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UPMC announces $618 million profit, fends off critics

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By Rick Stouffer
Friday, Aug. 24, 2007

The University of Pittsburgh Medical Center posted a record annual profit of $618 million, the health care giant announced Thursday.

"Being a nonprofit under the IRS code does not mean such an entity makes no profit," said UPMC spokeswoman Wendy Zellner. "In fact, nonprofits must make an excess margin (profit) to reinvest in their core missions and to maintain their vitality."

Chief Financial Officer Robert DeMichiei said the profits will be reinvested to strengthen the region's largest health care provider, enhance clinical programs and increase academic support for the University of Pittsburgh.

Some questioned the size of the profit, which covered the fiscal year that ended June 30.

"The question is, what do they do with all the money?" said Robert Strauss, professor of economics and public policy at Carnegie Mellon University.

Allegheny County Prothonotary Michael Lamb, the Democratic nominee for city controller, wondered whether UPMC pays its fair share for city services, a recurring theme among critics.

"They do have the state law regarding nonprofits on their side, but given the fiscal situation of the city, we want to ensure everyone pays their fair share. The question is, what is their fair share?" Lamb said.

UPMC's profit for fiscal 2007 compared with a profit of $525 million for the previous 12-month period that ended June 30, 2006. The hospital system reported record revenues that jumped 13 percent to $6.8 billion, compared with $6 billion a year earlier.

The majority of UPMC's profit in fiscal 2007 came from investment returns of $403 million, compared with $206 million the year before.

"Our diversified portfolio mirrored the stock market in producing stellar gains for the year," DeMichiei said. "However, we don't count on such gains every year, given the volatility of the stock market."

Profit from patient services and insurance operations for the year was $220 million, down $101 million from an operating profit of $321 million a year earlier.

Medical-surgical admissions for the fiscal year rose 2.6 percent, while outpatient activity increased 11 percent. Membership in UPMC's health insurance companies increased to 1.2 million in fiscal 2007, up more than 276,000 members. The increase was attributed primarily to a large Medicaid behavioral health contract, strong Medicare growth and implementation of a new disability insurance product.

UPMC said operating profits were lower because it added 2,000 employees, including 170 physicians, and spent $105 million on new and expanded electronic health record technology. UPMC also spent $185 million on construction of the new Children's Hospital in Lawrenceville.

Employment totals more than 45,000 worldwide.

"There is nothing in the law that prohibits a nonprofit corporation from making money," Zellner said. "Unlike for-profit entities, we have no stockholders, and excess revenues must be used to reinvest in our facilities and programs or to otherwise provide a community benefit."

UPMC's profit as a percentage of revenues for the fiscal year was 9.1 percent, higher than the same ratio at U.S. Steel Corp., 8.9 percent; H.J. Heinz Co., 8.7 percent; Alcoa Inc., 7.2 percent; and PPG Industries Inc., 6.5 percent.

The four companies in their most recent fiscal years paid income taxes of $324 million, $332.8 million, $835 million and $278 million, respectively. UPMC's income tax paid was $5 million.

Whether a nonprofit organization is fulfilling its core mission to better the communities where it does business is taken on faith, said professor Mark V. Pauly, professor of Health Care Systems and Economics at the Wharton School of the University of Pennsylvania in Philadelphia.

"The real issue is whether or not the new things UPMC is spending money on are more important than if it instead lowered its prices," he said.

Pauly added that pediatric hospitals nationwide are undergoing a "growth spurt" and that the new Children's won't hold down costs.

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