Saint Mary's working to balance its revenues, costs

Alarms started sounding in the executive suite and boardroom of Saint Mary's when the regional medical center posted an operating loss of $1.5 million in the third quarter of last year.

When the next quarter saw another loss $1.94 million, plunging Saint Mary's into the red by nearly $2 million for the year the alarms couldn't be ignored.

The losses, the first at Saint Mary's in a decade, continued into at the rate of nearly $1 million a month in the second quarter of this year.

Executives of Saint Mary's Health Network and its flagship hospital still are hammering out plans to return the nonprofit to financial stability.Almost certainly, layoffs among the system's 2,000 employees will be part of the equation, and they'll be announced this week.

Here, hospital executives say, is how Saint Mary's finds itself in a situation where it needs to reorganize itself to bring revenues and costs back into line: A decision by a major insurance carrier Aetna to move its health insurance group from Saint Mary's to Washoe Medical Center during 2003 took away a big chunk of business, says Donald Kowitz, senior vice president of Saint Mary's Health Network and chief operating officer of Saint Mary's Health Plans.

Hospitals in northern Nevada, Kowitz says, are particularly vulnerable to financial hits from the loss of a big customer.

Insurers typically sign on exclusively with only Washoe Medical or with a consortium composed of Saint Mary's and Northern Nevada Medical Center in Sparks.

This provides substantial price leverage for the insurers.

If they don't like the deal a hospital offers, they can walk.

Adding to the price pressure are comparisons with nearby markets such as Las Vegas and Southern California, where medical costs often are a bit lower than northern Nevada.

"Smaller markets just tend to be that way," Kowitz says.

Saint Mary's and other health-care institutions have felt the effects, too, of employer reductions in health-care coverage.

Most obviously, Kowitz says, higher deductibles to be paid by patients mean that hospitals face higher costs for collection and higher bad-debt expenses.

Rising levels of accounts receivable, in fact,were among the indicators that Saint Mary's needed to take dramatic action, says Art Faro, the interim chief executive officer who took over when Jeff Bills retired in May.

It doesn't help that the state government is exceptionally slow on paying Medicaid claims, says Faro.

More subtly, higher deductibles also mean that patients may delay elective surgeries further trimming hospitals' revenues.

"It's a confluence of events that got us where we are today,"Kowitz says.

The immediate solution, Kowitz says, is bringing revenues and expenses into line.

The longer-term answer is development of new revenue streams many of them from outpatient services.

He doesn't worry that that the health network is in long-term trouble.

Despite the losses, its balance sheet on March 31 showed $21.8 million in current liabilities against $63.1 million in current assets.

Still, Kowitz adds,"Any loss is important.We don't want to minimize it."

Salaries and benefits account for about 53 percent of the hospital's expenses, and staff cuts are likely to produce much of the savings Saint Mary's needs.

The health network last month launched a voluntary separation plan. About 167 employees are eligible; Saint Mary's will accept up to 40.

After the number of voluntary separations is known, executives will calculate the number of positions they need to eliminate.

The layoffs need to be planned and executed carefully, Kowitz says, to protect medical care and the reputation of the medical center.

"As difficult as it is to restore a financial situation, it pales in comparison with fixing a reputation problem," he says.

Operating revenues at Saint Mary's Quarter ended Profit/(loss) March 31, 2004 $1.4 million Dec.

31, 2003 ($1.94 million) Sept.

30, 2003 ($1.5 million) June 30, 2003 $413,320 March 30, 2003 $1.05 million Source: Filings with State Division of Health Care Financing & Policy Why not stop building? Even as Saint Mary's prepares to lay off workers,work continues on about $160 million in projects around the hospital's downtown campus.

Donald Kowitz, the hospital's senior vice president, is aware of the irony but he says the construction projects are necessary to protect Saint Mary's financial future.

"You can't ignore what needs to happen tomorrow," he says."You need to make those investments to provide the ultimate answers."

One of the projects, for instance, is a 211,000-square-foot, $20.3 million medical office building scheduled for completion in 2005.

Saint Mary's will occupy a portion of the building, providing services that will help offset the slump in inpatient revenues at the hospital.

Rent from other tenants is equally important, Kowitz says.

And even if the hospital diverted funds from the construction to keep workers on staff, the answer wouldn't address the long-term, Kowitz says.

"You can use capital money for salaries one time,"he says,"and then it's gone." JS