Southampton Hospital Gives A Preview Of Its Financial Outlook

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For Southampton Hospital, 2013 was an ideal year to highlight the paradox of hospital finances in a changing industry, according to preliminary end-of-year budget numbers.

“I don’t really know how to describe last year,” deadpanned Robert Chaloner, the hospital’s president and CEO, last week in his office, discussing the past year’s unaudited final numbers, which are being prepared for the hospital’s board of directors to review in March.

On one hand, the hospital’s operating budget, which is defined as reimbursements for care provided versus the actual cost of providing that care, posted a $6.5 million deficit last year. Operationally, the hospital strives to break even every year but as recently as 2011 had been doing just that. In 2012, the operational budget had a $2 million deficit.

“Operationally, last year was the worst we’ve had in five years,” Mr. Chaloner summed up.

On the other hand, the hospital finished 2013 with an overall surplus of $9 million, “finishing further in the black than we have since pre-1990s years,” according to the hospital’s CFO, Christopher J. Schultheis.

“It may be the best position the hospital has ever been in,” Mr. Chaloner added.

So, with the loss in revenue, how did the hospital finish $9 million in the black? Sound investments and a diversified portfolio, said Mr. Schultheis, without providing specifics. There was, in addition, the sale of a $3.7 million property on Main Street in Southampton Village, previously used as a thrift shop, and a strong year of philanthropic giving to the hospital.

Mr. Schultheis said the stock market did so well for the hospital in 2013 that deficits in its pension fund dropped by about $8 million, despite only about $1 million of new contributions being made.

“The balance sheet looks much better than last year—better than it has in a long, long time,” he said.

Because the numbers remain unaudited, they declined to provide overall budget figures for 2013, but the hospital’s overall expenditures for 2012 were approximately $119 million.

In trying to break down the hospital’s 2013 operational budget, and what caused the precipitous drop from the previous year, Mr. Schultheis said outpatient revenue soared $10 million from last year, even as inpatient revenues fell by $2 million.

Changes in both figures are partly a function of a new Medicare billing category called an “observational visit,” according to the hospital executives.

Before 2013, if a patient came to the emergency room with chest pains or another acute condition that would require monitoring, the hospital would check the person in, conduct inpatient tests and observe the patient over a period of time, often overnight. Regardless of the length of stay, whether overnight or a matter of hours, it would be billed to Medicare as a one-night inpatient stay.

But Medicare now considers this stay “observational,” and pays the hospital only for the treatments and tests, not the hospital stay.

And the financial implications of the change are significant—about $4,000 less for each observational stay. With the hospital billing Medicare for 1,000 observational stays last year, $4 million was taken off the top of the operational budget without any relief in costs for the care provided.

In fact, the hospital had a higher number of patients overall in 2013, but lower reimbursement from Medicare.

“This is the year that health reform really kicked in for us,” said Mr. Chaloner, stressing that all numbers under discussion had not yet been audited and will not be official until they are presented to the hospital’s board of directors on March 1. “We knew the change was coming. But it came faster, in some ways, than expected.”

Mr. Chaloner also noted that the numbers represent only what goes on under the hospital roof and do not include any revenues from the Meetinghouse Lane satellite offices or the Southampton Hospital Foundation, which are kept separate.

Further adding to the operational deficit, Mr. Schultheis said, $4.5 million will be written off as “no-pay” services, from patients who either didn’t have insurance but were treated or from claims that insurance companies have refused to pay. Mr. Schultheis said the federal government reimburses the hospital for a fraction of these expenses, “but only a small fraction.”

Overall, the hospital executives expressed confidence going forward, saying that the fact that they shouldered the brunt of the “observational” switch and still came out ahead should bode well as it moves into the new world of health care reform. That new world will place an emphasis on outpatient treatments and preventive care.

“After this year’s numbers, we know we’ll have the resources to carry us through future reforms,” Mr. Chaloner said. “It’s really where the hospital should be going anyway.”

Mr. Chaloner added that the hospital, despite making up for the operational deficit this year in other ways, was taking “significant steps to close [the deficit] back up.” The methods include seeking new sources of revenue, a continued growth in outpatient care, and intense scrutiny in terms of replacing or adding staff.

Mr. Chaloner was adamant that the deficit would be closed without any layoffs. Further, he said that the commitment to quality care was paramount. He said the board of directors has mandated that any measures taken to reduce the deficit must not hurt currently rising patient satisfaction and clinical ratings, which topped the national average this year.

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