$2 billion in UPenn health system profits has supported medical research and teaching in last decade

The University of Pennsylvania has plowed $2 billion in profits from its health system into medical research and physician support in the last 10 years, money aimed at supporting such breakthrough work as the mRNA vaccine for which its scientists won a 2023 Nobel Prize.

Health system profits have been used to cover start-up costs for dozens of new research scientists in recent years. Tens of millions have paid for medical school construction projects. Millions more have supported emerging treatments for patients that combine research and clinical care, such as uterine transplants, before insurance companies will pay for them.

Penn credits its unusual financial model with elevating its standing as a top life sciences research university. Penn spent more than $1.4 billion on life sciences research in 2022, more than double the total a decade ago, according to the National Science Foundation.

Money flows to medical research and to support non-profitable services more smoothly at Penn than at many peer institutions because of its health system is 100% owned and controlled by the university. This is rare among top research universities.

That allows clinical services, scientific research, and medical education to operate in sync, health system CEO Kevin Mahoney said. “The missions aren’t separate, but integrated.”

Now the long-term commitment to research is paying off financially.

The Nobel Prize-winning collaboration between Katalin Karikó and Drew Weissman, which began at Penn in the late 1990s, didn’t just provide the genetic underpinning for coronavirus vaccines credited with preventing millions of hospitalizations and deaths. The duos’ work has also resulted in more than $1 billion in vaccine royalties for Penn.

The royalties, which are separate from the $2 billion in transferred profits, are buoying medical research and education. This is helping to offset the health system’s lower profitability as costs for nurses and other workers rise and the shift to outpatient care accelerates, resulting in less revenue for health-care providers.

Academic medical centers such as Penn Medicine combine medical schools, hospitals, and employed physicians. Academic physicians typically treat patients, teach medical students, and conduct research. Under this arrangement, hospitals typically take in significantly more revenue than physicians.

That complicates the relationship between the hospitals and doctors. In an academic setting, most physicians need financial support from the hospitals as they balance their duties as clinicians, researchers, and educators of up-and-coming doctors.

“At most academic institutions across the country, there is a separately administered school of medicine, health system, faculty practice plan, and they literally negotiate against each other,” said Mike Parmacek, a cardiologist and chairman of Penn’s Department of Medicine.

At Penn, that doesn’t happen because the university has long used health system profits to subsidize physicians’ clinical and research efforts.

“What our system does [is] it aligns all three to support all the missions. That’s the key,” Parmacek said.

Penn’s model of direct university control might be the cleanest way to organize an academic medical center, said Jonathan Jaffery, chief health care officer at the Association of American Medical Colleges.

Penn’s main teaching hospital, the Hospital of the University of Pennsylvania, is part of the university. At other academic medical centers, it’s more common for a separate nonprofit to control the main teaching hospital.

Penn’s executive vice president of health and medical school dean gets to decide how much money to transfer each year, Jaffrey said.

“It’s going from his left pocket to his right pocket,” he said.

Penn’s system still expects its physicians to bring in money and sets benchmarks for their productivity. But then it provides cash support to help offset the losses that happen under the academic model.

“We are in the black because we receive support,” said Deborah Driscoll, senior vice president for the Clinical Practices of the University of Pennsylvania, which has 2,300 faculty physicians.

Penn has another set of incentives for research, which typically costs 20% to 25% more than the funding coming in through grants from the National Institutes of Health, according to Keith Kasper, the health system’s chief financial officer.

The incentives encourage departments to get as much research funding from external sources as possible. “If 50% of our assigned research effort is funded, we get ‘X’ amount; 60% we get more; 70% we get more,” Parmacek said.

Penn follows a general spending rule for health system profits when the health system has a profit margin of 4% or more: 60% goes to research, 15% goes to education, and 25% goes to health system capital.

“Research loses money, no matter how good you are. In our structure, that gets filled through the health system,” Mahoney said.

The $2 billion that Penn’s health system has transferred to the medical school is a large sum, but it’s appropriate for Penn, said Patrick Zagar, a Standard & Poor’s credit analyst who covers the University of Pennsylvania Health System.

“You’d expect it to be elevated given the size and scale of those programs at Penn. It’s all very consistent with the size of the health system, that academic research arm,” Zagar said.

If an academic health system spends too little or sharply trims research spending during hard times, that can be a problem, Zagar said: “If you do that, will you still be able to attract the talent? Will you still be up there in that top tier? The research is so much a part of who you are.”

Health system transfers to Penn’s medical school climbed steadily for years, reaching a peak of $264 million in fiscal 2021, but during the last two fiscal years they’ve been down to about $180 million as the system’s profits have flagged.

Penn’s operating margin during that last two fiscal years averaged 2% ― far below the 6% average margin Penn had during the three years before the 2020 pandemic, financial records show.

This is where the mRNA royalty revenue is saving the day.

Vaccine revenues are being put toward a $360 million laboratory facility that is under construction, said Kasper, the health system’s chief financial officer. This is in contrast to how the health system paid the $43 million cost of constructing the Jordan Medical Education Center, which opened in 2015.

In the last year, vaccine revenues paid for new researchers’ start-up packages. They cost $1.5 million to $2 million per scientist and are used to set up labs and give new researchers a start until they get their first outside grants.

“In the past, that was all health system dollars being transferred over,” Parmacek said.