Einstein Deal Helps Yeshiva University, Though Not Without Problems
On September 10th, 2015 Yeshiva University and Montefiore Medical Health System finalized an agreement transferring operational and financial control of Einstein Medical School to Montefiore. In recent years Yeshiva has reported large and sustained budget deficits, attributing somewhere between 40 to 100 million dollars a year of those deficits to the Einstein Medical School. This deal, which originated in a June 2014 Memorandum of Understanding between the two institutions, marks a large and important step in Yeshiva’s quest for financial stability.
Medical School Budgets
Though Yeshiva sought financial benefit by separating from its medical school, many universities profit from the sources of revenue brought in by their medical schools. In recent years, some universities have even sought to merge with medical schools because of the perceived financial benefits. Inside Higher Education, in a 2012 article entitled “Get Me a Med School! Stat!,” notes this trend of universities merging with medical centers for monetary gains. “Health science centers offer several revenue streams, particularly research funding and clinical fees… Medical schools and the hospitals attached to them also provide other potential sources of revenue, such as corporate partnerships, fees, government reimbursements, and philanthropic giving.” According to the Association for American Medical Colleges (AAMC), in 2014 the average medical school earned over 700 million dollars in revenue. Among private medical schools the number shoots to 1 billion dollars in revenue.
But if medical schools bring in so much revenue, why was Einstein generating such large deficits? Because unlike almost all of these medical schools, Einstein does not own an affiliate hospital. Originally, Einstein housed and operated the Jack D. Weiler Hospital. However, in 1969, Montefiore assumed operational responsibility for this hospital. Inside Higher Education notes that a large portion of medical school revenue comes from clinical fees and hospital income. According to the AAMC, in 2014, 40% percent of revenue came from practice plans, which is revenue generated from patients treated at a medical center. An additional 18% of revenue comes from Hospital Purchased Services and Investments. This means that the average medical school earns over 400 million dollars from these two categories. In contrast, YU’s 2014 budget showed a comparatively meager 36 million dollars in patient care, and an additional 23 million dollars from all affiliation agreements.
YU is not the only University with a low-revenue medical school. And in terms of endowments and research grants, Einstein generates significantly above-average revenue. In documents about projected revenue for the UC Riverside Medical School, the plans optimistically predict 130 million dollars of revenue, a sum significantly lower than Einstein’s budget. But UC Riverside directs far less funds towards research, and in 2014 received only three million dollars in funding from the National Institutes of Health (NIH), compared to Einstein’s 158 million. To succeed with its low budget model, Einstein could have substantially cut its research funding. Indeed, after the original Memorandum of Understanding between Montefiore and Yeshiva broke down, many suspected Yeshiva would administer these cuts in order to balance its budget. It was these fears that led to a no-confidence vote from the Einstein faculty senate. In response, when announcing the finalization of the recent deal, Yeshiva emphasized that the strengths of this deal lie in its preservation of Einstein’s vast and prestigious research endeavors.
On the list of high budget Medical Schools without a hospital, Einstein has only one complement: Harvard Medical School. While Einstein ranked 25th nationally with 158 million from NIH funding, Harvard ranked 21st, with 186 million. In Harvard’s reporting of its 2014 revenue, its funding sources closely resemble those of Einstein: research accounts for almost half of all revenue and endowment gains account for another quarter but minimal reported revenue comes from hospital related costs. However, stark differences exist too. Harvard receives almost 80 million dollars in “other revenue,” which includes services like continuing education and publications, sources of revenue that Einstein does not report. Further, Harvard’s endowment is considerably larger than Yeshiva University’s, and generates a great deal more revenue. Yeshiva’s total endowment revenues for 2014 were about eighty million dollars lower than Harvard Medical School’s share of its endowment.
Despite this greater revenue (Harvard’s revenue for its medical school was over 600 million, almost equal to Yeshiva’s entire budget), Harvard still reported a 40 million dollar deficit in 2014 and in multiple preceding years. Harvard credits these deficits to dwindling NIH funding and the rising expensive costs of modern day research. Due to the size and overall wealth of Harvard, though, the University was able to sustain these deficits, with aims to balance the Medical School’s budget while maintaining its high level of research. In 2014, this option was no longer available to the comparatively small Yeshiva University.
For forty years after relinquishing operational responsibility of its hospital, Einstein operated successfully without this revenue stream. In 2008, though, in a now-clichéd Yeshiva University storyline, Einstein embarked on large spending expenditures, only to be met by an economic downturn and the disappearance of funds.
