An unexpected rise in revenue from the Yale School of Medicine may be just what the doctor ordered for the University’s deficit woes.

For the 2014 fiscal year, the School of Medicine eliminated its $12 million projected deficit and finished the 12-month period with a $42 million surplus. According to YSM Dean Robert Alpern, the unexpected black on the balance sheet is due largely to the rise in YSM clinical revenues, in addition to Yale-New Haven Hospital support, malpractice credit and other royalties. Although the positive results are a primary reason the University may see a balanced budget in 2014 compared to the $39.2 million deficit in fiscal 2013, administrators cautioned against extrapolating the surplus for future years.

“We are continuously strategizing to increase our revenue,” Alpern said. “We’re always trying to get more grants, and make the clinical practice more efficient and better.”

University Provost Benjamin Polak said that under the leadership of Alpern, YSM has continued to expand the school’s total revenue — nearly $1.4 billion — by expanding its number of practicing clinicians. However, while the costs and revenues of this expansion have been previously “tracking each other,” Yale witnessed a net gain in clinical revenue for the first time this year, he said.

Alpern said the School of Medicine is distinct from the rest of the University since its revenue flows from entirely different sources than other schools. Tuition is about 1 percent of revenue, the endowment is roughly 8 to 10 percent, and the vast majority of revenue therefore comes from two main sources: grants and contracts, or medical services.

As well, the School of Medicine’s revenue is calculated separately from New Haven Hospital. However, YNHH provides financial support to many School of Medicine departments and co-invests in recruiting new faculty or launching new programs to provide destination medical care.

“Because there are so many uncertainties, it’s very hard for us to predict the revenue and predict the expenses, which is why we sometimes close the year with a different revenue than we expected,” Alpern said. “It’s good that this time it’s positive.”

According to the YSM’s budget data for fiscal 2014 obtained by the News, medical services had been budgeted to bring in $635,465,000. In reality, those services — which include over 1,000 practicing physicians as part of Yale Medical Group — brought in nearly $30 million more at $664,981,000, which shattered the actual revenue of $580,053,000 brought in during fiscal 2013.

Vice President for Finance and Business Operations Shauna King wrote in an email that the reason behind the growth of YSM’s clinical revenues was due largely to new physicians joining the YSM faculty, citing Yale-New Haven Hospital’s acquisition of St. Raphael’s hospital as one example.

Chief Operating Officer for YMG Fred Borrelli explained that the expansion of Yale’s clinical faculty parallels broader industry trends.

“In the past decade, private practice of medicine is quickly disappearing and largely aggregating into large group practices, so YMG … has been growing in light of the national trend,” he said. “When the hospital absorbed St. Raphael’s Hospital last year, YMG experienced a fairly significant rise in faculty that used to be private practice doctors … and also absorbed a number of practices in greater New Haven.”

Chief Financial Officer for YMG Roger Deshaies concurred and said this type of expansion is necessary for YMG to remain competitive with other clinical operations. If Yale does not hire these physicians, they will simply go somewhere else, he said.

Still, Deshaies warned against simply attributing the net gains in YSM revenue to the clinical side, since hired physicians receive salaries based precisely on the estimated revenue they are able to bring into the group. But, he added that the YMG needs to operate at a slight surplus.

“We have to operate the clinical practice in the black,” he said. “The numbers are too big and it is not the responsibility of the University to underwrite the provision of clinical services in the community.”

Simply focusing on the revenue of medical services, however, neglects the other half of the revenue flow for YSM: grants and contracts for research.

According to the submitted reports for fiscal 2014, grants and contracts for research were budgeted at $523,185,000. However, the actual total was $522,394,000 — almost $800,000 shy of matching the projection.

“Research … across all medical schools, both clinical research and basic science research, is almost impossible to operate without a loss,” Polak said.

Polak added there is a lot of uncertainty regarding research funding, specifically from the federal budget following the sequester in 2013. He added the National Institute of Health (NIH) grants and contracts peaked in real terms in 2003, and have been gradually falling since that high-water mark.

Alpern said the amount YSM budgets for research in its fiscal years is heavily influenced by prospective funding from the NIH, which may be difficult to ascertain in changing political climates.

“The research revenue will depend on the NIH budget, and I can’t predict that,” he said. “My guess is that it will be similar, maybe go up — if something happens in Washington it could go down.”

The final major sources of revenue to the School of Medicine stem from endowment income, tuition, contributions and other services. For fiscal 2014, there was a nearly $30 million surplus reported in this category.

Deputy Dean for Finance and Administration at the School of Medicine Cynthia Walker said that another principal contributor to the revenue flow was the support of Yale-New Haven Hospital — YSM’s main affiliated teaching hospital, which also provides financial support to YSM.

“[Yale-New Haven Hospital] co-invests with the medical school in recruiting new faculty or launching new clinical programs to provide destination medical care,” she said. “In terms of the budget, the financial support from YNHH was larger than anticipated in the budget by $9 million.”

Despite the unexpected surplus for the 2014 fiscal year, it appears unlikely the positive balance sheets will change the University’s course to reduce spending, at least for the time being.

“The main benefit here is the stability of the medical school,” Polak said. “[The surplus] does not have major implications for undergraduates, except perhaps for more labs to do research during the summer.”

Large uncertainty exists with the healthcare industry as a whole, Polak said. He said the Affordable Care Act may have unpredictable effects on the revenue of the School of Medicine.

He added that while federal legislation enjoys most of the attention, changes at the state level with Medicare and Medicaid reimbursements can also have large-scale effects on the patients that receive care through the YMG.

Deshaies added that physician compensation is not rising as quickly in the past, and many medical groups are looking for ways to cut back on operating costs.

He added the main goal for YMG given the political and economic climate is to weather any price reductions, while also offering the faculty competitive salaries.

“Our faculty know that, and as the environment squeezes rates and squeezes fees, it is going to impact them and their paychecks,” he said. “We are looking for things that are helping us avoid that.”

The 2013–2014 Financial Report, which includes the University’s audited financial statements, will be released in full later this month.