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North Carolinians have long taken pride in our university system and UNC Hospitals, whose missions have been service to all the people of North Carolina.

UNC Inc. 

Ignoring its mission, our university raised tuition as its hospital reduced access for the poorwhile rewarding leaders with big bonuses. A professor emeritus investigates.

John Hammond is a professor emeritus in the departments of pathology and lab medicine and biomedical engineering at the UNC School of Medicine. He spent 29 years at UNC, rising through the academic ranks to full professor and serving as a director of the chemistry laboratories at UNC Hospitals. He retired in 2003.

Sidebars: Personal PR | Healthy bonuses | UNC PAC money for legislators

North Carolinians have long taken pride in our university system and UNC Hospitals, whose missions have been service to all the people of North Carolina. There is a constitutional mandate to "so far as practicable" hold tuition at minimal cost to students. And the 1950 legislation authorizing the creation of the UNC Health Center had the unusual feature of calling for the center to "serve as a catalyst and coordinating agent and central element in developing a statewide health program which would provide good quality health care to all the people at a price they could pay."

From time to time, these missions have been under threat, but never to the present extent. Both these institutions have been in the news lately—the first for the astounding 71 percent increase in tuition since 1999 and the second for its aggressive collection policies and its recently implemented incentive policy that is having the effect of restricting access to care for uninsured and Medicaid patients.

Nationally there has been a move among state universities to improve their rankings. This effort has resulted in student bodies that are impressive academically but increasingly affluent. To fund their drive for higher national rankings, many public universities have increased their tuition. The fear is that by doing so, they are losing their force as engines of social change and social mobility through education and are shortchanging low-income and minority students.

Is there a common force at work here that has moved both our university and our hospital system to improve their rankings at the expense of their missions? I would argue that there is.

The university goes corporate

At the university, this drift away from its traditional mission and toward a priority on image and ranking began with the arrival of a new dean of the business school in 1987 and a new chancellor in 1988. Up to that point, the university leadership had placed the historical mission above building their own reputations and enhancing the image and ranking of the university or their school. Most, if not all, of them lived the state motto esse quam videri—"to be rather than to seem." This has been changing.

In 1987, the university chose to recruit a well-known and successful business executive for the open position of Dean of the School of Business instead of seeking an individual with strong academic credentials. The first retired business executive deans were Paul Rizzo (1987), former vice chairman of the board of IBM, and Paul Fulton (1994), a former president of Sara Lee Corp. Both brought with them all their corporate experience, ethics and expectations regarding compensation, fringe benefits and perks, as well as a management style learned from their corporate life experience. Their successful careers showed that they were skilled in building images—personal images and the image of their business unit. The fact that the business school was embarking on a significant fundraising campaign at that time may also have been a factor in its choice of leadership.

This was the apogee of the American corporate executive who could do no wrong. When the bubble burst later with the unfolding of the business scandals of the late 1990s, that image of corporate leadership was significantly tarnished. Perhaps it was because of those scandals that UNC returned to an academic as dean of the Kenan-Flagler Business School after Fulton left.

The Kenan-Flagler School of Business at UNC-CH, which took the lead in the corporatization of the university. - PHOTO BY DEREK ANDERSON
  • Photo by Derek Anderson
  • The Kenan-Flagler School of Business at UNC-CH, which took the lead in the corporatization of the university.

In 1988, Chancellor Paul Hardin was hired by a search committee led by Robert Eubanks, a member of the UNC Board of Trustees and a director of the investment management firm Franklin Street Partners. Eubanks is also the son-in-law of Texas oilman Walter Davis. Although not an alumnus of UNC, Davis used the political power he gained campaigning for various legislators to support the cause of greater independence from General Administration of the larger UNC system and later also for the formation of a healthcare system modeled after the Duke Healthcare System.

With the presence of Hardin and the business school deans, a major effort began to raise the national image and rankings of the university and its schools by improving revenue through raising tuition. The new priority was no longer based on the traditional mission of providing a college education at the lowest cost practicable for all students. Hardin also tried to drop the dreaded "-CH" from the university's name and attempted an end-run around General Administration for "managerial flexibility" (read independence), using friendly legislators with the support of Walter Davis.

UNC system President C.D. Spangler stopped both the name change and the end-run for "managerial flexibility." But the tension continued, and subsequent chancellors Michael Hooker and James Moeser have played the end-run game on several occasions, seeking greater independence from the UNC General Administration.

