinical services and preparation for value-based reimbursement

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• Research funding – NIH grants up 10%• Education funding – cost effectiveness

of WWAMI program• Clinical programs – revenue and

expense challenges for UW Medical Center and clinical volume challenges for Northwest Hospital

UW MEDICINE PERFORMANCE FY 2017

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• Total revenue and expense ~$5 billion• Key priorities for FY 2018 Budget

• UW Medical Center revenue cycle improvement and expense management

• Northwest Hospital clinical program growth

• Expense management across UW Medicine entities

UW MEDICINE FY 2018 BUDGET PLANS

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• Care transformation• Lean expense management• Employee engagement• Integrated clinical network

KEY FACTORS FOR FINANCIAL STABILITY OF ACADEMIC HEALTH ORGANIZATIONS

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TOUGH TIMES IN HEALTHCARE

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Brigham and Women's offers voluntary buyouts to 1,600 workers Written by Tamara Rosin | April 27, 2017

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MARCH 2017 MONTHLY PERFORMANCE VS. PY

8

($ 000's)Actual PY Change Actual PY Change Actual PY Change Actual PY Change Actual PY Change

Operating Revenue 84,669$     87,025$     (2,356)$     103,927$  101,991$  1,936$       29,156$     33,126$     (3,970)$     50,860$     48,866$     1,994$       268,612$  271,008$  (2,396)$    

Total Expense 83,409$     82,003$     (1,406)$     102,954$  102,226$ (728)$        32,348$    31,912$    (436)$         50,992$    47,370$    (3,622)$    269,703$ 263,511$ (6,192)$   Total Income (Loss) 1,260$       5,022$       (3,762)$     973$           (235)$         1,208$       (3,192)$     1,214$       (4,406)$     (132)$         1,496$       (1,628)$     (1,091)$     7,497$       (8,588)$    Margin % 1% 6% 1% 0% ‐11% 4% 0% 3% 0% 3%

Actual PY Change Actual PY Change Actual PY Change Actual PY Change Actual PY ChangeOperating Revenue 4,261$       3,723$       538$           4,458$       3,936$       522$           29,505$     29,283$     222$           132,510$  117,302$  15,208$     439,346$  425,252$  14,094$    

Total Expense 4,187$       3,530$       (657)$         4,761$       4,228$      (533)$        29,505$    29,283$    (222)$         119,398$ 115,819$ (3,579)$    427,554$ 416,371$ (11,183)$ Total Income (Loss) 74$             193$           (119)$         (303)$         (292)$         (11)$           ‐$           ‐$           ‐$           13,112$     1,483$       11,629$     11,792$     8,881$       2,911$      Margin % 2% 5% ‐7% ‐7% 0% 0% 10% 1% 3% 2%

HMC UWMC NWH VMC Total Hospitals

ALNW UWNC UWP SOM UW Medicine Total

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MARCH 2017 YTD PERFORMANCE VS. PY

9

($ 000's)Actual PY Change Actual PY Change Actual PY Change Actual PY Change Actual PY Change

Operating Revenue 746,699$  706,335$  40,364$    881,953$  844,788$  37,165$    265,347$  279,728$  (14,381)$  437,732$     416,927$  20,805$    2,331,731$   2,247,778$   83,953$      

Total Expense 742,621$  702,878$  (39,743)$  915,034$  866,982$ (48,052)$ 285,388$ 279,847$ (5,541)$    440,228$    404,836$ (35,392)$ 2,383,271$  2,254,543$  (128,728)$ Total Income (Loss) 4,078$      3,457$      621$          (33,081)$  (22,194)$  (10,887)$  (20,041)$  (119)$        (19,922)$  (2,496)$        12,091$    (14,587)$  (51,540)$       (6,765)$         (44,775)$    Margin % 1% 0% ‐4% ‐3% ‐8% 0% ‐1% 3% ‐2% 0%

Actual PY Change Actual PY Change Actual PY Change Actual PY Change Actual PY ChangeOperating Revenue 38,313$    34,798$    3,515$      36,124$    32,324$    3,800$      269,222$  242,905$  26,317$    1,021,329$  962,289$  59,040$    3,696,719$   3,520,094$   176,625$   

Total Expense 35,986$    31,230$    (4,756)$     40,771$    35,854$   (4,917)$    269,222$ 242,905$ (26,317)$ 1,007,028$  969,902$ (37,126)$ 3,736,278$  3,534,434$  (201,844)$ Total Income (Loss) 2,327$      3,568$      (1,241)$     (4,647)$     (3,530)$     (1,117)$     ‐$           ‐$           ‐$           14,301$        (7,613)$     21,914$    (39,559)$       (14,340)$       (25,219)$    Margin % 6% 10% ‐13% ‐11% 0% 0% 1% ‐1% ‐1% 0%

HMC UWMC NWH VMC Total Hospitals

ALNW UWNC UWP SOM UW Medicine Total

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•Strong volumes over prior year• Admissions up 4% to 14,144

• Inpatient surgical cases up 5.7% to 5,051

• Emergency Dept. visits up 5.2% to 20,775

•Degradation of reimbursement within commercial

•Payer mix shift from commercial to governmental payers

•Changes in approaches from payers requiring revenue cycle changes

•Failure to meet budgeted expenses, especially related to compensation

KEY DRIVERS IMPACTING UWMC FINANCIAL PERFORMANCE

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SHIFTS IN PAYER MIX AND MEDICAID EXPANSION HAVE IMPACTED EARNINGS

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UW Medicine wide modeling of 2%, 4% and 6% reduction on FY 2017 budget began in FebruaryRevenue cycle improvement project

• Focus at UWMC in the past 12 months (e.g., accounts receivable days at 10 year low)

• Nationally recognized consultant engaged to assist in realizing recurring net revenue benefit as well as one-time cash benefit for UWMC and HMC (June 1 start)

• Estimated total benefit is $45M - $70M (including annual, recurring benefit of $26M to $37M and one-time cash flow benefit)

Expense management• Decrease overtime, premium and hourly FTEs and agency (outside staffing) spend

• Care transformation aimed at continued improvements in health workforce organization and staffing

• Nationally recognized consultant assisting in achieving savings

KEY FINANCIAL PERFORMANCE IMPROVEMENT INITIATIVES (SELECTED EXAMPLES)

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