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Posted on Thu, Dec 6, 2012 : 4:45 p.m.

CEO Ora Pescovitz emails staff: U-M Health System needs to cut expenses

By Amy Biolchini

The University of Michigan Health System must cut its operating expenses for the next six months or face a growing negative budget margin, according to an email sent by CEO Dr. Ora Pescovitz and other top health system officials Thursday afternoon to her entire staff.

The Health System is not bringing in the amount of revenue it expected in the 2013 fiscal year, according to Pescovitz's email. The 2013 fiscal year extends from July 1 to June 30.

pescovitz red jacket 11.09.jpg

Dr. Ora Pescovitz


"All of our leaders have responded with plans that will significantly reduce our negative margin. But more work remains," the text of the email said. "We have not closed the gap between our expenses and our revenue for this fiscal year, and our challenges moving forward are growing."

Pescovitz's announcement, which was also sent on behalf of Doug Strong, CEO of U-M Hospitals and Health Centers and Dr. James Woolliscroft, dean of U-M's Medical School, comes in the face of a positive presentation of the status of the health system at the one-year anniversary of the new C.S. Mott Children's Hospital last week.

At that time, health system officials said the new hospital was exceeding its targeted goals financially and for capacity. They did not provide specific numbers when asked.

The construction of the new children's hospital set the health system back at a negative operating margin of 0.5 percent for the 2012 fiscal year, but administrators were confident in June that they would be able to pull into the black in 2013.

The University of Michigan Board of Regents adopted the 2013 budget at the end of June for the Health System that included a 0.5 percent positive operating margin.

According to the email sent Thursday, that figure is no longer an obtainable reality without additional budget cuts across all departments.

In November, the Health System asked all of its department heads to figure out how to cut costs. Plans include attrition management, reduced appointments, reduced overtime, reduced temporary staff and contract labor, as well as "savings from improvements in supply chain efforts," according to the email.

U-M's Faculty Group Practice in the Medical School asked each of the medical directors of U-M's ambulatory care facilities to reduce its budget to fiscal year 2012 levels.

However, it appears even the measures submitted by the department heads are not enough to close the negative margin, the email indicated.

By the end of 2020, the Health System may be facing a $200 million annual gap in its clinical margin, the Health System officials said in the email.

In addition to the Health System's apparently struggling revenues, the approaching federal fiscal cliff that would mean a deluge of tax increases and spending cuts after Jan. 1 is worrisome for the Health System, according to the email.

If the federal government is unable to prevent its finances from hitting the fiscal cliff, the Health System will see a "decrease in National Institutes of Health and medical education funding, potentially significant reductions in payments for hospital outpatient services and decreases in physician reimbursement," the email indicated.

Amy Biolchini covers Washtenaw County, health and environmental issues for Reach her at (734) 623-2552, or on Twitter.



Fri, Dec 7, 2012 : 3:48 p.m.

what about that huge endowment fund ? what's it for, if not for hard times ?


Fri, Dec 7, 2012 : 3:52 p.m.

Endowment funds are for only one thing: bragging about how big yours is.


Fri, Dec 7, 2012 : 2:30 p.m.

Maybe athletics can lend them a few million!


Fri, Dec 7, 2012 : 8:26 p.m.

At least somebody at the UM has a product that turns a profit.


Fri, Dec 7, 2012 : 6:07 p.m.

How dare you suggest that athletics be tapped to help the uom? That's obscene, immoral & worse than stealing. Kids are out tearing there bodies apart to amass the athletic funds that you wish to peter away on the medical palaces and ingrate patients. Leave the hallowed sports campus well enough alone. They have trouble enough inventing ways to spend all their funds.


Fri, Dec 7, 2012 : 12:31 p.m.

It's only going to get worse as Obamacare grows into this monstrous bureacracy that consumes more and more health dollars to fund itself. We've heard this story before in our shcools, police departments, fire departments, city of Detroit, France, and Greece but have chosen as a nation not to do anything. Fire up the printing presses, raise taxes on the rich, fasten your seatbelt and hope for change. For such a smart country and people we sure like to learn things the hard way. Small pain and changes now will avoid very large pain in the future. But we won't do it; we won't wake up and do the right things until the pain is so intense that we'll be begging for real reform or forced to do it. The good/unfortunate thing is this timeline is getting shorter and that Obama will hand off to his successor his own Bush legacy times one hundred while he jets off into the sunset, gets paid big money to lecture, on his taxpayer funded life free from the pain he's left in his wake................