Dean Paul Fulton, used to dealing with problems directly, saw that the MBA tuition for the business schools was far below that of the private business schools such as Harvard, Wharton and MIT. He sought to correct the problem by bypassing UNC General Administration, then under the direction of system President Molly Broad. He lobbied the legislature directly to raise the MBA tuition by $5,000 a year. The additional funds were to be used to enhance faculty salaries as well as the reputation and ranking of the Kenan-Flagler School of Business.

One might question whether it would have been more appropriate to compare UNC to other publicly supported universities instead of to private schools that have no responsibility to provide an education that benefits the citizens of their state.

This occurred during the first month of Molly Broad's tenure as president, but it was the first of several attempted end-runs around her office. She prevailed upon lawmakers to ask UNC General Administration to do an overall study of the tuition issue at all UNC campuses, including the Kenan-Flagler School of Business. Paul Rizzo, by then a member of the Board of Governors of the UNC system, also tried to promote the $5,000 tuition increase, but the power play of Fulton and Rizzo was defeated or delayed and the study of tuition at all campuses went forward.

It was at this point that the stage was set for the tuition spiral that is still continuing, making a mockery of the state constitution's requirement for an education at the lowest practical cost and substituting instead a philosophy that tuition should be driven by value and the market. Shortly after this controversy, Fulton announced that he had accomplished his goals, had never seen himself as a long-term educator, and would retire in June 1998. By 2002, tuition for out-of-state MBA students had increased so much that Dean Robert Sullivan, Fulton's successor, asked that tuition not be increased further because it had reached the upper limit of the market value of a Kenan-Flagler MBA—$30,430 a year for an out-of-state student, including tuition and fees at the time.

Exacerbating the problem is the fact that a relatively small group of wealthy, working and/ or retired corporate executives, some active in financial institutions in Chapel Hill and others in through the boards of three UNC institutions—UNC-Chapel Hill, the UNC Board of Governors and the UNC hospital system. Former business school dean Rizzo, for instance, was a principal in Franklin Street Partners and served on the UNC system's board of governors, UNC-CH's board of trustees, and the UNC health system's board.

Many of these individuals are far removed from the economic challenges facing the average North Carolina family seeking to pay for a college education for their children. Further, it is not surprising that these board members have adopted a philosophy blind to the social good of keeping tuition at the lowest practicable cost as a means for continuing to make the university a positive agent for driving social change and economic justice in our state.

In 2002, Fulton returned to the scene and helped organize a PAC to support UNC, Citizens for Higher Education—and many of its donors were the same business people rotating through the university system's boards. The PAC was rated the richest one buying support in the General Assembly in 2006, giving $425,000 in the previous two-year election cycle. That level of lobbying by a public university was criticized by a number of independent watchdog bodies.

UNC Hospital goes profitable
click to enlarge Construction proceeds on the North Carolina Cancer Hospital near the Women's and Neurosciences hospitals. New construction paid for using hospital profits caught the eye of UNC administrators. - PHOTO BY DEREK ANDERSON
  • Photo by Derek Anderson
  • Construction proceeds on the North Carolina Cancer Hospital near the Women's and Neurosciences hospitals. New construction paid for using hospital profits caught the eye of UNC administrators.

In 1971, after a disastrous administrative arrangement as a department within the School of Medicine beginning in 1956, UNC Hospital was placed under the General Administration of UNC as a separate entity. In 1991, the state began to allow UNC Hospitals to retain revenue in excess of expenses in an enterprise fund, to be used to pay for new buildings without the need for additional taxpayer money. This surplus of revenue was possible because from 1990 to 1996, Medicare reimbursement was well above the cost of services. The financial advantage ended after the enterprise fund accumulated half a billion dollars. This fund was earmarked to build the Neurosciences Hospital and the Women's and Children's Hospitals, all of which were built without tax money.

This half-billion dollar accumulation in the enterprise fund attracted the attention of both the UNC-CH chancellor and the dean of the School of Medicine. Both wanted control and/ or a cut of the fund. Meanwhile, a number of alumni and political supporters (with no expertise in healthcare economics) were thinking that both the School of Medicine and the hospital should follow the model of Duke Medical Center—that they should buy hospitals and physician practices in order "to remain competitive" in the changing healthcare market. What they did not know was that Duke was following a model of the University of Pennsylvania Medical Center, and Pennsylvania was reacting to the statewide and unsustainable expansion of its major competitor, the Allegheny Healthcare System.

The political friends of UNC-CH and the School of Medicine worked to place the hospital directly under the university and the School of Medicine instead of under the UNC system's General Administration. An earlier attempt had failed, but this one partially succeeded because of the support of the university's friends in the state legislature, who had received generous campaign contributions from many current and former board members of the university. One of the university's biggest supporters in the General Assembly was former state Sen. Howard Lee of Chapel Hill, who helped lead the effort and in 1998 received $5,000 from Rizzo, $4,000 from Robert Eubanks (of Franklin Street Partners and a UNC trustee), and former business school dean Paul Fulton.

