The University of Chicago Medical Center took a hard hit in the 2006 fiscal year, falling $33 million short of its budgeted operating income due to rising expenses and lower than expected revenue.

The Center had set a target operating income of $46 million but only earned $13 million, about $58 million less than the $70 million it earned in the 2005 fiscal year, according to U of C Hospitals spokesperson John Easton in a written statement. Decreasing revenue accounted for two-thirds of the Hospitals’ $33 million income shortage this fiscal year.

Easton cited three primary causes for falling revenues, pointing first to “unmet expectations from the Illinois Medicaid Provider Tax, which we received in the fiscal year 2005 but not in the fiscal year 2006.” The tax accounted for $17 million of the $21 million in income shortage attributed to decreasing revenue.

New expenses in the 2006 fiscal year, including the first full year of operating costs for the new Comer Children’s Hospital, were another source of lowered earnings, according to Easton. Although the new hospital site replaced a fully depreciated building, “it will take a few years for revenue to ‘grow into’ the new building,” Easton said in the statement.

The final factor, Easton said in the statement, is “the ongoing shift towards types of insurance that pay at lower rates.” In the 2006 fiscal year, about 63 percent of all treatment at the Medical Center was covered by Medicare or Medicaid or not covered by insurance at all. These plans pay much less to the Hospital than private insurance plans.

Kenneth Kates, the former U of C Hospitals (UCH) interim president, wrote to staff in a recent newsletter that, compared to the 2005 fiscal year, UCH revenue increased by just 5 percent despite a 13 percent rise in costs.

“As you can imagine, the gap between the growth of revenue and expenses is sustainable and, if continued, would result in significant operating deficits,” Kates wrote in the newsletter.

The Medical Center is etching out a plan to cut costs and save money without hindering daily operations. Around 40 UCH jobs will be cut, but those employees will likely be moved to other available hospital positions, according to Easton.

In his letter to staff, Kates reiterated institution-wide efforts to improve revenues.

“Just about every member of the Medical Center team can participate in efforts to hold the line on expenses,” Kates said. “Over the coming weeks, and throughout the year, you may have opportunities to work with your manager to look at ways to conserve resources while maintaining high standards of quality throughout the institution.”

Another cause of the budget problems may have been the search for a new Medical Center president, according to Crain Chicago Business. Last week, the Medical Center appointed David Hefner as its new president.

There are still plans for a $625 million New Hospital Pavilion, to be completed by 2011, Kates said in the letter.

Kates said that to keep accomplishing its goals, the Medical Center must maintain a strong financial standing over the next few years.

“At the same time, we are committed to continuing our leadership role as an important resource for those in our surrounding community who need care,” Kates said in the letter.