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Harvard turns to hospitals for $36m

Medical school’s 3-year deal may alter relationship

By Liz Kowalczyk
Globe Staff / June 21, 2010

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Harvard Medical School, which has suffered financially due in part to a sharp decline in Harvard University’s legendary endowment, has successfully negotiated a deal in which Boston’s major teaching hospitals will contribute $36 million to the school over three years.

The hospital money is a small portion of the medical school’s $580 million annual budget, but it may represent a larger turning point in the unusual relationship between the country’s top medical school and its prestigious hospital partners.

Harvard is one of the few US medical schools — and may be the only — that traditionally has not received significant financial support for its operations from its teaching hospitals and their physicians, despite their intertwined mission, according to the Association of American Medical Colleges.

This leaves the medical school particularly dependent on endowment income and government research funding — and vulnerable to downturns in those areas. Research grants account for 42 percent of the school’s budget, and endowment income, 29 percent.

During the fiscal year that ended June 30, 2009, the university’s endowment tumbled 27 percent to $26 billion because its investments soured as the stock market plunged. That resulted in a 20 percent drop over two years in the endowment income the medical school could use to pay its operating expenses.

The medical school also carries significant debt because of past projects including its well-appointed New Research Building at 77 Avenue Louis Pasteur, which has not secured a major donor to defray costs.

The equivalent of 70 full-time employees were laid off or took early retirement in 2009, and, like some other US medical schools and Harvard University generally, Harvard Medical School froze salaries.

The medical school expects to break even or come close during the fiscal year that ends on June 30, said Daniel Ennis, executive dean for administration, and it hopes to turn a small profit next year. But the school needs money to expand programs, including genetics, and invest in emerging new areas to remain competitive with other top medical schools.

It was against this backdrop last summer that medical school dean Dr. Jeffrey Flier approached the chief executives of the major Harvard teaching hospitals — Massachusetts General, Brigham and Women’s, Beth Israel Deaconess, Children’s, and Dana-Farber Cancer Institute — and asked them for help.

During several meetings, Flier laid out the medical school’s financial situation and talked about the importance of the long-term relationship between the school and the teaching hospitals.

He said in an interview that the school and the hospitals depend on each other for various services. “There are massive numbers of interactions every day,’’ Flier said. “Despite that and the increased cost to the medical school’’ of overseeing a growing number of faculty, “the fund flow did not reflect that.’’

Unlike many other medical schools, Harvard Medical School doesn’t own its teaching hospitals, believing that affiliating with an array of hospitals would provide more diverse learning opportunities for students. But this has meant that Harvard, unlike these other medical schools, doesn’t get revenue from patient care.

And even at many medical schools that don’t own hospitals, research done by physicians is overseen by the schools and done in school labs. In Boston, the Harvard teaching hospitals oversee their own research programs.

All of this has meant a greater degree of financial independence between Harvard and its hospitals.

Still, the medical school and hospitals have numerous joint research programs, for which money flows back and forth. Physicians employed by the hospitals teach medical students during their clinical rotations, while Harvard oversees the appointment and promotion of 12,000 physicians and researchers to medical school faculty positions and lends the doctors and hospitals perhaps the most valuable asset of all: the Harvard name on applications for research money, jobs, and in marketing their services to patients.

“The crimson seal — the fact that doctors are part of Harvard Medical School creates tremendous value to them,’’ said Paul Levy, chief executive of Beth Israel Deaconess and a former medical school administrator who oversaw approval of the New Research Building. It is valuable to the hospitals too.

Three major Harvard teaching hospitals — Mass. General, the Brigham, and Beth Israel Deaconess — had been contributing about $4 million a year since 2008 solely to help pay doctors to teach, but that program was difficult to administer.

Flier had to convince hospital chiefs that it was in their interest to financially support the medical school more broadly, given the still-deep pockets of Harvard University.

“All the institutions around the table are facing various financial challenges,’’ said Dr. Peter Slavin, chief executive of Mass. General. “They had to convince us that this is the fairest thing to do. It’s in the hospitals’ interest to support the medical school’s mission and vise versa.’’

The major Harvard hospitals are profitable, but they are facing increasing pressure from state regulators, insurers, and politicians to reduce their costs.

Levy said Flier was “very transparent’’ about the medical school’s finances, in a way previous deans weren’t, and hospital chiefs “really appreciated that.’’

In return, the hospitals asked for quicker decisions on promotions for doctors and other improvements in how the medical school handles hospital business.

“I negotiated hard,’’ Levy said. “None of us want to pay more than we have to. [The financial issues] got people’s attention, but once we got into the discussion we realized we were talking about the long-term relationship.’’

Starting July 1, Mass. General will give the medical school $11.1 million over the three years; the Brigham, about $9 million; Beth Israel Deaconess, $6.1 million; Children’s, $5.1 million; and Dana-Farber, $1.5 million. The amounts are based on factors including number of faculty and the amount of teaching at each hospital. The medical school is finalizing agreements with some of its 12 other affiliated hospitals and research institutions, and expects a total $36 million contribution.

Liz Kowalczyk can be reached at kowalczyk@globe.com.

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