Hospital system has profitable year

This article submitted by Michael Jacobson on 12/22/99.

A very profitable year meant a very pleasant audit report for the Paynesville Area Hospital District Board of Directors, who held a special noon meeting on Friday to meet with representatives of Deloitte and Touche, the firm that prepared the audit.

The hospital system had a profit of $684,000 for the fiscal year that ended on Sept. 30, 1999, including $578,000 in operative income. Of the $106,000 in nonoperating income, over half was from donations.

Revenues in the system were up by over a million dollars, an increase of nearly nine percent over last year. Expenses, meanwhile, increased by $572,000, only five percent, yielding an operating income of $578,000.

"You don't normally see that," said Tracy Mostaert, a senior manager at Deloitte and Touche, who presented the audit report, of revenues increasing by more than expenses.

The clinics in the system increased their revenues by 18 percent from last year, aided by a 7.5 percent rate increase and a seven percent increase in days. Clinic revenues increased by $590,000 from last year.

Outpatient revenues at the hospital increased by $926,000, with inpatient revenues up $314,000. The hospital saw its discharges and patient days return to levels it hadn't reached since the 1996 financial year.

"This is the point where everyone is supposed to stand up and cheer. You had a great year," added Jeff Gendreau of Deloitte and Touche, who presented the preliminary findings of a debt capacity study later in the meeting.

Offsetting these revenue increases was $5.1 million of care for which the charges went uncollected. The hospital wrote off $2.5 million in charges to Medicare alone in the last fiscal year. Overall, uncollected charges increased by $783,000 from the previous year.

In the Koronis Manor, unpaid care from contract providers nearly doubled, from $215,000 in 1998 to $384,000 in 1999. "The payers," explained Gendreau, "have decided they're not going to fund extended care."

Despite those write offs, the hospital system turned a healthy profit. "Just think if you had that $5.1 million," hospital system administrator Willie LaCroix told the board.

In all, hospital system's fund balance was up by almost $700,000.

Mostaert praised the system's ability to collect its accounts receivables. By averaging just 40 days in accounts receivable, the system easily ranks in the top quartile of hospitals both nationally and in Minnesota. The average is at least 60 days.

At 9.3 years, the average age of the plant also compares well to national and state figures.

Two areas that the system doesn't compare well with the national and state averages is in debt ratios. Carrying $4,478,000 in long-term debt, the hospital system carries more debt for its size than is typical. In fact, it ranked in the bottom quartile of both debt ratios, which compare debt to yearly revenue or overall fund balance.

Mostaert noted that the trend was good for both debt ratios. With profitable years like 1999 favorably impacting the bottom line, the ratios have steadily improved over the last five years.

Debt makes cash precious, so the profitable year helped the system's cash on hand and its investments, which were up $514,000 in 1999, including $401,000 in funds designated for the Richmond clinic construction.

Revenue from outpatients at the hospital now accounts for 40 percent of all service revenue for the hospital system, up from 34 percent in 1996. Inpatient revenue, which is diminishing, is next at 23 percent. Clinic revenue was at 22 percent this year, up from 18 percent in 1996. Also dropping in revenue is the Koronis Manor, which accounted for 19 percent of the system' revenue in 1996 but only 13 percent this year.

Debt capacity study
Debt, cash on hand, and declining revenue at the Koronis Manor all were topics that were discussed again during Gendreau's presentation of the preliminary findings of a debt capacity study during the second half of the board meeting Friday.

The hospital system is considering a major remodeling and building project that would involve work at its hospital, clinic, and nursing home in Paynesville. The project would include a small addition to the Paynesville Area Medical Clinic, additions to the hospital along with substantial renovations of some portions, and a major addition to the Koronis Manor in conjunction with extensive remodeling.

The project would add a new emergency entrance, an ambulance garage, and a second operating room to the hospital, which would also see its outpatient area expanded. Some services at the Koronis Manor would be upgraded, and more space would be provided in bathrooms, toilets, and rooms to accommodate patients in wheelchairs. More of the patient rooms would become private as well.

The entire project is now estimated to cost at least $6.1 million, instead of the $4.5 that was projected in August. Patient accounting and medical records will now be remodeled, too. Another addition will therefore be needed for the hospital, and another area will need to be renovated.

The Koronis Manor portion of the project is expected to cost $3 million, while another $3.1 million would be spent on the hospital and clinic portion. "We really need to take a hard look at what we need, what we can afford, and what the alternatives are," said LaCroix, in introducing the debt capacity study.

The project, which would need to be almost completely financed, would more than double the system's debt. Gendreau called it a prudent step to study the system's capacity to handle the debt. Deloitte and Touche used modeling to develop a five-year strategic plan of the hopital system.

"It's a very big decision," Gendreau explained to the board. "You're talking about doubling your debt and going back to a very highly levaraged position. This is the biggest decision you'll make in the next 10, 15 years."

Some key assumptions in the model were a annual rate of 6.8 percent growth, that LaCroix called realistic; the four new providers that the hospital system could add (two new doctors have signed with PAHCS already and should begin their medical practices here next summer); and continued growth in Stearns County.

"We're going to have to capture more market share," said Gendreau, who cited new clinics in Richmond and Watkins as reasons to expect it.

"You're going to be moving more patients in the clinics and hopefully that will transfer into hospital business," added Gendreau.

Gendreau felt the system could afford the added debt, if it can keep turning a profit like this year. Just like the new clinic and PHO (Physician-Hospital Organization) earlier in the 1990s helped pave the way for the profits now, the investment could pay off in a few years. "You should feel good about yourselves," he said. "You're starting to hit on all cylinders. A lot of the investments you made several years ago--the clinics and the PHO--are starting to pay off."

For instance, recruiting four providers in the current fiscal involves paying signing bonuses, which are current outlays that only are repaid over time. "It's a classic symptom of a growing organization," Gendreau explained. "Growth takes cash."

To minimize the debt, two other options were studied: doing just the hospital portion of the project; or doing hospital portion at once and spreading the nursing home portion over a five-year period in increments of $750,000, which would maximize state aid.

By adding an operating room and expanding the outpatient wing, the hospital portion would bring a return to the investment more quickly than the nursing home project. But a remodeling project in a working health care system is complex because every department needs to remain functional.

Board member Mike Hansen wondered if the nursing home project was more local, not affecting the entire hospital district, and if it was risky, involving a sizable investment with little hope of it influencing the bottom line favorably.

LaCroix noted that the Manor is the only nursing home in the district that provides rehabilitation seven days a week. He said that just because the state treats nursing home residents as second class citizens in terms of reimbursement doesn't mean the hospital should, too. "There are some significant issues above and beyond the bottom line," LaCroix told the board.

"If we don't do it," he added, "how much market share do we lose?"

Gendreau said he was caught between both sides, part of him wanting to store up while profits are good and the other part knowing that the additions and renovations were really needed.

Hospital board welcomes new member from Richmond
As a first order of business at a special noon meeting on Friday, the Paynesville Area Hospital District Board of Directors accepted the appointment of Vickie Ruegemer to the board.

Ruegemer was appointed by the Richmond City Council as the representative of the city of Richmond, which joined the district through special legislation this year.

Ruegemer has lived in Richmond for 22 years and has a background in health care administration. Ruegemer works for CentraCare in St. Cloud as an assistant to the president.

She toured the facilities of the Paynesville Area Health Care System on Friday morning before her first board meeting. "It's exciting," she said after the meeting. "I like rural central Minnesota, and I'm interested in some of the expanses and advancements in medical care." Ruegemer's seat will be up for election in November.

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