USC Medical School Faces Budget Crisis : Education: In letters to faculty, dean says the institution has an $11-million deficit and may institute layoffs or salary cuts. Building of staff, changes in the health care industry are cited as key factors.

Feeling a financial squeeze from health care’s shift to managed care and the hiring of star faculty members, the USC School of Medicine faces an $11-million budget deficit and is considering faculty layoffs, officials confirmed Wednesday.

Dean Stephen J. Ryan broke the news to the school’s more than 1,000 faculty members in two letters mailed out in recent weeks. In one of the letters, Ryan said the county’s oldest medical school had run out of temporary fixes for chronic budget problems and warned that measures to correct the deficit “will hurt.”

The $11 million represents about 3% of the medical school’s budget.

Ryan said in an interview that the radical changes going on in the health care industry have caught up with USC and the budget squeeze is structural.

“We have to address these things, because if we don’t, we may not be around. It’s that real,” Ryan said.

Committees composed of department heads and other faculty members are studying alternatives to layoffs or salary cuts. They are scheduled to present their recommendations to Ryan at the end of the month.

Dr. Joseph Van Der Meulen, vice president of health affairs at USC, said the budget problem will not interrupt service at County-USC Medical Center, the sprawling hospital complex in Boyle Heights staffed by medical school doctors.

“We’ve made it very clear that any contractual obligations we have are not to be affected by any of this,” Van Der Meulen said in an interview Wednesday. “We have called the county and told them that.”

School officials said two factors have contributed to the crisis. Insurance companies and health maintenance organizations that run managed care plans have put hospitals and physicians under competitive pressure to cut rates and the length of time they keep patients. And academic medical centers, such as USC, are under even more pressure because they double as medical schools and research centers, both of which carry high costs.

Ryan chose to combat these problems in part by recruiting superstar researchers and clinical practitioners to the medical school’s faculty, believing that was the best way to build clinical business and generate new research dollars, which now total about $100 million a year. The medical school has invested $27 million in new faculty and facilities over the last four years.

Among Ryan’s prize recruits are Dr. W. French Anderson, an internationally known geneticist who directs USC’s gene therapy laboratories, who was lured from the National Institutes of Health; Dr. Vaughn A. Starnes, a heart-lung transplant specialist enticed to USC from the Stanford University Medical Center; and Dr. Demetrios Demetriades, a trauma surgeon who moved here from South Africa two years ago and made a major impact, helping to lower death rates at County-USC after taking over the medical center’s trauma division.

In a letter to USC faculty members describing the problem, Ryan said he believes his plan is sound, but said that “not enough time has passed for us to reap the benefits of this investment, and our short-term return is minimal.”

Sources close to the school say the budget problem has created internal tensions between the newer faculty members and older ones, some of whom have been at the school for decades.

Most of the older employees are protected by tenure, but the administration has not ruled out layoffs or salary cuts.

“There is a morale problem among some,” said one high-ranking medical school official. “But I don’t think it is anything different than that being experienced by high-paid employees in other segments of the economy. It seems like everyone is feeling the crunch these days.”

Dr. Timothy Stout, an ophthalmologist who specializes in retinal surgery, is one of USC’s newest faculty members. He said he and his wife, Dr. Ann Stout, also a pediatric ophthalmologist, turned down a dozen offers from other medical schools to come to USC. He said he thinks that academic medical centers across the nation are facing financial problems and that USC is not unique.

“I didn’t get the feeling that by coming here I was going to a place that was having a unique problem, nor did I think that this was an unsolvable problem,” said Stout. “We both think this is a short-term thing.”

A veteran faculty member, plastic surgeon Dr. Randy Sherman, said, “It’s a tricky time, but we are all in this together. We all want to see the dean succeed.”