1. Economics of Academic Pathology ADASP Annual Meeting March 2, 2013 Jay L. Hess M.D. Ph.D. M.H.S.A.

2. Notice of Faculty Disclosure 2 In accordance with ACCME guidelines, any individual in a position to influence and/or control the content of this ASCP CME activity has disclosed all relevant financial relationships within the past 12 months with commercial interests that provide products and/or services related to the content of this CME activity. The individual below has responded that he/she has no relevant financial relationship(s) with commercial interest(s) to disclose: Jay L. Hess, M.D., Ph.D., M.H.S.A.

3. Context for academic pathology 3 “It was the best of times, it was the worst of times it was the age of wisdom, it was the age of foolishness…” Charles Dickens 1859

4. Economics of academic pathology 4 1. Department sources and uses of revenue 2. External environment and impact on department’s “economy” 3. Examples of what’s working

5. Revenue sources ~ $50 million

6. Operating expenses

7. External environment – major themes 7 1.Movement away from fee for service to risk sharing and capitation - relentless focus on improving efficiency and reducing costs - evidence-based utilization management 2. Management of population health - laboratory testing across the continuum of care - importance of health IT connectivity and analytics 3. Hospital mergers and practice consolidation - rapid growth in specimen volume versus risk of outsourcing pathology services

8. External environment – major themes 8 4.Rapid movement toward genome-wide analysis - What is healthcare system strategy and how does pathology fit into it? 5. Intense competition from for profit labs 6. Flat or declining NIH budget 7.Increasing costs of research subsidization - Long on ramp - Sophisticated, rapidly evolving technology - NIH salary cap reduced $199,700 to $179,900 - NIH inflationary increases eliminated on most grants

9. Context for academic pathology - revenue sources 9 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department

10. Context for academic pathology - revenue sources 10 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department endow professorships if possible

11. Context for academic pathology - revenue sources 11 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department 1. consults help pay market- competitive Salaries 2. Clinical incentive program

12. Context for academic pathology - revenue sources 12 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department $1.4M in incremental revenue

13. Context for academic pathology - revenue sources 13 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department negotiations based on CMS salary data and well documented effort reports

14. However pressure on technical revenue 88305 change is only the beginning On November 1 CMS released Physician Fee Schedule (PFS) Final Rule for 2013 2% increase in professional component reimbursement 52% decrease in the technical component reimbursement Cost of 7% family physician increase spread across all specialists with 1% cut to pathology UMHS will see a 33% reduction in global 88305 payments (roughly $911K)

15. Context for academic pathology - revenue sources 15 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department 1.programmatic funding 2.non traditional sources 3.Active faculty management

16. Active faculty management Hire people with grants New researcher orientation Assigned mentor RO1 “boot camp” Joint lab meetings Monthly meetings with grants administrators Annual chair reviews Research incentive program “watch list”

17. Managing the research enterprise – medical school level

18. Managing the research enterprise - departments

19. Managing the research enterprise –Department

20. Managing the research enterprise - department % effort funded by grants Amount of research space allocated Research space margin Pending proposals

21. Managing the research enterprise – individual PIs

22. Context for academic pathology - revenue sources 22 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department Centers of excellence Get to know and help your gift officers

23. Context for academic pathology - revenue sources 23 Professional revenue Professional component revenue Part A and clinical PhD salary support Grants and contracts Gifts Tuition Provost/Dean support Endowment income IP/royalties Other businesses MISSION Department Opportunity to teach in other schools? For CME revenue?

24. Context for academic pathology – expenses 24 Faculty salaries Dean’s and other taxes Resident and fellow salaries Staff salaries Facilities (rent, renovations ) Start up funds/other commitments Hosting/recruiting Supplies Common Equipment Professional allowance and travel MISSION Department

25. Medical School finances affect department FY03 – FY13 All Funds Total Margin

26. Healthcare system finances 26

27. 27 Improving department finances 1.Acknowledge need for expense reduction and revenue enhancement Negative department and UMMS all funds margin Clinical needs and faculty recruitment and retention commitments All revenue streams threatened (EPIC, fiscal cliff, SGR, IME, NIH, etc.) We need to recognize about $1.9 million in revenue enhancement/expense reduction 2. Preserve the mission Is this expense contributing to excellence in patient care, teaching or research? What is the “return” on investment, financial or otherwise? What revenue opportunities have not yet been pursued? 3.Communicate Discussion of department and UMHS finances and response in faculty meetings Meetings with Division Directors/Section leaders/others potentially affected Seek Executive Committee input and endorsement of proposed changes 4. Implement

28. 28 Where can we increase revenue? -MLabs margin (doubled over past four years) -Business development opportunities and sponsored research agreements -Increase private foundation support -BCBSM Genetic Testing Resource Center Where can we decrease expenses? - Reallocate work instead of backfilling faculty positions - Staff reductions and reduced overtime expenses - Retirement planning -50% research incentive reduction -Consolidate and return space to MSA - Reduce clinical fellowships from 22 to 18: establish committee for allocating slots - Reduce personal discretionary funds for research - Reduce subsidy to proteomics facility, expand recharge work across campus - Move qualifying examination for second year graduate students to Fall 2 nd year - Reduce hosting expenses - Eliminate “technology” allowance $1.8 – 2.0 million savings Improving department finances

29. Meeting pressing needs Jeffrey Myers M.D.

30. Meeting pressing needs Ulysses Balis M.D.

31. Aibin Shi A. et al. Structural insights into inhibition of the bivalent menin-MLL interaction by small molecules in leukemia Blood 120:4461-4469, 2012 Cover and Plenary Paper Payoff from focused investment - Drug discovery Tomasz Cierpicki Ph.D. Jolanta Grembecka Ph.D.

32. Michigan Center for Translational Pathology (MCTP) 32 Mission Establish the University of Michigan as the international leader in discovery and characterization of disease biomarkers and therapeutic targets using an integrated multi-disciplinary, systems biology approach. Establish a new paradigm of bringing personalized medicine to routine clinical care through the use of high-throughput sequencing Arul Chinnaiyan M.D. Ph.D. Director MCTP

33. Keeping our best and brightest Scott Tomlins M.D. Ph.D.

34. New business ventures – not for profit Sequencing Pathologist & Oncologist Reviewed Patient Delivery Analysis 1)Clinical Trial Eligible 2)Actionable Results Informed Consent Tumor Biopsy (FFPE) Laser Cryo Enrichment & Or oncologist ordered 1.Biospecimen banking 2.Pharmaceutical support services 3.Sequencing-based diagnostics http://www.paradigmdx.org/