UVM's Tower is a Major Cost Issue

by Hamilton E. Davis

   In the broad scheme of things, the Green Mountain Care Board’s denial of the University of Vermont Medical Center’s request to add to the planning costs for its proposed new bed tower should just be a slight bump in the road. The requested increase amounted to $1.5 million for a project that is expected to cost $187 million—less than one percent.
   In its formal decision, the Board said the reason for the denial was that the new money was actually not for planning per se, but for the early construction phase. The Board has not granted approval for the project itself; the Board will hold hearings on that question May 18 and 19.
   The hospital, in other words, simply assumed that it will be granted permission to build, and getting started a few months earlier than planned could save a little money. The Board didn’t buy that.
   “The board must maintain the distinction between conceptual and project expenditures to ensure that the authorization of planning expenditures does not thwart the cost containment purpose at the heart of the CON (certificate of need) review,” the decision read.
   The Board’s rationale is clear enough, and the brief delay could amount to not very much. It also seems clear, however, that if final project approval is pretty much assured, starting early makes sense. So, the Board decision could presage a much tougher attitude on the project itself, based on its sheer cost and volume.
   The reason for the new bed tower is to modernize the inpatient facilities of the hospital. Inpatient rooms now are presumed to be more efficient if they are single rooms, not doubles. They also have to be bigger in order to accommodate bulky modern equipment and to ease the flow of medical personnel in and out.
   In the health care industry, no one disputes the new room paradigm. The problem in the UVM case could lie in the cost to the system of doing the work, According to documents provided by UVM to the Board, the hospital’s long-term debt, now at $495 million, would rise to $605 million, a 22 percent increase, if the project goes forward as planned.
   Moreover, the hospital’s margin of revenues over expenses—the “profit” or “bottom line” in a non-profit entity—would increase to $100 million or so per year out into the future. The hospital’s margin has risen sharply in recent years. During the first decade of the millennium, Vermont hospitals got state approval for margins of roughly two percent of their net income.  
   In Fiscal Year 2013, UVM got Board approval to take its margin to around four percent. UVM’s financial planning documents envision that edging up to the five percent range. The margin is not directly connected to the bed tower project, but it will have a significant effect on the rates that get charged to patients.
    Given that the UVM health care system delivers nearly half the care in the state, the bed tower could become a focal point in the Board’s three-plus-year effort to get costs into the sustainable range. The Board has retained a consultant, Deloitte Transactions and Business Analytics, to assess the tower financing. The consultant’s report will be available prior to the late May hearings.
   In addition to the financial issues, the Board will have to cope with the practical political effect of the addition of the tower. The 13 community hospitals in the state are facing tough regulatory pressures on their costs, and there could be considerable resentment there over the financial weight of the tower.
   No knowledgeable person is likely to challenge the bed tower project on its medical merits, but the cost pressures inside the whole system are growing daily. And the outcome of UVM’s project could be a manifestation of just how tough those pressures will get in the next two to three years.