University of Kentucky lent $87 million to UK Healthcare to cover cash shortfalls

lblackford@herald-leader.comJuly 30, 2012 

Dr. Justin Fraser, a neurosurgeon, center, talked Wednesday about the capabilities of a new hybrid operating room at UK Chandler Hospital. Built at a cost of about $3.2 million compared to $1 million for a traditional operating room, it features sophisticated imaging and robotic technology.

HERALD-LEADER

Cash shortfalls at UK Healthcare in the past year prompted the University of Kentucky's academic side to float $87 million in internal loans to its medical division.

Of that money, $35 million was lent to help finish construction of hybrid operating rooms in UK Healthcare's new $590 million patient bed tower. The academic side lent an additional $52 million because of cash-flow problems at UK Healthcare, partly due to a change in Medicaid billing. The money is to be paid back in the next two years.

"The university has been providing cash advances to the hospital as needed to ensure their positive operating financial position as they grapple with issues such as delayed payment for services under Medicaid as well as the aggressive debt payments on the new hospital, among other things," spokesman Jay Blanton said. "The hospital is paying back those dollars at a higher interest rate than we would typically make in overnight investments."

Although the hospital traditionally has been a breadwinner for the university, these issues, along with uncertainties over federal health care reform, could become liabilities, according to a new report on the school's debt capacity.

The report was ordered by UK President Eli Capilouto in order to gauge UK's financial health as it attempts to take on the construction of new academic buildings and student housing. The study concluded that UK could add between $450 million and $650 million to its debt capacity.

UK Healthcare has had historic surpluses that created a $220 million endowment for the system. However, the 2011-2012 budget planned a cash deficit of $24 million because of the new tower and support for health care colleges. That deficit was worsened by delayed reimbursements of $60 million, some of it due to the state's shift to Medicaid managed care.

Although UK Healthcare, which had revenues exceeding $900 million in the past year, has an endowment, officials decided it would be imprudent to draw money out of the reserve fund, which is tied up in long-term investments, Blanton said.

"At the same time, the hospital must confront a great deal of variability in its cash flows, including delays in accounts receivables such as reimbursements for Medicaid-funded services," Blanton said. "As a result, it was prudent for the university to temporarily advance the hospital money to maintain its positive daily cash balance. Those funds will be repaid with interest."

Mike Rust, president of the Kentucky Hospital Association, said a lot of hospitals have seen payment delays since November, when the state switched most of its Medicaid operations over to three managed care companies, Coventry Cares, Kentucky Spirit and Wellcare.

"We have been meeting with the managed-care organizations on a regular basis to discuss issues with regard to the new program and trying to work out a large number of the issues," he said.

Rust said he had not heard of the academic side of a university loaning money to the medical side of a university, and that it seemed "unusual."

News of the internal loans comes more than a month after UK laid off 140 employees and eliminated dozens of other vacant positions because of financial pressures caused by declining state support, officials said.

The debt capacity report requested by Capilouto also made the following observations about the hospital:

■ UK Healthcare is "most negatively impacted" by the 20-year debt amortization schedule that was required by the state for the new hospital tower, because of the size of the debt and the large debt payments required.

■ "Uncertainty regarding the potential impact of health care reform on Medicaid managed care and other issues at both the federal and state level add significant risk. Adding further stress to the health system has been the large increase in transfers to fund faculty hiring and other expenses at the College of Medicine."

■ UK Healthcare's cash reserves are "relatively low given the scope and potential unpredictability of its operations."

Linda Blackford: (859) 231-1359. Twitter: @lbblackford.

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