In 1998, the UNC Healthcare System was formed by an act of the legislature. Broad managed to keep it under UNC General Administration, which meant the university was not able to control either it or the enterprise fund.

The dean of the School of Medicine became CEO of the healthcare system, but the leadership of the hospital under Eric Munson remained in place. The CEO of the healthcare system reported to system President Molly Broad.

Needless to say, the newly created healthcare system immediately began to emulate Duke. It established off-campus physician practices and bought Rex Hospital for $100 million. About the time the UNC acquisitions were complete, the Allegheny Healthcare System entered bankruptcy. The University of Pennsylvania Healthcare System was also reported to be losing millions of dollars; ultimately its CEO was removed. Meanwhile, it took many years for the Duke Medical Center to return to profitability after its acquisition of physicians' practices and two local hospitals.

The irony was that the fear of the HMO insurance system, which had driven these mergers, never really became a threat. Much of the conventional wisdom in the 1990s on how academic medical centers should protect themselves from the HMOs had been wrong. Today, the major problems facing UNC Hospitals and many others are the declining revenue from Medicare, Medicaid and private insurance and the ever-increasing costs of operating large, geographically separated healthcare systems, plus the growing number of patients without health insurance because of the collapse of manufacturing in North Carolina.

In 2003, the first CEO of the UNC Hospital System (and dean of the medical school) resigned. The following January, a search committee formed by Molly Broad hired Dr. William Roper, then dean of the School of Public Health. Prior to his tenure at the School of Public Health, Roper had been senior vice president of Prudential HealthCare, which was subsequently sold to Aetna. Before that, he had been the administrator of the Centers for Disease Control.

Roper's first major administrative action was to fire Eric Munson, then president of UNC Hospitals. It was Munson who had led the team that had created the half-billion dollar enterprise fund that built all the new facilities at UNC hospitals without tax money. Removing Munson enabled Roper to gain control of the financial resources of the hospitals. Roper then hired the CEO of Rex Hospital as president of the UNC Hospitals. Thus it was that these two individuals, with no previous experience in leading a billion-dollar academic medical center and teaching hospital, became the new leadership of the UNC Hospital System.

The mission changed immediately—from primarily service to primarily profit, rankings, and image. Navigant consultants were hired not to enhance services for the citizens of North Carolina but to improve strategic, financial, operational, clinical research and market performance of the hospitals. In 2005, Capstrat, a high-powered Raleigh PR and lobbying firm, was hired for $1 million over three years to help Roper with strategic communications aimed at enhancing the hospital system's rankings and Roper's national image, according to their contract.

Only parts of Navigant's contract are public record, but it appears the firm's recommendations included:

  • Reduction of personnel;

  • Replacement of expensive personnel with cheaper personnel;

  • An increase in the collection of co-pays and deductibles before service is provided;

  • Reduction of losses from uninsured or underinsured patients;

  • Aggressive collection of past-due bills;

  • Use of bonuses in clinical and administrative departments to provide motivation for personnel to work to increase profit margins.

One of the earliest manifestations of these recommendations was the replacement of skilled, medical social workers in the discharge-planning department at UNC Hospitals with cheaper, less qualified workers. Evidence of poor discharge planning began immediately. Elderly patients were discharged to their homes using public transportation, without making sure there would be adequate support for them when they got there and without even notification of the family that they were on their way.

In one case, a mentally incompetent patient was simply released in the hospital lobby without notification to his family. He wandered away, requiring an exhaustive search of the entire medical complex before he was found. There have been numerous other examples of failure in discharge procedures because of inadequate planning.

Not surprisingly, serious morale problems have developed as the staff has been pressed to do more with less, even in parts of the hospital operations critical to its financial success. For example, operating rooms have been unable to operate at full capacity due to lack of operating room staff.

click to enlarge A plaque at the Kenan-Flagler School of Business is a reminder of its responsibility to the people of North Carolina. - PHOTO BY DEREK ANDERSON
  • Photo by Derek Anderson
  • A plaque at the Kenan-Flagler School of Business is a reminder of its responsibility to the people of North Carolina.

Several recent newspaper stories have documented the new, aggressive collection policies, including the use of collection agencies and the courts. Liens have been placed on the homes of persons made destitute by catastrophic medical bills. A former long-term faculty member of the School of Government was turned over to a collection agency by the hospital for non-payment of a $41.43 bill and his credit rating was compromised even though it was unclear whether he or Carol Woods, his life care community, was responsible for the charge.

