Hospital's financial decline detailed in sale documents

By Vicki Hyatt | Jul 15, 2014

A burgeoning debt load, a lackluster economy that doubled the amount of charity care and the failure to adjust staffing ratios to patient numbers were major factors in the difficult times faced by Haywood Regional Medical Center, according to documents made public last week.

Duke LifePoint, a Nashville, Tennessee, based partnership between Duke and LifePoint Hospitals, operates more than 65 community hospitals across the nation. The for-profit company has offered to purchase MedWest Health System's principal units, HRMC and WestCare facilities.

The details of the WestCare purchase are not public, but the Haywood sale agreement, which is subject to public review since the hospital's operating authority was organized as a public nonprofit entity, can be found on the county's website and will be the subject of a county commissioner board meeting at 5:30 p.m. Monday, July 21.

A 6:30 p.m. Thursday HRMC Board of Commissioner meeting will be held to vote on the proposal.

The new company, DLP Haywood Regional Medical Center, will be investing $36 million in hospital facilities over the next eight years and will pay $29.1 million for the assets amassed by HRMC through the years. The Haywood County Hospital was a model for other counties when it was first formed in 1926 with a sizable grant from the Duke Endowment.

It was the first county to build a public hospital, and the original 75-bed facility has grown through the years to include a 169-bed hospital, an in-patient hospice center, a home health care agency, a health and fitness center and other associated medical facilities.

The details in the sales agreement, however, indicate a large chunk of the funds being received will be needed to cover the indebtedness racked up through the years and $12 million must be held in escrow to cover unexpected claims that could crop up that originated in the past few years.

What the audits show

While HRMC documents have been public through the years, audits compiled since the beginning of MedWest were not shared because the integration agreement followed the WestCare model of being a private nonprofit organization.

The sales agreement, however, includes financial information for the past five years and offers insight into why the community hospital has struggled.

The audit prepared by Pershing, Oakley & Associates of Knoxville, Tennessee, indicate the 2010 operating loss of $1.1 million was primarily due to one-time charges of $1.4 million and costs of $482,582 associated with a HRMC board decision to terminate an agreement with the emergency department medical group.

On the upside, operating revenues were favorably impacted by a 3-percent market share growth over the prior year and operating revenues increased by 12.7 percent. The prior year was when HRMC lost its certification and couldn’t see patients for a three-month period until it was regained.

In the 2009-10 audit year, the amount of financial assistance to uninsured patients not eligible for government programs more than doubled to $2.6 million.

The audit makes public for the first time details of how MedWest was organized when HRMC and WestCare facilities affiliated on Jan. 1, 2010, the terms of the Carolinas HealthCare System management fee, and how the system would operate.

This year’s audit also warns of problems from the healthcare reform legislation, a sluggish economy and projected a negative outlook for the industry for a third consecutive year. Though hope was offered for increased revenue with the expanded coverage of uninsured citizens in 2014, the audit predicted reimbursement rates would continue to decline.

“We believe healthcare providers are facing a period of uncertainty resulting from industry reform the likes of which has not been seen since the origins of Medicare in the 1960s,” the audit states. “This, coupled with the persistent, weakened economy, could significantly impact the financial viability of some healthcare providers.”

2011 audit

The audit ending Sept. 20, 2011, prepared by the same company shows HRMC added $6.1 million in debt primarily for the required federal electronic medical record keeping system, to purchase physician offices, lease cardiac catheterization equipment and the purchase of 6.24 acres on which to locate an outpatient surgery center. The $1.3 million borrowed for this purchase was secured by a open-ended bank note for up to $2.5 million on the hospital’s health and fitness center.

Operating revenues grew by about $7 million, but operating expenses grew by $10 million, resulting in $4.3 million operating loss. The loss was attributed to the increased loss in owned physician practices, an increase in the number of employed physicians, and depreciation.

Neither the operating or cash flow margin percentages were at desired levels, the audit stated, however the capital investments in 2011 were necessary to implement the hospital’s strategic plan. Significant cost-reduction efforts began in late 2011.

The audit portrayed a continued negative outlook on healthcare and the economy.

During the year, HRMC provided $1 million in subsidized care for Medicaid/Medicare patients, provided $1.9 million in free or discounted at cost and provided an additional $6.9 million in uncompensated care in the community.

The 2011 audit provides the acquisition prices and debts of the acquired physician practices. The purchases ranged from $50,000 to $113,000 per practice for Blue Mountain Urology, Waynesville Family Practice and Haywood Surgical Associates.

All these practices became part of the nonprofit Western Carolina Physician Network — a company that will be part of the WestCare component of MedWest once the sale to Duke LifePoint is finalized.

This audit also discusses the $10 million line of credit agreement with Carolinas HealthCare System in January 2012.

2012 audit

By September 2012, HRMC’s balance sheet declined even more. Debt increased by $7.7 million from the previous year, bringing the total indebtedness to $16.5 million. Funding was secured through the $10 million line of credit from Carolinas HealthCare System, the terms of which are listed in the audit, and $1.2 million from a bank revolving loan of $2.5 million to purchase equipment and furniture for the Homestead hospice center and outpatient care center.

Operating revenues increased 6.6 percent, primarily from physician practice acquisitions, but operating expenses increased 14.2 percent, with employee compensation up 11.3 percent, again primarily from physician practice acquisitions.

Overall, employee compensation for hospital operations declined, however. This led to a $12.3 million operating loss for the year, a result of physician practice activity and a slow, gradual approach to expense reductions, the audit states.

This dropped the operating margin from a negative 4.7 percent in 2011 to a negative 12.1 percent in 2012. The operating cash flow went from less than 1 percent in 2011 to a negative 4.9 percent in 2012.

“Actions throughout 2012 were aimed at reducing operating expenses while attempting to increase volumes,” the audit sates. “Most notably, work force reductions over the course of many months were not large enough or quick enough to produce the desired financial results."

Hospital leaders subsequently reduced the labor force and designed a plan to bring employee compensation directly in line with volumes and revenues.

The audit again forecasted a gloomy outlook for healthcare that included lower reimbursement levels, a soft economy and the continued uncertainty of healthcare reform, including an impending “pay for performance” criteria that would penalize hospitals for re-admitting patients for the same conditions and hospital acquired conditions.

A Supreme Court ruling that states did not have to expand Medicaid eligibility requirements was also cited as a negative for the hospital, as there would be no reimbursement for this group of uninsured individuals.

During 2012, $2.2 million in subsidies were provided to Medicare and Medicaid patients, $1.1 million was provided in discounted care and $6.9 million in uncompensated care to was provided to patients.

Community benefit programs totaled about $11.2 million in 2012, the audit stated, or about 10 percent of the hospital’s operating expenses.

No audit was available for the 2013 fiscal year, but a balance sheet for the period 6-2014 lists current assets at $29 million, which includes $2 million in cash, $13 million in accounts receivables, $2.4 million in third-party accounts receivables, $7.8 million due from affiliates, $953,000 in other accounts receivable, $1.3 million in inventories and $969,000 in prepaid expenses.

The property, plant and equipment value of $111.9 million, less accumulated depreciation of $84 million left a new of $27 million. With other assets added in, the total value of all was listed at $57 million.

Liabilities, however, including $15 million in accounts payable/salaries and nearly $9 million in long-term debt, place the total current liabilities at nearly $28 million, and total assets equal liabilities of $57.4 million.

The entire sales agreement, plus supporting documents, is available on the Haywood County website.

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