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The UCSF Medical Center is part of the University of California system, and as such receives from the state about $12 million a year in clinical teaching funds. That money pays for the treatment of patients who cannot pay the full cost of their hospital care -- but whose admittance to UCSF hospitals is absolutely required, if new doctors are to be properly taught. The third-party reviewers refused to consider those funds as income of the UCSF Medical Center -- even though the state will continue to pay for clinical teaching, whether a merger goes through or not.
But $12 million in teaching funds was hardly the only funding underestimate made by the third-party team.
Unlike Stanford, UCSF does not currently pay into a pension fund for its employees, because the University of California pension plan is overfunded -- that is, it has enough money invested to sustain itself, at least for a time, without annual contributions. The third-party review ignored this overfunding -- worth about $21 million a year -- on the assumption that the overfunded situation could not go on forever, and UCSF would someday again have to contribute to the plan.
And someday it will. But unless it merges, the university will enjoy the luxury of not paying $21 million a year toward pensions, for at least a few years. It is only in the event of a merger that the medical center will have to immediately begin pension payments.
These and other financial discrepancies in the third-party review were pointed out by economist Mark Blum, a consultant hired by UCSF unions who have filed a lawsuit to stop the merger. Blum's analysis was backed by Richard Weber, an economics professor and expert witness on fund accounting for the Securities and Exchange Commission who had been hired by the UCSF Academic Senate.
"The Hellman [Third-Party Review] Report, apparently the justification for the UC Regents decision to merge the UCSF and Stanford Medical Centers, had projected a deficit of nearly $11 million for fiscal year 1997, based on analytic assumptions that I can only describe as somewhat bizarre," Blum testified in a recent state Senate hearing on the merger. "When I finally had the opportunity to review the Hellman Report, I was unable to identify any sound financial rationale for the projection."
UCSF quickly dismissed the Blum/Weber analysis -- but without effectively rebutting any of its key points. Essentially, the university administration continued to say the merger is a good idea because Hellman's team said so -- even though it was clear by then that many of the team's assumptions were wrong.
In July, at the request of California Sens. Quentin Kopp and Tom Hayden, state auditors looked at the proposed merger -- an examination that regents had never requested.
Again, the auditors had a limited charge; they were only to examine the financial benefits of the proposed merger, not its legality or constitutionality, or its impact on patients, students, and the public.
State auditors found that both Stanford and UCSF were in good financial health, and that the third-party review had overstated the financial benefits of a merger by tens of millions of dollars.
"A merger is not needed for either of them to remain viable," says State Auditor Kurt Sjoberg. "They need to address any number of initiatives to be more competitive in the market in which they find themselves. That can be accomplished in any number of alternatives."
But the UC regents didn't need to wait for the state auditors' report to know the financial condition of the university's medical centers.
Last November, during a private meeting of the Board of Regents Committee on Audit (university officials, apparently realizing the meeting had been illegally closed to the public, would later release transcripts of the event), accountants from the firm of Deloitte & Touche, which had been hired to audit all five of the University of California medical centers, delivered some news that was disturbing, even when presented in the flat prose used by members of the dismal profession:
"We have very serious concerns about the accounting and the financial controls at the University of California."
To make UC's books balance, the auditors had needed to make $100 million in adjustments to the university system's financial statements. Many of those adjustments dealt with reserves that had been hidden "off the books" by university departments.
As with most academic institutions, UCSF divides its money into a variety of funds. These funds are roughly analogous to bank accounts; each has its own balance sheet. In making its report on the merger, Warren Hellman's third-party review team looked at the UCSF Medical Center's operating fund -- that is, the fund into which money paid for patient care flows and from which bills are paid.
But the Medical Center has many other accounts, some quite substantial. Among others, reserve and capital improvement accounts were not considered in the third-party review, even though they are part and parcel of the overall financial picture of the center.
In fact, back in November, auditors cautioned the regents that the medical centers were stashing money in reserve accounts. This stashing of excess year-end funds where legislators are unlikely to look is fairly common among universities and nonprofit entities. But the UC campuses were taking the practice to extremes.
Accountant Tom Weixel told the regents:
"Management needs to be more disciplined about monitoring the level of these reserves and more importantly not building them up just to avoid reporting larger bottom lines in these medical centers. At several medical centers active partnering and merger discussions are under way ... [text deleted by the UC's lawyers]."
In total, counting reserves, UCSF's most recent financial statements show the institution has $139 million in surplus funds -- that is, money available for operations or plant expenditures -- an increase of $42 million during the past two years. The Medical Center's long-term debt is about $40 million. In other words, the UCSF Medical Center, as a business, has enough expendable assets to pay off its debt three times over.