Reports are also emerging of significant billing errors which, coupled with the aggressive collection practices, have provoked a revolt in the community. Yet those in charge of these failing billing systems have received multiple five- or six-figure performance bonuses over the last two and a half years, according to documents provided by UNC.

Charles Ayscue, the chief financial officer of UNC Hospitals, received a $68,292 bonus in 2006 in addition to his salary of $318,000, according to records provided by UNC-CH. Dr. Marshall Runge, chair of the Department of Medicine and chair of UNC P&A, the professional billing service for the clinical faculty, received bonuses totaling more than $298,000 from fiscal 2005-2007 on top of his annual salary of $458,830. Keith Gran, the administrator of UNC P&A who's in charge of day-to-day operations, collected bonuses totaling $188,651 in that same period in addition to his salary of $267,500 a year.

One result of the new emphasis for clinical staff on bringing in revenue to the hospitals is that patients are being asked for payment before treatment in the hospital and clinics. As a result of the effort to reduce losses from treating uninsured and Medicaid patients, Piedmont Healthcare, a primary care facility for the poor, is finding it extremely difficult to refer its poor patients to UNC Hospitals for specialty treatment, as they have done for many years prior to implementation of the clinical faculty bonus system.

The emphasis on enhancing profit and the incentive of bonuses has also had the effect of encouraging the departments to set quotas for service to the uninsured and Medicaid patients. For example, the Department of Orthopedics now will see patients with insurance within two weeks, whereas only 40 appointments a week are made for Medicaid patients. With this limit on a service covered by this federal health program, one can only imagine how long it will take Medicaid patients to be seen.

It seems clear that the incentive of bonuses has influenced this change in the policies of service as experienced by Piedmont Healthcare. In orthopedics alone, the chair and faculty received $1,320,714 during the fiscal years '05, '06 and the first half of '07. The chair, Dr. Douglas R. Dirschl, received $188,000 of that. In '06 alone, while publicly stressing how hard it was to make a 3 percent profit margin, Roper allowed $2.5 million in bonuses to be paid to administrators of UNC Hospitals. Over the last two and a half years, all the clinical departments paid a total of $16,419,592.87 in bonuses. Most of these individuals, of course, have salaries and fringe benefits that handsomely compensate them for their services.

So what we see here is leadership excessively focused on enhancing the profit margin and the image and rankings of the institution plus personal gain through bonuses while short-changing its mission by reducing access to care and quality of care.

The primary responsibilities of a state supported, not-for-profit hospital is to balance the need for its own financial health with the need to preserve quality of services in keeping with the mission to serve as a safety-net hospital for the citizens of North Carolina. The new policies have weakened support for the institution in the community and in the state.

What now?
click to enlarge Mike Harrington and Ana Felix help 2-year-old Catie Felix drink from the fountain at the Old Well across from South Building, which houses the university's top administrators. - PHOTO BY DEREK ANDERSON
  • Photo by Derek Anderson
  • Mike Harrington and Ana Felix help 2-year-old Catie Felix drink from the fountain at the Old Well across from South Building, which houses the university's top administrators.

The tuition problems at the university and the restrictions on access to care at the hospital system are directly related to the fact that the boards of both these institutions and in UNC General Administration are populated largely by corporate executives or retired business executives whose ethical value systems have always promoted the image and rankings of an institution and its leaders. A small pool of wealthy individuals chosen for their business success and their fundraising ability have rotated through the three boards. Despite their clear capability and their wish to serve these institutions, they tend to have little in common with students from poor families who are trying to better their lot in life through education and even less in common with the working poor who lack employer-based health insurance or the means to pay for commercial health insurance or healthcare.

Perhaps it is not surprising that leaders recruited by these boards have adopted the philosophy and values that lead to business success. Unfortunately, this philosophy is detrimental to the primary historical mission of both these institutions, which is to be of service to all the citizens of the state.

Further, many of the board members are major contributors to the politicians who may nominate and/ or appoint them to these boards. The method of selection of board members needs to be expanded and open to all citizens who have a desire to serve. An open public process should be established that allows citizens to make application to serve on these boards and thus expand the economic diversity and literally return the "public" to our public institutions.

Clearly, the incentive bonus program for both the clinical faculty and administrators that has reduced access to care for the poor and poorly insured must be eliminated if the healthcare system is to regain public trust and support.

Strong steps such as these need to be taken to restore both these public institutions to their historic mission of service and return them to living our state motto, esse quam videri.

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