Fri, Dec 7, 2012 : 4:48 p.m.

Ralph - I'm not worried about it, and no I didn't like George Bush once he became a free-spending liberal in his own right (with a Democratic congress). I hope you're not running the hospital with a mindset like that..............


Fri, Dec 7, 2012 : 2:31 p.m.

Too bad you lost!!!


Fri, Dec 7, 2012 : 9:59 a.m.

The wages and benefits being paid to most of the positions of the U-M Health System are obscene. It is another example of why health care will bankrupt the US - especially, now that Obamacare is moving forward full steam. Health care wages/benefits are only rivaled by college wages/benefits ala U-M.


Fri, Dec 7, 2012 : 8:37 p.m.

Goober, I bet you'd like $15 an hour workers to run the U-M Health System. You get what you pay for.

Stephen Lange Ranzini

Fri, Dec 7, 2012 : 4:44 a.m.

Being CEO of a local community bank whose 323 employees manage $12 billion in assets, I have five economic and management observations about this development: 1. It is a major blow to Ann Arbor that it's largest employer is losing money & needs to hit the panic button.y Each job at the U-M Health Center is a base economic job & probably supports another two jobs locally. 2. I applaud the management team for coming to the realization that the fiscal cliff is real & that it is likely to happen. Some of the key funding programs for U-M Hospitals such as NIH grants could be cut in the sequestration by 10%. Medicare will also be chopped hard. Being proactive is better than waiting until it is too late to act. 3. I once was forced to make a 1/3rd staff cutback in one of our business units when I stepped into direct management of that unit late that year, to eliminate a large monthly deficit. One of the cardinal rules of business is never make a large cutback between Nov. 15th and Jan. 1st, so I waited until Jan. 5th. Cutting during or just before the holidays is Scrooge-like, bad for morale & bad for business. t's a management failure & leads staff to question, how bad is it really, because if they are having to cut now, it could mean that they are facing a real disaster & the scope of the problem is worse than publicly admitted. 4. When the Veba Trust runs out of money later in the decade (as it will unless GM's stock price stages a remarkable recovery in the teeth of the next coming depression), there will be a funding crisis among the healthcare providers in the state. The Veba Trust spends about $5 billion a year on healthcare, of which 2/3rds is spent in Michigan. That & future impacts from the ACA are probably driving their long term projection of $200 million per year deficits. 5. If you cut, cut your own salaries first! Scary stuff for all of us. I wish all U-M employees effected my sincere hope for a more positive outcome.


Fri, Dec 7, 2012 : 4:46 p.m.

@1bit Think thru this logically. The Veba trust is like a child living of the wealth created by the parent as part of an inheritance. It will surely end some day. The union has no business to generate income , so it has to end. GM is done paying for the cash cow. Now, you will have to pay the piper. Common sense - reality bites and it bites harder in winter :)


Fri, Dec 7, 2012 : 3:27 p.m.

I have found that fellow team members are smart, valuable and truly the assets of any company or organization. There is no good way to reduce the size of the team . They probably know that a layoff is coming anyway, especially if you have had a habit of sharing business related information with them. Hiding this until after the holiday break is horrible.

Stephen Lange Ranzini

Fri, Dec 7, 2012 : 1:32 p.m.

@Michigan Man: It is human nature that people pay more attention to the opinions of experts or people with expertise in the topic being discussed.

Stephen Lange Ranzini

Fri, Dec 7, 2012 : 12:57 p.m.

@1bit: As to the Veba Trust, if you start with $50 billion and spend about $5 billion a year, and that sending is on healthcare costs rising rapidly each year as your retirees age and healthcare industry costs increase, you'd better have some awesome results from your invested assets. So far since the IPO, GM stock has gone the wrong way for them and dropped from $33 to $24.57. All Michigan residents should wish the Veba Trust great success with its investments, because otherwise our healthcare ecosystem will be severely impacted.

