Costs outweigh funding, revenue

The University of Hawaii Cancer Center is facing an uncertain future as revenue streams shrink and financial losses mount at the research facility. At the same time, federal requirements call for operations to expand.

The Cancer Center, a research unit of UH-Manoa, ended last year with a nearly $10 million deficit and is quickly draining its reserves to stay afloat. While some cancer researchers blame the controversial former director for allegedly mismanaging funds, UH officials say the center’s money troubles stem from an outdated business model.

"The Cancer Center has a set of operating and management issues that are much bigger than who the director is," said UH President David Lassner.

The center pursued building a state-of-the-art facility — initially expected to cost $119 million — based on a 2010 business plan that assumed UH’s share of the state’s cigarette tax would remain steady at close to $20 million a year. But cigarette tax revenues have been declining while completion of the Kakaako facility has saddled the center with an $8 million annual mortgage payment that it can’t afford.

Without help, the center — which has a mission of reducing the burden of cancer through research, education and outreach — will deplete its reserves within two years.

"Our challenge is that if we don’t have a solution to the bond debt service, we will have — in just a little more than two years — insufficient funds to operate the Cancer Center and pay for that bond debt and maintain our programs. And without that we won’t be able to retain our (National Cancer Institute) designation," said medical school Dean Jerris Hedges, who was named interim director of the Cancer Center last month.

Selling the center’s operations and facility is seen as a last resort — an option that has support from some lawmakers but resistance from others.

"There’s basically a structural problem. There is not enough revenue to support the costs. … We have to find a way to fix that problem, and really, there’s a limited number of bullets you can fire," Henry "Chip" Ellis, the center’s director of fiscal administration, recently told the state House Higher Education Committee.

"There’s some outliers of things like simply selling the whole operation to somebody else. We’re not looking at those seriously right now, but they’re on the table and we have to consider them all," he said.

To avoid that scenario, UH plans to seek a broader tobacco tax and other legislative funding this session to help repay the bond debt for its $100 million building, which opened in early 2013 along the Kakaako waterfront.

"I believe that a realistic business plan is possible," Manoa Chancellor Robert Bley-Vroman told lawmakers. "But it’s much more difficult to see how that can be accomplished given the existing debt payments on the building. … With elimination of the building problem, we have a pretty good chance of coming up with something that’s going to be reasonable."

When Lassner tapped Bley-Vroman over the summer to serve as interim chancellor, the two agreed to prioritize an "objective" review of the Cancer Center, where infighting between a group of faculty researchers and the former director, Michele Carbone, over his leadership style made headlines over the past year.

Carbone, a mesothelioma expert, resigned from the post last month to focus on his research.

Vassilis Syrmos, UH’s vice president for research and innovation, is heading the chancellor’s review and said a draft report will be completed next month with recommendations to rein in costs, seek additional revenue sources and maintain federal designation as a National Cancer Institute center. The report is expected to help shape a new business plan.

"Going forward, clearly, the cigarette tax is a very important source of revenue for the Cancer Center, but it’s not a stable source," Syrmos said.

Lawmakers in 2006 approved legislation allocating a portion of the state’s cigarette tax to help cover the center’s building and operations. But as fewer people smoke, the center’s share of the tax has dropped from $19.5 million in 2010 to $14 million last year, and is expected to come in at $11 million this fiscal year, leaving fewer dollars for operations after the building payment.

"Cigarette taxes were hoped to be an answer for much of not only the cost of the building construction and its subsequent debt service, but also the programmatic operation," said Hedges, dean of the John A. Burns School of Medicine (JABSOM), which sits adjacent to the Cancer Center in Kakaako. "Unfortunately, from the standpoint of running a business, the cigarette sales have declined, but that’s a good thing from the health standpoint."

Grants have also been coming in below targets in the current business plan.

Syrmos said one recommendation will be to seek legislation to tap into the state’s tobacco master settlement agreement. Under the 1998 class-action settlement with the tobacco industry, Hawaii is one of more than 40 states that will receive payments in perpetuity from an endowment. There is no restriction on how states spend the money.

