The U-M Hospitals and Health Centers (UMHHC) unit of the U-M Health System (UMHS) will finish its fiscal year in strong financial shape, with a positive operating margin nearly twice the size predicted a year ago.

At the June 17 meeting of Board of Regents, UMHS leaders presented preliminary results showing that UMHHC expects to achieve a 3.3 percent operating margin on revenues of $2.0 billion in the fiscal year that will end June 30, surpassing the original target of 1.7 percent.

Despite an economic environment that continues to challenge health care institutions nationwide, UMHHC has achieved 14 straight years of positive operating margins. The milestone of passing $2 billion in projected revenues comes just eight years after UMHHC revenues first passed $1 billion, in fiscal year 2003.

“This year’s success can be attributed to a combination of more patients, more efficiency, more teamwork, and more attention to every factor that affects our bottom line,” said Doug Strong, chief executive officer of UMHHC. “Our patient care activity rose by 5.7 percent, showing that more patients are seeking out our care, and other indicators were similarly strong. All of us can take satisfaction in this result, but at the same time we must perform even better in the new fiscal year in order to best prepare ourselves for a future of health care reform.”

Also, regents approved UMHHC’s budget plan for the 2011 fiscal year, which sets forth an aggressive 4 percent margin target on revenues of $2.1 billion for U-M’s three hospitals and 40 outpatient locations.

Said UMHS CEO Dr. Ora Hirsch Pescovitz, “Positive margins fuel the strategic growth and renewal — in physical facilities, information technology and human resources — that will allow us to meet the rising demand for our nationally known patient care. They also provide vital support to our strong biomedical research and education programs,” both of which are ranked among the top 10 in the nation. Pescovitz is the university’s executive vice president for medical affairs.

Unlike the rest of the university, UMHHC’s budget does not include a direct outlay from the state General Fund. The Medical School, which also is part of UMHS, does receive General Fund support.

But the school’s Faculty Group Practice, which includes all of the physicians who see patients at UMHHC facilities, shares responsibility for achieving positive financial results — especially in the outpatient centers, which it manages.

This year, the financial departments of the two major units of UMHS were brought together under Chief Financial Officer David Morlock, making possible new efficiencies. A new “rolling forecast” approach to budgeting and planning is helping all areas of UMHS stay on top of factors that affect the bottom line.

Strong financial performance now will help UMHS prepare for the opening of a massive new facility for children’s and women’s inpatient and outpatient care in late calendar year 2011, and major investments in clinical information systems and other clinical infrastructure.

The continuing struggles of the Michigan economy, which in turn has led to double-digit increases in the amount of charity care and uncompensated care that UMHS provides, also pose a significant challenge, Morlock said. UMHHC experienced a 17 percent rise in uncompensated care in the past year, with increases in both the number of patients who qualify for charity care and those who cannot pay bills for care they’ve already received.

“But the institution is in a stronger position than many other health care providers in the state and peer institutions nationwide. And, our long history of positive financial results and close connection with the university has led to an excellent bond rating that helps make large capital projects more affordable,” he added.

At the same time, a higher percentage of UMHS patients are covered by Medicare, Medicaid and county health plans, which do not reimburse at the same rates as private insurers. In fiscal year 2009, UMHHC was reimbursed $300 million less by these plans than it would have been if the same patients had been covered by private insurance. UMHHC is a major part of UMHS.

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