April 15, 1982
As many of you know, in the last few years, two Certified Public Accounting firms, Deloitte Haskins & Sells and Ernst & Whinney, have recommended that certain Systemwide Administration costs should be allocated to the campuses, especially to the teaching hospitals. In addition, during the course of the University's annual budget negotiations in recent years, State Department of Finance staff have suggested that the University recharge more of the State-funded costs of various support activities, especially those related to the teaching hospitals and auxiliary enterprises.
These recommendations are founded not only on accepted accounting and costing principles but also, for the teaching hospitals, on the principle of maximizing reimbursement from third-party health care sponsors such as Medicare and Medi-Cal. The University continues to be open to criticism by not following these recommendations, recommendations which could result in increased cost recovery from patients, their sponsors, and others who use the services of the University's teaching hospitals and auxiliary enterprises.
Although certain Systemwide Administration costs, such as malpractice and other insurance costs, have been recharged annually to the campuses for some time, the Ernst & Whinney study identified other Systemwide Administration costs that, beginning in 1976-77, might have been recharged to the teaching hospitals.
In view of these recommendations and the reductions in State support for Systemwide Administration in 1981-82, it will be necessary to begin in 1981-82 recharging certain additional Systemwide Administration costs to teaching hospitals and auxiliary enterprises.
Systemwide Administration departments have estimated the cost of their services to the teaching hospitals and auxiliary enterprises for 1981-82, and a total of $1,033,684 has been initially identified for recharge. This total may, of course, be subject to change depending upon the results of Systemwide Administration staff reporting. It is expected that 1982-83 recharges will be at least at the same level as 1981-82 recharges, with perhaps some additional increase to cover range and merit adjustments and price increases.
Because over half.of the fiscal year has passed and rates at the teaching hospitals and auxiliary enterprises are generally established at the beginning of the fiscal year, I have decided that only one-half of these additional Systemwide Administration costs will be recharged to the teaching hospitals and auxiliary enterprises in 1981-82. The worker's compensation insurance premium refund made earlier this year should help to defray this unexpected cost and avoid increasing rates solely to recover the Systemwide Administration costs.
In 1981-82, Systemwide Administration costs identified for recharge to teaching hospitals were $854,041, and one-half of this amount, or $427,020, therefore will be recharged to the five teaching hospitals, at one-fifth of the total cost, or $85,404, to each hospital. Since the share of Systemwide Administration effort and related cost provided to any one teaching hospital does not by its nature vary, as with traditional cost allocation criteria, such as patient workload or expenditures, recharging this cost on an equal basis to each hospital appears reasonable.
In 1981-82, Systemwide Administration costs identified with auxiliary enterprises totaled $179,643. Of this amount, $57,686 is a continuing cost which was identified last fiscal year and is already being recharged to the campuses. Therefore, one-half of the remaining $121,957, or $60,979, will be recharged to the campuses during this fiscal year. Additional information on the manner for recovering these Systemwide Administration costs from the various auxiliary enterprises and the amount of the recharge for auxiliary enterprises at each campus will be provided separately by Acting Vice President Cheit.
Attached is an analysis of the Systemwide Administration costs that were identified as related to the direct provision of services in 1981-82 to the teaching hospitals and auxiliary enterprises.
David S. Saxon