Auditor reveals: Hospital's main problem isn't with collections | Eastern North Carolina Now

    According to Hood Richardson at Thursday's Beaufort County Board of Commissioners meeting, the Beaufort Regional Health Systems finance committee, of which he is a member, instructed the hospital's auditing firm, Larson Allen, to clean up both known, and unknown, longtime problems in the accounting books.

    "We wanted the public to know what had been going on in the past," said Richardson. "And you're going to see today that there was a trail that has gone on over the last several years that brought us to where we are."

    Larson Allen representative, Steve Stang, was at the commissioner meeting, to present the hospital's 2010 audit for the second time this week. His company reviewed 2008, 2009 and 2010 financial statements. He gave his first audit report to the hospital board on Tuesday.

Larson Allen representative Steve Stang delivers Beaufort Regional Health System's 2010 audit report at Thursday's Beaufort County Board of Commissioners meeting.

    The trend Larson Allen identified, according to Stang, was a continual decrease in operating income since 2008. The loss from operations, essentially revenues less operating expenses, increased exponentially over the past three years. The hospital posted about a $300,000 profit in 2008, to a $2.5 million loss in 2009, to a staggering $11.5 million loss in 2010.

    A portion of the $11.5 million loss in 2010 can be attributed to management's $4 million write-off of doubtful receivables. These uncollected monies have been pooling since, at least, 2008, said Stang.

    "There were just a lot of receivables that just were not being collected--a little over $4 million," he said. "We didn't go back earlier than 2008, but I feel confident that you'd see the same thing in many years past."

    Even so, $4 million is only a fraction of 2010's total loss from operations. Stang emphasized that, even without the $4 million write-off, the hospital would still be facing a $7.5 million operating loss.

    Typically, an increase in operating expenses should result in a similar increase in revenues. In 2010, however, operating expenses increased, while revenues decreased. Net patient service revenue declined to $67.5 million in 2010 from $73 million in 2009. Total expenses increased to $80 million in 2010 from $78 million in 2009. Though Stang is an admitted personal proponent of revenue-driven economics, he acknowledged that such an imbalance could hint at a need for cost-cutting.

    "At a very high level, I shared with the hospital board that that could indicate there's opportunities for cost savings," he said.

    Nevertheless, Stang said that cuts would only temporarily increase profits, and he went on to paint a scenario that would call for, in his "personal opinion," a further increase in operating expenses. He said that if the economy improves and revenues don't (which, in this reporter's opinion, is unlikely), BRHS would have to meet its employees' changing pay expectations, resulting in an even greater loss from operations.

    Stang said that the primary focus should be on revenue growth. If an improved economy wouldn't provide a stronger revenue base, it is unclear how a community hospital, or any hospital for that matter, would ever survive without welfare assistance.

    One definite hindrance to increasing revenues is the chronic lack of liquidity enjoyed by BRHS. Most community hospitals, according to Stang, aim to have 90 days cash-on-hand (cash, less expenses, per day)--enough to use as leverage for borrowing money to invest in new information systems and other improvements. For the past three years, at least, Beaufort County has been dangerously illiquid, with eight days cash-on-hand in 2008, seven days in 2009, and only five days in 2010.

    "I think that's critical, as you're looking forward. Because, again, with the cash portion, how are you going to be able to afford to replace assets as they continue to age out?" posed Stang.

    And BRHS's assets are certainly aging out faster than they can be replaced. According to the audit, the value of capital assets, the hospital's property and equipment, fell to $28.2 million in 2010 from $31.8 million in 2009. The reduced 2010 value surprisingly still includes the $4.8 million of land and medical office buildings, plus depreciation, sold to the county in Sept. 2010. Larson Allen decided, for accounting purposes, to treat said transaction as a loan. The 2010 valuation also includes $900,000 of new assets purchased by BRHS that year.

    The one major financial indicator that isn't completely apocalyptic might be BRHS's long-term debt position. Even though the figure increased to around $20 million in 2010 from $18 million in 2009, the biggest piece of the increase in debt, according to Stang, was a result of the decision to treat the land sale as a loan, which added that $4.8 million to the books. Some of the proceeds from the land sale were used to pay down the debt, as well.