"Our hope is that we can encourage the Legislature to continue to focus those moneys on preserving and extending health in Hawaii," Hedges said.

The medical school receives about 26 percent of Hawaii’s annual allocation, which is used to cover the bond debt payments on JABSOM’s 10-year-old Kakaako campus. Hedges said the Cancer Center would require about 20 percent of the settlement to cover its mortgage.

The university is also pushing for a new tax on loose or roll-your-own tobacco to add to the existing cigarette tax in hopes of generating more revenue.

Sen. Josh Green, chairman of the Senate Health Committee, said he plans to introduce legislation for both recommendations.

"Conceptually, it may be time to create a university health center or complex, which would include JABSOM, the Cancer Center and an institute for nursing, where we could have better efficiencies," said Green, an emergency room doctor on Hawaii island. "We have to have doctors and nurses trained in Hawaii, and we have to have cancer research going on. … And to fund it, which is the big question, I do anticipate a tax on other tobacco products … like we tax cigarettes, and consideration of using some of the master settlement fund."

UH also is exploring consolidating core functions of the medical school and cancer center to save money. "Every penny counts at this time," Syrmos said.

State Rep. Isaac Choy, chairman of the House Higher Education Committee, believes the university overall has overbuilt itself both "physically and fiscally."

Choy, a certified public accountant, contends the Cancer Center pursued an ambitious and expensive facility built on a set of assumptions, none of which have materialized. He added that he’d want to see a feasible business plan before considering additional revenue streams for the center.

"You can’t just throw money at it," he said. "It is not sustainable — no amount of budgeting, cutting, firing or restructuring will make that place financially feasible or sustainable."

He acknowledged that the center’s scientists and researchers are doing lifesaving work and are among the most productive grant-getters for UH.

"The sad part of this whole episode is the top-notch scientists and researchers … may be adversely affected," he said.

As one of 68 National Cancer Institute-designated centers in the country, the center attracts about $20 million a year in federal research grants. UH first received the designation in 1996 and received its latest five-year award in 2012.

But as with most federal agencies, the National Institutes of Health has been subject to governmentwide spending cuts, or sequestration. The reductions, adding to the already competitive environment for research grants, mean the NIH has been funding approximately 10 percent of grant applications received, Hedges said.

"We cannot expect the Cancer Center to exist solely on research grants and research revenues," he said.

He said renewal of the designation will require adding to the number of faculty and staff on payroll and expanding clinical trials.

"The (National Institutes of Health) made clear to me that simply having strong programs in research is insufficient. We have to demonstrate a translation to actual care in the community," Hedges said.

Because UH does not have a university hospital, the Cancer Center does not enjoy revenues from clinical trials like other centers on the mainland. Carbone helped create a partnership with private hospitals to form the Hawaii Cancer Consortium with the Queen’s Medical Center, Hawaii Pacific Health and Kua­kini Health System to conduct trials based on UH research.

The number of clinical trials open for patient enrollment has remained relatively flat the past five years, with about 100 trials enrolling adults and children with cancer every year.

UH officials said the consortium is supposed to provide $2 million a year for the clinical program but that it has not met that goal in the last three to four years.

"Clinical research is very, very insignificant in Hawaii. In terms of cancer, that’s really bad because patients are denied cutting-edge research in clinical trials," said Carl-Wilhelm Vogel, who served as the Cancer Center’s director from 1999 to 2008 and now works as a cancer researcher and professor.

Art Ushijima, president of Queen’s and a director of the consortium’s board, said the hospital will work with UH to support the center.

"The Queen’s Medical Center recognizes the importance of the UH Cancer Center and renewal of its National Cancer Institute designation to our state. In the coming months, we look forward to working with Dean Hedges in support of both the Cancer Center and its efforts to renew the NCI designation," Ushijima said in an email statement.