Wednesday, March 18, 2009
Tough year at Carilion
The nonprofit shows a decline in net assets, mainly because the value of its investments decreased.
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The economic meltdown, physician shortages and capital expenditures related to a new electronic medical record system have led Carilion Clinic to post a $144.6 million decline in unrestricted net assets for the 2008 fiscal year.
The nonprofit reported $798.7 million in net assets for the fiscal year ended Sept. 30, 2008, nearing levels reported for the 2005 fiscal year when Carilion had $779 million in net assets.
The current net assets equate to nearly a 16 percent drop from the $946 million in net assets that Carilion had at the end of the 2007 fiscal year. It's also well below the $879.4 million Carilion reported for the 2006 fiscal year.
An investment loss totaling $102.7 million was the single largest contributing factor in the decrease, according to the audited financial report prepared by Deloitte & Touche and released by Carilion to The Roanoke Times.
After two years of significant investment gains boosting the health system's bottom line, the latest report sits in stark contrast. The loss nearly canceled out the $106.2 million investment gain Carilion saw for the 2007 fiscal year.
Because the fiscal year ended in September, the hit to Carilion's investment portfolio came before some of the more recent downturns on Wall Street, and Carilion's chief financial officer said the company is already experiencing continued losses in the current 2009 fiscal year.
"We continue to look at our portfolio to see if there is anything we can do to mitigate the risk," said Don Lorton, Carilion's treasurer and chief financial officer.
A decline in investments related to Carilion's pension fund also represented a significant loss of $20.98 million. That loss, while affecting the bottom line, is related to an accounting change that went into effect in 2007 and does not adversely impact any employee's pension, Lorton said.
While the vast majority of the decline in net assets is the result of investment losses, Carilion also experienced an operating loss for the first time since 2002.
Total unrestricted operating revenues grew 11 percent to $1.22 billion for the year. But increases in total operating expenses outpaced that growth, going up 13 percent to $1.24 billion.
As previously reported, Carilion posted a $20.2 million operating loss for the year ended Sept. 30, 2008. Carilion officials had said the decision to convert to a new electronic medical record-keeping system was a major factor in the operating loss. The new system equated to about an $11 million expense for 2008, Lorton said.
The new record system was "the single biggest item" contributing to the operating loss, he said.
But unlike the investment losses, the record system expense was something Carilion had counted on as it took steps to build an integrated clinic system for providing health care in Southwest Virginia. Carilion made the decision as it began its conversion from a traditional hospital system to a clinic.
Still, other factors also weighed on the health system's operations including a significant shortage of physicians in Carilion's regional rural hospitals outside Roanoke. Doctor shortages at Carilion New River Valley Medical Center, Carilion Franklin Memorial Hospital and Carilion Giles Memorial all required the company to step up recruitment efforts and in some cases pay premiums to temporarily fill voids.
For instance, Carilion paid some Roanoke physicians premiums to have them cover emergency room shortages at the other hospitals, Lorton said.
"It's an aggregate item that really added up," Lorton said of the shortages. He estimated the total financial impact to be between $5 million and $7 million.
Not only did Carilion have to pay top dollar to temporarily fill positions, but the hospitals also lost revenue because not as many patients could be seen. Shortages of psychiatrists and surgeons were particularly prevalent during 2008, Lorton said.
"I don't know where the patients go," Lorton said. "Unfortunately I think they often just go without."
Despite the decline in net assets, and the losses in investments and operating income, Lorton said Carilion has positioned itself well.
"We're still financially very sound," he said. "It's not as strong a balance sheet as we had a year ago, but in a world where nobody has a balance sheet they had a year ago, we're doing well."
That said, as the recession deepened through the winter months, with stock market indexes hitting record lows not seen since 1997, Carilion is already seeing losses in the 2009 fiscal year.
"We're not spending capital on anything that we can defer right now," Lorton said. "There is a lot of belt tightening going on."
