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MeritCare revenues fail to meet expenses

FARGO - MeritCare administrators have watched nervously over the past four years as technology costs have soared twice as rapidly as revenues that were slowed by lagging reimbursements.

"We said pretty soon these lines are going to cross and they crossed this year," said Dr. Roger Gilbertson, MeritCare's president and chief executive officer.

The final impetus for a $9.2 million budget-paring plan - in which 90 employees got the ax and 120 vacant positions were eliminated - was the threat that a sharp reduction in Medicare payments to doctors would slash $11 million from MeritCare's revenues.

That cut, averted last week by Congress, came as Blue Cross Blue Shield of North Dakota warned of a possible 2.5-percent cut that would trim another $2 million, according to MeritCare's estimate.

"This has been sort of waiting for the guillotine to come down," Gilbertson said before Congress acted to reverse the Medicare physician cut. When the funding was restored, MeritCare administrators said the layoffs and other reductions still must be carried through, and said they still are struggling with Medicare payments that are the lowest in the nation.

The cuts, announced June 26, prompted The Forum to review financial disclosures in lieu of tax returns the nonprofit health system filed with the Internal Revenue Service for its 2004 to 2007 budget years.

Lagging Medicare reimbursements and the possible cut from the Blues forced MeritCare to trim expenses and boost efficiencies to ensure the health system's long-term financial viability, Gilbertson said.

Another ill-timed financial complication: a sharp drop in investment income, which had cushioned MeritCare against lagging reimbursements until this year, when financial markets plunged.

Interest income on savings, for instance, jumped from almost $8.5 million in 2004 to $14.2 million in 2007, an increase of 67 percent. Investment returns remained healthy through last year.

"We depended more on it in 2006 and 2007 than in the past," said Lisa Carlson, MeritCare's chief financial officer. "In 2008, we can't. There isn't any."

The health system lost $3.3 million in its investment portfolio in June alone, Carlson added. "June was ugly."

Expenses rise, revenue margins drop

As a result of lagging reimbursements, MeritCare's financial disclosures reveal steadily declining financial performance over the past four years.

The combined revenue margins at MeritCare Hospital, its affiliated clinic and parent health system have fallen 26.5 percent in a recent four-year period, ending June 30, 2007.

The revenue margins of the three entities - MeritCare Health System, MeritCare Medical Group and MeritCare Hospital - together dropped from $22.3 million in 2004 to $16.4 million in reporting year 2007. Those are the most recent figures available in disclosures filed with the Internal Revenue Service.

More grim results: Revenue margins also are shrinking significantly at key MeritCare subsidiaries. MeritCare Health Enterprises, primarily pharmacy services, plummeted

60 percent during the four-year period, while F-M Ambulance Service experienced a decrease of 53.7 percent.

As with the hospital and clinic, lagging reimbursements from insurers and rising costs explain the decreasing revenue margins, Carlson said.

Those are among the trends that stand out in a financial portrait of the sprawling medical system from disclosures the nonprofit conglomerate reports to the Internal Revenue Service.

At MeritCare Hospital, the core of the health system, revenues from services grew 28.8 percent from 2004 to 2007 reporting years.

During the same period, total expenses at the hospital rose 30 percent. The rise was much sharper, however, for the "management and general" expense category, which spiked 67.4 percent during the four years.

That expense category includes everything not attributable to direct patient care, including many medical technology upgrades and capital expenditures. Among those expenditures is a recent $60 million north addition and renovation project.

The rise in expenses was softened by a similar rise in returns from investments, which generated income that rose 67 percent during the four-year period, the same rate as the expense category that includes new technology expenses.

Since the start of this year, however, investment revenues have fallen sharply, as financial markets have struggled from the housing slump and spreading credit crunch, Carlson said.

MeritCare Medical Group, the clinic, suffered a loss each year, deficits that grew over time and required huge bailouts from the hospital each year. The most profitable services had been clustered under the hospital to maximize reimbursement revenues, she said.

The clinic's losses ballooned from $6.1 million in 2004 to $19.7 million in 2007, requiring similar infusions of cash each year from MeritCare hospital. The problem, once again, is compounded by Medicare funding. Physician reimbursements have been flat for the past four years, Carlson said.

MeritCare not alone

MeritCare isn't the only health organization in the region to cut expenses.

While the other North Dakota health systems have avoided slashing jobs, MedCenter One in Bismarck eliminated some programs to absorb Medicare funding cuts in 2007.

SMDC Health System, based in Duluth, Minn., announced in April that it needs to reduce costs and its work force, said spokeswoman Kim Kaiser.

The system, similar to MeritCare in size and revenues, expects to cut 230 jobs over the course of several months, she said. Most of the reductions will come through attrition, but about 60 people will likely lose their jobs.

A slowing economy, fewer patients and lower reimbursements from government programs all played a role in the decision, Kaiser said.

"These are always very difficult decisions for the organization and the employees affected," she said. "But it's our priority to continue to provide quality patient care."

Until the pending reimbursement reductions forced the budget cuts, MeritCare administrators had planned to handle the cost-and-revenue squeeze with a "lean" restructuring plan to boost efficiency that has been in the works for two years, Gilbertson said.

Although bad debt continues to rise - to $27.3 million last year, up from $19.1 million in 2004 - MeritCare does not turn any patients away for inability to pay their bills, at the clinic or hospital, Carlson said.

"We have not restricted access in any way," she said. "We're not required to take on all comers, particularly in physician offices, but we do."

Expensive technology

Technology upgrades, including updated computer networks, an electronic patient records system and a digital image sharing network, improve service to patients but don't help the financial bottom line, Carlson added."These systems are so great for patient care but don't have a financial return," she said. The yearly operating cost for information technology in the new budget year, for example: $32 million.

In the future, MeritCare must exploit its technological investments to better weather the climate of rising costs and lagging reimbursements, she said. "We've not been able to manage more efficiency," she said.

That will require doing more with fewer people and reaping the benefits of automation and other forms of technology.

Personnel costs now comprise

64 percent of MeritCare's cost. Administrators aim to reduce that to 62 percent in the next 18 months, and to 61 percent in the long term. Last year, MeritCare Health System reported consolidated expenses of almost $710 million.

"Our stated goal is to have fewer people and pay them more," Carlson said.

Wayne Gadberry, a trucking firm executive and chairman of MeritCare's board, said the health system was forced to add staff as patient services demand has increased 8 percent to 10 percent a year in recent years.

Adjusting to growing patient demand while facing reimbursements that failed to keep pace with rising costs, MeritCare had no choice but to trim staff, Gadberry said. It was unable to predict the sluggish reimbursements.

The new strategic plan, which goes through 2012, will improve efficiency without compromising patient care, he said. The benefits haven't yet come to fruition, he said.

"We put a greater emphasis on quality," Gadberry added. "I can assure you that we will be monitoring quality."

Meanwhile, financial pressures remain. MeritCare's cash on hand as of May was $164 million. That's a large sum, equating to 83 days of expenses, short of the 100 days considered desirable - especially since Medicare halted physician payments for 10 days.

"We are being very conservative with our capital spending," MeritCare spokesman Darren Huber said.