Sometimes, a positive cash flow doesn't signify the end of financial woes.
Despite Durham Regional Hospital's projected $1.5 million dollar profit for the upcoming fiscal year, up to $3 million worth of its programs could be cut in pursuit of a three percent operating margin, said Duke University Health System officials.
The announcement came June 23 on the heels of a joint meeting between Durham County commissioners, the Durham County Hospital Corporation and DUHS.
Newly appointed Durham Regional CEO Richard Liekweg said administrators do not yet know which programs might be axed. But he did offer a hint: "Certainly, those programs which we operate at a loss would be at the greatest risk.... It would be irresponsible on our part to think otherwise."
He offered the hospital's substance abuse treatment center, Oakleigh, as a good example of a program whose lackluster financial performance over the past two years is being evaluated. "It was never said that we wouldn't consider closing it, but that's not the focus of the analysis," he said.
DUHS officials maintain that they did not wish to be "bailed out" of any financial troubles by the county but simply wished to alleviate the budgetary strains of a hospital whose income was overstated and lease price was set too high.
"I think, coming out of the discussion today, that the county representatives made it pretty clear that they had their own concerns and point of view and we had a different point of view," said DUHS Executive Vice President Bill Donelan June 23.
The meeting, more specifically called a "meet and confer," is a provision of the lease agreement that presents the involved parties with an opportunity to discuss impending issues arising under the lease agreement. DUHS initiated this provision May 31 with the intent of discussing the financial performance of Durham Regional.
"This was one avenue and the most direct and appropriate one-to have direct discussion about the problems," said Donelan.
But direct discussion has done little to clarify the situation-two years after its merger with DUHS, Durham Regional's financial woes remain clouded by confusion and conflicting explanations.
While Durham County currently receives $7.1 million annually for Durham Regional under the 20-year lease agreement, DUHS officials claim the hospital was overvalued by a faulty audit when the lease agreement was negotiated.
They contend that an accounting glitch caused the hospital to overestimate the revenue it received from its contracts with insurance providers.
As a result, DUHS officials maintain that the lease payments are twice as high as they should be, as was determined by a different, external audit performed in the 1999 fiscal year. Durham Regional's auditor stands by its numbers.
"In the business discussion we simply had a mistake made through nobody's bad intent... and it had a consequence in the setting of the lease price," said Donelan. "This is a problem that can be remedied."
DUHS officials say they initiated the "meet and confer" with the intent of doing just that.
"Immediate action by the county would have provided additional time to repair and reposition the hospital in light of the rapidly changing healthcare industry environment, including the provision of the hospital and health care for indigents and underinsured citizens of Durham County," wrote DCHC Board Chair Charles Blackmon in a June 23 statement.
But the county commissioners disagree with this assessment and expect to continue receiving the previously agreed-upon lease payments without any cuts in the hospital's indigent care.
"The county attorney informed the Duke representative that we don't have the ability to renegotiate the deal," explained County Commissioner Ellen Reckhow. "If we were to renegotiate we would need to reopen the bidding process."
Reckhow acknowledged that many hospitals across the Carolinas and throughout the nation are suffering losses.
However, having seen the hospital's new budget and noted its positive cash flow, she believes that DUHS should allow the situation to stabilize.
"All I can say is that I hope they will be patient and judicious with any cuts," she said.
Reckhow also pointed out that since PricewaterhouseCoopers, the accounting firm that prepared the initial financial documents for Durham Regional, continues to stand by its audit, DUHS should take issue with the firm, not the county.
"If the audit was not correct they should sue the firm," said Reckhow, adding that "reams of financial data were sent to [DUHS] auditors and law firms.... We feel that they knew what they were getting into."
The hospital posted a $14.5 million loss for the fiscal year that ended this June. The $16 million upward swing was achieved partly by cutting expenses and improving the collection of revenues, and partly by moving $9 million in revenue that would have otherwise been at Duke to Durham Regional.
Liekweg reiterated that the hospital administration is not currently pursuing any further cuts.
"We will continue to look for ways to improve our bottom line, as a projected $1.5 million operating margin is thin and will not provide the necessary funds to reinvest into our programs," Liekweg wrote in an e-mail, adding that most hospitals strive for a three percent operating margin.
Durham Regional's current operating margin is about 1 percent.
Greg Pessin contributed to this story.
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