Stephen Lange Ranzini

Fri, Dec 7, 2012 : 12:20 p.m.

@1bit: The Intrade political futures market currently predicts the odds of going over the fiscal cliff at 85-88%. See:

Michigan Man

Fri, Dec 7, 2012 : 12:15 p.m.

Stephen - we do not need your resume posted on this page.


Fri, Dec 7, 2012 : 11:32 a.m.

Stephen, you should have stuck with points 1, 3, and 5. Points 2 and 4 are cynical and alarmist, carrying the equivalent predictive value of next month's weather forecast. Yes, storms may be ahead but they may not be and they may not be as bad as imagined.


Fri, Dec 7, 2012 : 4:42 a.m.

I'm sure they'll handle it by either not hiring new staff or making sure that staff raises are <2% next year. God forbid anyone else (physicians) share in the tightening of belts.


Fri, Dec 7, 2012 : 1:52 a.m.

Perhaps the good Doctor had NO prior business experience and she is NOT qualified for her position. I got this nugget from Forbes Magazine. This was her prior position before joining UofM. Perhaps the good doctor should think about shaving her own salary since she was the "chef in the kitchen" for this debacle......... Profile Ora H. Pescovitz, M.D., On May 11, 2009, Dr. Pescovitz became the University of Michigan's first female Executive Vice President for Medical Affairs and Health System Chief Executive Officer. Life Technologies Corp Director Compensation for 2011 Fees earned or paid in cash $135,000 Total Compensation $135,000 Stock Ownership for 2012 Number of shares owned 4,178


Fri, Dec 7, 2012 : 5:49 a.m.

Before coming to U of M, Pescovitz was the #2 at the University of Indiana medical school and ran the children's hospital there (the nation's sixth largest). She oversaw the construction a $470 million building expansion while there. I agree, she should take a cut in salary to go along with the hospital's decreased financial performance. But it's hard to say she wasn't qualified for the job. (Also the Mott expansion was well underway long before she arrived here.)


Fri, Dec 7, 2012 : 1:36 a.m.

I'm obviously thinking about this way too much.... Since I'm nowhere near educated enough to be a CEO, but my question is...Who oversees these budgets? Why aren't THOSE jobs on the line. Obviously the "numbers" didn't add up. Why let workers who put their blood, sweat, and tears into making that institution run, who have hands on patient care....all the people who were PRIDED upon prided upon in the commercials last year when they were campaigning for the "New Mott". Yes, I used to be employed there many, many years ago, and it was one of my most favorite jobs, to see patients, to see doctors and nurses at work, to see patients young and old. This place cannot run without the people who are being let go. They were hired for a reason. So what, the people who get to keep their jobs are going to be strrrrrrretched to their limit and do the jobs of 2...or more? I really don't understand that logic.


Fri, Dec 7, 2012 : 1:38 a.m.

oops...PRIDED upon (just one time).

Michigan Man

Fri, Dec 7, 2012 : 1:34 a.m.

Obamacare is just beginning - It will only get considerably worse, financially speaking.


Fri, Dec 7, 2012 : 4:41 p.m.

@Ignatz, ,Please spare us your moral outrage. If you really want to care for the folk, please do it yourself and then fluff out and beat your chest how charitable you really are. Otherwise ,please back off onwaving your finger at us for not doing anything. Throwing this "responsibility" onto the govt means no one is responsible for anyone.


Fri, Dec 7, 2012 : 4:21 p.m.

@Ignatz actually u are right - stop spending needlessly on the military and cut foreign aid - and put that money into education and then we stop borrowing from china to give to others and limit the scope of our goverment, allowing people to keep more of what they earn. i do not exist to take care or my fellow citizens, nor do I work for them. I work for myself and take care or my own ... my own rational self interest matters, doesn't it? Or do i really exist for others? and i work for others too?


Fri, Dec 7, 2012 : 2:47 p.m.

Yes, how dare we expect to be able to care for our fellow citizens. Doing so would just take us closer to being part of the civilized world. After all, we need that money to fuel the military-industrial complex so we can murder more innocent foreign citizens on their sovereign soil!


Fri, Dec 7, 2012 : 10:16 a.m.

