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Meeting Information

HEALTH AFFAIRS COMMITTEE

Friday, February 25, 2000

8:30 - 9:15 a.m.

East Oval Room, The Rotunda

Committee Members:

Charles M. Caravati, Jr., M.D., Chair Terence P. Ross H. Christopher Alexander, III, M.D. Elizabeth A. Twohy William G. Crutchfield, Jr. Harry J.G. van Beek William H. Goodwin, Jr. John P. Ackerly, III, Ex Officio



I. CONSENT AGENDA (Dr. Cantrell)

A.Conflict of Interest Exemptions (Upstate Biotechnology,Inc.)

B. Conflict of Interest Exemptions (DirectGene, Inc.)
Fiscal Impact Statements



II. REPORTS BY THE VICE PRESIDENT AND PROVOST FOR THE HEALTH SYSTEM (Dr. Cantrell)

A. Medical Center Financial Report (as of January 31,2000) (Mr. Sandridge to introduce Mr. Fitzgerald; Mr.Larry Fitzgerald to report)
B. Remarks by the Vice President and Provost for theHealth System C. Miscellaneous Report

JCAHOAccreditation Survey



III. EXECUTIVE SESSION

Discussion of proprietary business-related information pertaining to Medical Center acquisition of a clinic operation, and pertaining to the impact of Medicaid reimburse- ment rates on Medical Center contracting and cost reduction strategies, where disclosure would adversely affect the competitive position of the Medical Center, as provided for in Section 2.1-344(A)(23) of the Code of Virginia



I.A. Conflict of Interest Exemptions (Upstate Biotechnology, Inc.)

    BACKGROUND:The School of Medicine is negotiating a sponsoredresearch contract and a material transfer agreementwith Upstate Biotechnology Inc., a New York companyinvolved in funding research in and commercializationof bioreagents.

    Two University faculty members serve on the company'sscientific advisory board. One of the two receivesannual income in excess of $10,000. Under the VirginiaConflict of Interests Act, the University's contractingwith Upstate Biotechnology Inc. would place its facultywho receive income in excess of $10,000 in violationof the Act, unless the Board of Visitors approvesthe conflict created by their income in excess of$10,000. State law grants such approval authorityto the Board in the case of sponsored research, inorder to allow research furthering the public interest.

    DISCUSSION:The research contract will help fund research forthe development of immunological reagents directedat the chemical modification of histone proteins.

    Virginia law and University of Virginia policy willrequire Dr. David Allis to file annual disclosurestatements of his personal economic interests in thecompany. Neither of the faculty is involved in theUniversity's negotiation, approval, or procurementof contract terms with Upstate Biotechnology, Inc.The chair of the Department of Biochemistry headsa University oversight team responsible for managingand overseeing the research, including independentlysupervising, evaluating, and making personnel decisionsto ensure that the continuing best interests of theUniversity are served. As an additional precaution,the chair will report at least each quarter to thedean on the progress of sponsored research activityand the utilization of University resources.

    ACTIONREQUIRED: Approval by the Health Affairs Committeeand the Board of Visitors.

    CONFLICT OF INTEREST EXEMPTION

    WHEREAS, the School of Medicine wishes to enter intoa sponsored research contract with Upstate BiotechnologyInc., a New York Corporation, for funding researchin and commercialization of innovative and hard tofind bioreagents; and

    WHEREAS, David Allis, Ph.D., receives annual incomein excess of $10,000 from Upstate Biotechnology Inc.,and the University's entry into a research agreementwith Upstate Biotechnology, Inc. would thereby exposehim to violation of the Conflicts of Interest Actunless the conflict is approved by the Board as permittedby '2.1-639.6(c) (7) of the Code of Virginia;

    RESOLVED that the conflict is approved by the Boardof Visitors in order to permit the University to negotiateand enter into a proposed contract for the developmentof immunological reagents directed at the chemicalmodifications of histone proteins; provided, as requiredby the law, the faculty file the required annual disclosurestatement of personal income from Upstate BiotechnologyInc., the University files the required annual reportconcerning the contract with the Secretary of theCommonwealth, and the department chair vigilantlyoversees application of University resources and personnelengaged in the transaction so as to ensure the continuingbest interests of the University and compliance withUniversity policy.

    UNIVERSITY OF VIRGINIA

    FISCAL IMPACT STATEMENT

    PROJECT/PROPOSED BOARD OF VISITORS ACTION: UpstateBiotechnology, Inc.

    DESCRIPTION: The School of Medicine is negotiatinga sponsored research contract with Upstate Biotechnology,Inc., a New York biotechnology start-up company createdin the eighties. The Scientific Advisory Board includestwo University of Virginia faculty members.

    One faculty member receives annual income in excessof $10,000. Under the Virginia Conflict of InterestsAct, the University may enter into a research contractwith Upstate Biotechnology, Inc. without placing thisfaculty member in violation of the Act, if the Boardof Visitors approves the conflict created by his receivingannual income in excess of $10,000.

