Report urges UH to spin off ailing Cancer Center

External consultants are recommending the University of Hawaii strongly consider changing the struggling UH Cancer Center to a semiautonomous business entity, co-owned and run with community hospital partners, to keep the research facility viable.

The recommendation is among 10 key findings in a report prepared for UH by Warbird Consulting Partners, with headquarters in Atlanta, and Navigant Consulting Inc., based out of Chicago. Another recommendation would require researchers to cover a portion of their salaries with grants, a common practice at other cancer centers.

“Establishing the UHCC as set aside from but not outside of UH, for instance as an Enterprise Fund, may be the best structural approach to enable the UHCC to achieve its potential,” the consultants wrote in their report, which will be presented next week to the Board of Regents. “We believe the potential of the UHCC can only be unlocked by enabling quasi-independent functioning.”

The report says, in general, colleges and universities typically use so-called enterprise funds to run bookstores, cafeterias, student housing and parking operations as separate business entities. UH officials say there are no such existing enterprises at the university.

“For UH to establish an enterprise model for the center, several years — minimum — will be required for planning to modify legislative policy, securing joint venture partnerships with the center’s community medical centers, exploring new relationships for current employees of the center under the proposed enterprise model, and developing a functioning comprehensive business plan for such a novel proposal will be needed,” UH wrote in an updated business plan based off the consultants’ report.

Dr. Jerris Hedges, the center’s interim director and dean of the medical school, added, “This may be a wonderful solution, but it is a long-term solution. … There were many issues that made it impossible for us to immediately implement the ultimate solution that was visualized by the consultants.”

As one of 69 National Cancer Institute-designated centers in the country, the center’s researchers generate between $20 million and $23 million a year in federal grant expenditures. UH first obtained the designation in 1996 and received its latest five-year award in 2012.

The center’s financial troubles stem from a faulty business plan that had assumed the university’s share of the state’s cigarette tax would remain constant at $19 million to $20 million a year. But as fewer people smoke, the tax revenues have dropped off.

Adding to the problem, UH in 2010 pursued building a $130 million state-of-the-art facility in Kakaako using that outdated business plan. To pay for the building, UH issued bonds, which have saddled the center with a nearly $8 million annual mortgage payment that it can’t afford.

Because UH does not have a university hospital, the Cancer Center does not enjoy revenues from clinical trials like centers on the mainland. The center’s former director 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 consultants’ report, which the UH Foundation paid for using $104,800 in private funds, suggested the consortium partners could become the ownership entity under the proposed enterprise model, with a governing board made up of members from the hospitals, the medical school and community and faculty physicians.

University and state officials have been grappling for some time with how to deal with the center, which has been operating in the red and draining its reserves to stay afloat.

The chairman of the state House Higher Education Committee, Rep. Isaac Choy, who has been an outspoken critic of the center’s money woes, called a legislative hearing Thursday to vet a $5 million budget request UH is seeking for center operations next year.

“Three years ago I identified the Cancer Center as a litmus test, testing management’s ability in making bright, clear and decisive decisions for the good of the university. It was clear three years ago that the Cancer Center would not be sustainable,” Choy (D, Manoa) said. “It was clear three years ago, for the Cancer Center to even have a remote chance of survival, it would require razor-sharp management, no mistakes and lots of luck. Unfortunately, this hasn’t happened.”

The latest business plan is the third in recent years — two others were produced in-house — to try to come up with a proposed way forward. It suggests phased steps in the short term to maximize revenue and productivity to finance the center’s research operations, including:

>> Reorganizing the medical school and the Cancer Center’s administrative services to operate as a single campus, cutting down on duplicated services. UH Manoa initiated plans last year to make the center a research unit under the John A. Burns School of Medicine.

>> Seeking $4 million to $5 million in state general funds to pay for research faculty and staff. The center’s $2.3 million in general funds is not sufficient, so it’s been relying on reserves to cover the majority of the research personnel. “Without new funds,” the plan says, “the center will need to lay off hundreds of UH and (Research Corporation of the University of Hawaii) employees within two years due to financial exigency.”

>> Seeking an annual $1.5 million investment from UH to fund facilities operations.

>> Creating new revenue streams by leasing empty space in the center.

>> Changing the way researchers are paid by requiring newly recruited faculty to cover at least 25 percent of their base compensation with extramural funds after two years of employment.

“Part of the business plan is to have a variety of approaches that will help fill the gap — that’s what we’re trying to do. We can’t do it with one silver bullet,” Hedges said.

The consultants advised against some of the more extreme suggestions, including closing the center, selling it to an outside entity, merging with a mainland cancer center and abandoning its federal National Cancer Institute designation.

As a result of efficiencies from consolidation efforts and a hiring freeze under Hedges, the center ended fiscal 2015 with a $6.4 million operating deficit, compared with deficits of more than $10 million in fiscal years 2013 and 2014, the report shows.

But the consultants said, “It is clear that the center will run out of financial resources in less than three years without action being taken.”

“UHCC has the opportunity to conduct significant and impactful cancer research that can make a difference for the people of Hawaii and elsewhere,” the report said. “Operational and financial improvements are possible but as UHCC expands its research, it will always need financial support from a combination of sources: the state, local communities, the University of Hawaii, and the Hawaii Cancer Consortium.

“Furthermore, UHCC will need to seek additional funding and contributions from the corporate and philanthropic communities.”