Yes, you are right. Many Americans are in denial as to the true cost impact of Obamacare. We are all in for a brutal, rude awakening.


Fri, Dec 7, 2012 : 12:41 a.m.

Somehow this does not surprise me at all. I remember a similar situation happening in the mid-90's. Lots of people were riffed - I think that was the expression - only to be rehired a few months later. But it was extremely stressful and very unpleasant and didn't help make for a positive work atmosphere.


Fri, Dec 7, 2012 : 12:06 a.m.

It should be quite easy to compare years and see the impact of Mott. More interesting is the release last week designed to overshadow this.


Thu, Dec 6, 2012 : 11:33 p.m.

Eagleman....this is already in a hidden reply, but I am saying it here too. If Ora Pescovitz's salary is is a "mere pittance" in the scheme of things....what about the employees who make $15 per hour or less, are single, who have no one else to depend on but themselves, who are being asked to knock that $15 hour full-time 40 hour position to a parttime 20-hour position, with no benefits? Sure, that might be what all CEO's of any large entity make, but share the burden. The cost of living has gone up over the years, but salaries have not....let's not talk about bonuses, because they are always a topic of conversation, and we know who gets them. Point is, this is going to be very, very tough for a lot of people. Merry Christmas (sigh).


Fri, Dec 7, 2012 : 2:38 a.m.

Good one JCJ....I so wish I could be that quick-witted! Have a good night. Let's see what has to post dawn, new day.


Fri, Dec 7, 2012 : 2:22 a.m.

Looks like eagleman spread his droppings and flew the coop!


Fri, Dec 7, 2012 : 2:04 a.m.

"who are in the know"...meaning who know more than I do.


Fri, Dec 7, 2012 : 2:02 a.m.

JBK...thanks. I always get a little nervous posting sometimes when it comes to people are in the know, as I speak straight from the heart many times, and don't always know the facts, I'll be the first to admit it. Yes, I know very well what you are talking about, the person who took $1 salary. That is something that is very rare, and I remember applauding that person. I am specifically talking about Dr. Pescovitz. It just seems like it was a huge risk to play with other peoples livelihood thinking that the New Mott was going to bring in all this revenue after they put so much into it. It put them in the hole and now the little worker bees are out of a job. That's the way "I" see it. That's just me.


Fri, Dec 7, 2012 : 1:41 a.m.

Lisa - I appreciate your bloggings as they seem insightful, BUT I would beg to differ that CEOs do not share the pain, as in 2010/11 Oracle Founder and CEO Larry Ellison made only $1 in salary. Oracle was in shambles. He agreed to the $1 salary until the company started posting profits again. This is very common in the private sector as CEOs will routinely take a very low salary and in return accept stock options based on the company's performace under their watch.


Fri, Dec 7, 2012 : 12:07 a.m.

I agree. Taking a salary cut when you hardly make money means poverty; her salary cut would mean, what? No more first class? The Caribbean instead of Europe this year? A true leader would share the pain, but there are no such leaders in the United States. How can she justify her salary when asking others to stand in the food line? Yea, I get that CEOs make this much; the point is that no human is worth so much more than the next. She doesn't create jobs or cure cancer. Give me a break.


Thu, Dec 6, 2012 : 11:33 p.m.

I believe UMHS has been running budget surpluses for decades. This was always a point of pride for past CEO's/CFO's. It looks like the new Mott Hospital might be a huge factor here.


Thu, Dec 6, 2012 : 11:31 p.m.

There are so many lost opportunities for UMHS to increase revenue it's pathetic -- that is where the focus should be, not cost cutting. Specialty care providers are often at a 6-9 month wait -- do you really expect patients to wait around? UMHS has to realize that they are not the only shark in the sea. I am one of many who have moved their care elsewhere in the area (and even out of state) due to the lack of responsiveness of the hospital, clinic and its employees. I fear that the 'solution' to this problem will lie in those who need their jobs the most, where the responsibility truly lies with those in leadership. It's time to rethink how you deliver care, and how you maintain a productive, ethical workforce.


Fri, Dec 7, 2012 : 5:01 p.m.