    The research contract would help fund research forthe development of immunological reagents directedat the chemical modifications of histone proteins.

    FISCALIMPACT: Fiscal impact is negligible, at worst.The University Patent Foundation receives annual royaltyincome for products developed at the University ofVirginia and licensed to Upstate Biotechnology. Therefore,major breakthroughs could result in significant revenuegain for the University.

    CONCLUSION:It is recommended that the Board of Visitors approvethe Conflict of Interest and enter into the proposedcontract for developing gene therapy for slow growingbrain tumors and prostate cancer.

    RECOMMENDAPPROVAL OF BOARD ACTION

    __________________________

    Leonard W. Sandridge

    February 25, 2000



I.B. Conflict of Interest Exemptions (DirectGene, Inc.)

    BACKGROUND:The School of Medicine is negotiating sponsored researchcontracts and a material transfer agreement with DirectGene,Inc., a Delaware biotechnology company created in1999 to pursue the development of gene therapies forcancer and other diseases. Technology developed atthe University of Virginia has been licensed to DirectGeneby the University of Virginia Patent Foundation, whichhas a 1.2 percent equity interest in the company.

    Four University faculty members and one Universitygraduate student own three percent or less of theequity in the company. Four faculty members own inexcess of three percent. Under the Virginia Conflictof Interests Act, the University's contracting withDirectGene, Inc. would place its faculty who own inexcess of three percent in violation of the Act, unlessthe Board of Visitors approves the conflict createdby their equity interest. State law grants such approvalauthority to the Board in the case of sponsored research,in order to allow research furthering the public interest.

    DISCUSSION:The research contracts would help fund research ofadenoviral based gene therapy for cancer and bonerepair.

    Virginia law and University of Virginia policy willrequire Drs. Chung, Zhau, Kao, and Jeng to file annualdisclosure statements of economic interests in thecompany. None of the faculty is involved in the University'snegotiation, approval, or procurement of contractterms with DirectGene, Inc. The chair of the Departmentof Urology heads a University oversight team responsiblefor managing and overseeing the research, includingindependently supervising, evaluating, and makingpersonnel decisions to ensure that the continuingbest interests of the University are served. As anadditional precaution, the chair will report at leasteach quarter to the dean on the progress of sponsoredresearch activity and the utilization of Universityresources.

    ACTIONREQUIRED: Approval by the Health Affairs Committeeand by the Board of Visitors.

    CONFLICT OF INTEREST EXEMPTION

    WHEREAS, the School of Medicine wishes to enter intoa sponsored research contract with DirectGene, Inc.,a Delaware Corporation, for developing adenoviralbased gene therapies for cancer and bone repair; and

    WHEREAS, Leland W.K. Chung, Ph.D., and spouse, HaiyenE. Zhau, Ph.D., and daughters, Lynna K. Chung andShunney H.C. Nair, Chinghai Kao, Ph.D., and spouse,Meei-Huey Jeng, Ph.D., have disclosed in advance theirequity interests of 1.2, 2.7, 2.2, 2.2, 1.2, 2.1 percent,respectively, in DirectGene, Inc., and the University'sentry into a research agreement with DirectGene, Inc.would thereby expose them to violation of the Conflictsof Interest Act unless approved by the Board as permittedby '2.1-639.6(c) (7) of the Code of Virginia;

    RESOLVED that the conflict is approved by the Boardof Visitors in order to permit the University to negotiateand enter into a proposed contract for developingadenoviral based gene therapies; provided, as requiredby the law, the faculty file the required annual disclosurestatement of personal interests in DirectGene, Inc.,the University files the required annual report concerningthe contract with the Secretary of the Commonwealth,and the department chair vigilantly oversees applicationof University resources in the best interests of theUniversity and in accordance with policy.

    UNIVERSITY OF VIRGINIA FISCAL IMPACT STATEMENT

    PROJECT/PROPOSED BOARD OF VISITORS ACTION: DirectGene,Inc.

    DESCRIPTION: The School of Medicine is negotiatinga sponsored research contract with DirectGene, Inc.,a Delaware biotechnology start-up company createdin 1999. The founding members of DirectGene, Inc.include eight University of Virginia faculty membersand one University graduate student.

    Four faculty members and one University graduate studenteach owns less than three percent of the equity inthe company. The remaining four faculty own a totalof ll.6 percent in the company. Under the VirginiaConflict of Interests Act, the University may enterinto a research contract with DirectGene, Inc. withoutplacing these faculty members in violation of theAct, if the Board of Visitors approves the conflictcreated by their ownership in excess of three percent.

    The research contracts would help fund research intoadenovirus tissue specific expression for cancer andbone repair, which has great potential for patienttreatment.

    FISCALIMPACT: Fiscal impact is negligible, at worst.The University Patent Foundation retains a l.2 percentequity interest in DirectGene, Inc. Therefore, majorbreakthroughs could result in significant revenuegain for the University.