The Einstein website notes that “In 2008, the College of Medicine embarked on a major expansion program that effectively doubled the size of its campus.” In the years since, magnificent and enormous “state-of-the-art” research centers have been built and renovated all over campus. While Yeshiva was updating and expanding the Einstein campus, and spending large sums to accomplish these goals, University revenue was decreasing in a number of areas. Einstein’s largest source of revenue comes from federal grants, specifically the NIH. After a twenty-year period during which total funding provided nationally by the NIH tripled, funding began to stagnate in 2008 and soon began to decrease. Einstein’s other sources of revenue also decreased. Yeshiva’s endowment shrank from 1.7 billion dollars to around 1 billion dollars. The economic crisis of 2008 somewhat curtailed gifts and donations to Yeshiva University. In 2013 tax returns, Yeshiva listed some of these reasons, noting that “recurring operating losses by the University are as a result of several economic factors, including:…Reduced research grant funding, Investments in faculty to enhance undergraduate education and medical research, Investments in facilities to support the growth needs of education and medical research.” Like Harvard, Einstein reported repeated years of large budget deficits. But Einstein’s deficits began earlier, lasted longer, and coincided with oversights of overall university budgeting.
In 2014, Yeshiva experienced well-documented and formidable economic struggles. To balance its 100 million dollar budget deficits, it sold off valuable real estate and took out loans. This process was unsustainable in the long-term, and Yeshiva received a number of credit downgrades at the time. When Standards and Poors (S&P) downgraded Yeshiva to a BBB, it noted that the termination of the original agreement between Montefiore and Yeshiva “further pressures Yeshiva's bottom line given that about 40% of the deficit was generated from Einstein in fiscal 2014 and 60% in fiscal 2013…we are operating under the assumption that the university will maintain full control of Einstein, which we believe will prolong deficits at the consolidated entity.”
After five years of budget mistakes and irresponsibility leading to an ever-increasing and unwieldy debt, Yeshiva needed to hastily balance its budget. Due to Einstein’s responsibility for a large portion these deficits, Yeshiva was faced with a choice: either maintain the high-level research and run itself bankrupt, substantially lower the quality and quantity of Einstein’s research, or let go of Einstein and allow a hospital with its own large sources of revenue to preserve Einstein and benefit from its prestigious research. S&P noted that “A divestment of the operations of Einstein or taking a minority partnership would be positive for the credit quality of the university given that Einstein has incurred significant deficits over the past few years.” Therefore, on September 10th 2015 Yeshiva transferred financial responsibility of Einstein to Montefiore Medical Health System.
Details and Implications of the Deal
While this deal buys Yeshiva University financial stability, Yeshiva loses out significantly with regards to its prestige and standing as a university. Yeshiva proudly boasts its consistent ranking in the top 50 of the US News rankings of National Universities. The website notes that the rankings give great importance to “groundbreaking research.” Einstein’s large sum of 158 million dollars in NIH research accounts for over 70% percent of Yeshiva’s research grants. Einstein receives grants from other sources too, and in total Einstein most likely accounts for at least 80% of Yeshiva’s 215 million dollar research budget. With its lowered research efforts, Yeshiva’s place in these rankings will fall.
But the result of this deal is even more profound. Without Einstein, Yeshiva might not even qualify as a National University. According to US News’s classification system, to qualify as a national university an institution must offer a full range of doctoral programs and must emphasize faculty research. Most of Yeshiva’s doctoral programs and faculty research have occurred at Einstein, so YU’s loss of Einstein might actually force US News to reconsider their classification of YU as a National University. Though Yeshiva’s top 50 ranking often justifies comparisons to large universities like Columbia or Harvard, without its medical school Yeshiva might literally belong in a different category.
These effects though, depend on the exact nature of the continued relationship between Yeshiva and Einstein, a murky and hotly debated issue. Montefiore assumes financial responsibility, so Yeshiva will no longer list Einstein’s research grants in its budget. Though Montefiore and Yeshiva agree on this point, their statements reflect less clarity about Yeshiva’s future affiliation with Einstein. Yeshiva emphasizes in its statements that it will maintain a continued relationship with Einstein and will function as its degree granting institution. Statements from Einstein and Montefiore, though, make no mention of this continued relationship, noting only Yeshiva’s temporary status as the degree granting institution. A statement from Einstein writes, “Einstein is seeking the authority to grant degrees (which is expected to be approved in approximately three years’ time),” and Montefiore’s statement echoes this claim. It is therefore unclear what, if any role and association, Yeshiva will have with the new entity of Einstein at that time. Yeshiva did not respond to requests for comment.
The exact financials of the deal also remain unclear. S&P notes that “As a result of the transaction, $136 million in university bonds that provided financing for Einstein were defeased,” or cancelled. Additionally, “$42 million in mortgaged debt will be transferred to the new entity, as well as other liabilities associated with Einstein.” Beyond the transferal of debts, Yeshiva will receive payment from Montefiore for the real estate assets of Einstein. New York property filings evaluate Einstein’s real estate at 209 million dollars. S&P writes that these payments will be “rendered over the next 23 years,” so the total payment will probably increase due to interest.
While exact payment remains unclear, the deal clearly delivers great financial relief to Yeshiva. Through the annual payments from Montefiore, elimination of debts, and, most importantly, the balanced budget this deal will hopefully help achieve, Yeshiva emerges a more healthy university. Though the deal alters the nature and overall standing of the university, it represents a huge and crucial step toward financial stability, securing Yeshiva’s continued existence while preserving its undergraduate education, which is now undeniably its core focus.