Yep, I've worked at the Med school for over 20 years. I would never go to the UofM health system for care. Why is there a 6 month wait to see specialists? Why is there always a 20 minute wait when calling to make an appt? It's St. Joe's for me.


Fri, Dec 7, 2012 : 2:21 a.m.

Here Here!


Thu, Dec 6, 2012 : 11:37 p.m.

Well said.


Thu, Dec 6, 2012 : 10:47 p.m.

I know much over-budget building the new C.S. Mott Hospital put the U-M. My question is....if you have a budget to work with, how can it go that far over. We're talking MILLIONS. I think some of the higher-ups need to take a HUGE paycut instead of bumping full-time employees to part-time or giving them the option of taking unemployment. This is really ugly, as I personally know some of those affected. Sad situation. I heard through the grapevine clerical staff would be the first to go. Not true.


Thu, Dec 6, 2012 : 10:04 p.m.

No more free helicopter rides, I'd guess.

Ron Granger

Thu, Dec 6, 2012 : 10:31 p.m.

Bet it would be interesting to see a log of trips, and the budget.


Thu, Dec 6, 2012 : 9:57 p.m.

Interesting; I've never heard the use of the term "negative margin" to describe a budget deficit. Those must be words you use when you breathe the air up there.


Fri, Dec 7, 2012 : 9:08 a.m.

Sorry, my first reference to 2012 in my thread should read 2013.


Fri, Dec 7, 2012 : 9:06 a.m.

GoNavy you raise a a great question!!!! The article does not give us enough information to answer if U of M Health System is actually losing money or not. They can be running a negative margin relative to their budgeted PLAN for 2012. Which means they are making money, just not as much money as they PLANNED for in 2013. Or they are running a negative margin to their ACTUAL revenues to expenses? Which would mean their revenue is less than their expenses....thus ACTUALlY losing money. So is Dr. Pescovitz referring to their negative variance in margin as measured against their 2013 planned budget or their actual balance sheet?

Angry Moderate

Fri, Dec 7, 2012 : 5:09 a.m.

She is not talking about contribution margins. She is talking about budget shortfalls.

Michigan Man

Fri, Dec 7, 2012 : 1:33 a.m.

Alan is correct - Have used negative margin/negative contribution margin for years in my healthcare work - healthcare finance types know this term quite well.

Angry Moderate

Thu, Dec 6, 2012 : 10:45 p.m.

A Google search for "negative budget margin" shows 5 results--and 3 of them are this story.


Thu, Dec 6, 2012 : 10:34 p.m.

Common accounting terminology.

Angry Moderate

Thu, Dec 6, 2012 : 10:32 p.m.

That is one awkard term, and confusing since "margin" has its own meaning in finance. Ms. Pescovitz should just say what she means.


Thu, Dec 6, 2012 : 9:54 p.m.

Maybe start with Ora's $739k base salary.


Fri, Dec 7, 2012 : 4:15 p.m.

Dont like making $15 an hour? Improve your situation. Get more education. Stay relevant. Contiunously improve your skills and value to your employer. Leave for a better position. Who says one is stuck in the same job forever? or - stay content to make $15 and complain when things dont go your way


Fri, Dec 7, 2012 : 2:19 a.m.

eagleman Don't spread your droppings here! You attitude that is a "mere pittance" is sicking! If her salary is a "mere pittance" then leave those alone that are making $25,000.


Fri, Dec 7, 2012 : 12:11 a.m.

eagleman: You've fallen for that usual shtick given for CEO salaries. The real answer is that every CEO presiding over a $200 million shortfall should get a pay cut. Administrators love to cut expenses - especially at everyone else's expense.

Clarence Worley

Thu, Dec 6, 2012 : 11:31 p.m.

Bingo!!!!! Good call A2.


Thu, Dec 6, 2012 : 11:20 p.m.

If her's is a "mere pittance" in the scheme of things....what about the employees who make $15 per hour or less, are single, who have no one else to depend on but themselves, who are being asked to knock that $15 hour full-time 40 hour position to a parttime 20-hour position, with no benefits? Sure, that might be what all CEO's of any large entity make, but share the burden.


Thu, Dec 6, 2012 : 10:31 p.m.

That is a mere pittance in the grand scheme of things. Her salary is in line with CEOs of any large entity make.