    CONCLUSION:It is recommended that the Board of Visitors approvethe Conflict of Interest and enter into the proposedcontract for developing adenoviral gene therapiesfor cancer and bone repair.

    RECOMMENDAPPROVAL OF BOARD ACTION

    __________________________

    Leonard W. Sandridge

    February 25, 2000

II.A. University of Virginia Medical Center Financial Report as of December 31, 1999

    ACTIONREQUIRED: None

    BACKGROUND:The Medical Center prepares a financial report andreviews it with the Executive Vice President and ChiefOperating Officer before submitting the report tothe Health Affairs Committee of the Board of Visitors.The Health Services Foundation (HSF)prepares and presentsfinancial statements to the Vice President and Provostfor the Health System.

    DISCUSSION:Admissions for the Medical Center for Fiscal Year2000 are below budget by 1% and below Fiscal Year1999 by 2%. Since admissions are down, we completeda comparison of our market share for the Medical Centerfor calendar year 1995 to 1999, and have concludedthat overall market share is flat to slightly increased.The length of stay for the Medical Center for FiscalYear 2000 has dropped to 5.2 days - 13.3% below thelength of stay for Fiscal Year 1998. This positivetrend contributes to our efforts to lower costs.

    Net operating revenue for Fiscal Year 2000 is almostequal to Fiscal Year 1999 and 1% above the budget.The Balanced Budget Refinement Act of 1999 restoreda portion of the Medicare funding reductions whichhad been made by the Balanced Budget Act of 1997.As a result of this Act, the Medical Center will realize$2 million of additional (non-budgeted) net revenuein Fiscal Year 2000. The December year-to-date financialstatements reflect $666,000 additional net revenuefrom the Refinement Act. Each month through June 2000,the financials will reflect $222,222 of additionalnet revenue. The major item adjusted by the RefinementAct was indirect medical education payments.

    Total operating expenses for Fiscal Year 2000 are$.5 million below budget and $4.8 million below FiscalYear 1999. This is primarily the result of salaries/benefitsand supplies being below budget and below Fiscal Year1999. The number of full-time equivalent employees(FTEs) is 150 below budget and 159 below prior year.

    After six months of Fiscal Year 2000, the operatingmargin is 4.0% We anticipate ending Fiscal Year 2000with an operating margin of 4%. We also anticipatethat expenses will increase in the next six monthsbecause of employee raises that were made in January2000.

    At the February 25th meeting financial results throughJanuary 2000 will be presented.

    AccountingPolicy

    Each year the Medical Center prepares a Cost Reportto determine the final payment by the Medicaid program.The Cost Report is prepared, filed, and audited afterthe year for which it applies. Historically, the MedicalCenter has recorded as net revenue the lump sum finalsettlement from the Medicaid Cost Report when it isreceived, generally two years after the year for whichit applies. In June 1999, the Medical Center recorded$2.7 million as net revenue as the final settlementof the 1997 Medicaid Cost Report.

    The practice historically followed by the MedicalCenter is in accordance with Generally Accepted AccountingProcedures (GAAP); however, it was a very conservativeapplication of GAAP.

    In June 2000, the Medical Center will receive approximately$5.6 million as a final settlement of the 1998 MedicaidCost Report. We will record additional net revenueof $4.0 million from this anticipated settlement spreadevenly over seven months starting December 1999. Wewill also restate the monthly financial statementsfor Fiscal Year 1999 as if this accounting practicehad been followed in Fiscal Year 1999. This new accountingpractice will not change the annual results for FiscalYear 1999 or Fiscal Year 2000; however, it will changethe historical pattern of recording a large increaseto net revenue in the final month of the fiscal year.



II.B. Remarks by the Vice President and Provost for the Health System

    ACTIONREQUIRED: None

    DISCUSSION:The Vice President and Provost for the Health Systemwill utilize this portion of the Health Affairs Committeemeeting to inform the Board of Visitors of recentevents which do not require formal action, but ofwhich they should be made aware.



II.C. Miscellaneous Reports

    ACTIONREQUIRED: None

    BACKGROUND:The JCAHO final report for the inpatient and ambulatorysurvey was received on January 26th, 2000. The finalreport on the home health care survey is expectedsoon.

    DISCUSSION:The JCAHO uses a decision grid to provide a numericsummary of an organization's level of compliance withstandards under the various performance areas surveyed.The summary grid score can be compared to a test scorein that 100% reflects the best possible performancean organization can achieve.

    Prior to beginning the most recent survey, the JCAHOsurveyors announced that as the survey process hasbecome more stringent, most hospitals have experienceda 20% decline in scores compared to prior surveys.The Health System's final score of 94, however, reflecteda one-point increase over the score earned in 1996.This remarkable achievement is attributable to theexcellent skills and dedication of the Health System'semployees.

    Recommendations made by JCAHO surveyors to furtherimprove performance are being implemented.