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The return to profitability comes as Carilion Clinic slowly emerges from the recession’s effects on health care.
The Roanoke Times
Tuesday, April 16, 2013
For the first time since 2007, Carilion Clinic turned a profit in the most recently completed fiscal year.
The Roanoke-based health care organization saw operating income of $13.4 million in the 2012 fiscal year, which ended Sept. 30, according to its latest audited financial report.
In the previous fiscal year, Carilion lost $6.2 million.
The return to profitability comes as Carilion slowly emerges from the recession’s effects on health care, which coincided with an earlier-formed plan to pump millions into a new clinic model and other capital expenses.
As the region’s largest private employer, Carilion did not significantly cut back on employment or health care services during the lean years since 2007, a period in which its net assets declined dramatically.
In fact, it did the opposite, and officials hope the new clinic model and other growth initiatives will pave the way for more years in the black.
“We’re pleased with the success we’ve had in executing our plan and returning to profitability,” said Don Halliwill, Carilion’s chief financial officer.
“But we also know that challenges will continue to arise as we move forward,” Halliwill added, an acknowledgement of the changing landscape of health care brought on by the new federal health care law and other attempts at reform.
Carilion shared its latest financial numbers, which were reviewed by the auditing firm of Deloitte & Touche, with The Roanoke Times.
The results were of interest not just to health care insiders, but to a larger community that relies on Carilion as both a provider of medical treatment and an economic force that generates more than 11,000 jobs.
“You want the largest employer in the region to be healthy,” said Beth Doughty, executive director of the Roanoke Regional Partnership.
Carilion — which as a nonprofit organization will return the $13.4 million it made last year back into its operations — reported total revenues of $1.3 billion in the most recent fiscal year. That’s up 9 percent from the previous year.
Patient admissions increased by 2.5 percent during the past fiscal year, and visits to the emergency department were up by 4.4 percent at the health system’s eight hospitals across Southwest Virginia.
At the same time, Carilion saw a large increase in premium revenue related to its Medicare Advantage insurance program and a Medicaid managed care plan.
As part of its nonprofit mission, Carilion is responsible for providing charity care to those who can’t afford medical treatment.
The estimated cost of providing charity care in the 2012 fiscal year was $67 million, a 9 percent increase from the year before, according to the financial statement.
Steady increases in charity care, as well as rising levels of bad debt, were recurring symptoms of a bad economy that has finally turned somewhat in Carilion’s favor — a least in the form of returns on its stock portfolio.
Investment income went from a $56 million loss in 2011 to a gain of $61 million in 2012, the latest figures show.
Despite the recent turnaround in profits, Carilion has yet to see a corresponding increase in its overall worth.
Net assets, which took a hit in the years that Carilion was not profitable, were $285 million last year, down from $320 million the year before.
Before the economic downturn, the nonprofit’s net assets were as high as $946 million — meaning there has been a 70 percent decline since 2007.
At times, Carilion has been forced to dip into its net assets to make up for losses in operating income.
But Don Lorton, who recently retired as Carilion’s chief financial officer, said the “No. 1 culprit” behind the decline in net assets was the impact on Carilion’s pension plan of lower interest rates that have lingered since the recession.
With interest rates remaining low, Carilion was forced to revise its pension plan obligations upward to the tune of another $350 million in additional liability.
Despite that adjustment, there have been no changes to pension benefits.
“The fund is just as sound as it’s ever been,” Lorton said.
Had it not been for the adjustment for pension obligations, Carilion would have posted a net gain in assets in the 2012 fiscal year, Lorton said.
For several years now, number crunchers for the health care system have been predicting that it would see a profit beginning in the 2012 fiscal year.
Part of that was based on the expectation that it would take several years for the system’s new clinic model — which offers multi-specialty physician services as opposed to just running a chain of hospitals — to ramp up after bringing new doctors on board.
“They come in and set up a practice and build their patient base, and that may take a year or two until the volume reaches the expected level,” Halliwill said.
Converting to the clinic model has involved hiring new doctors, purchasing other health care practices and various construction projects to support the system’s growth, including new buildings in Carilion’s Riverside Center medical complex.
Carilion also has spent about $100 million on a new electronic medical records system over the past decade.
Had the system known in advance that a recession was looming, officials said, it might have held off on some of the high-dollar projects.
“It would be fair to say that if we had had a crystal ball to see how bad things were going to be,” the timing might have been different, Lorton said.
But in the end, he added, “it was the right decision.”
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