Editorial: Porter’s golden goose; plus how a $11 million deficit can yield a $3.7 million surplus

Ask the average bloke on the street what they know about Porter Hospital’s finances and chances are they would say Porter is close to failing and they heard something about the hospital losing $11 million in the past four years. “Wowza,” they might add. “How can the hospital stay open with that much red ink? Better cut expenses and fast!”
That was precisely the effect former Porter CEO Lynn Boggs and her team had hoped to achieve. They needed to change the public understanding of the hospital’s financial status if they were to make significant changes in their operating procedures. What they didn’t want was the public questioning the need to make such drastic changes if Porter was, in fact, profitable and doing OK — which had been the story for much of the past 30 years.
From the administration’s perspective the strategy made sense, but it also distorted much of the story. Omitted from the statewide headlines declaring Porter’s financial woes, was this: Porter posted a $3.7 million surplus, averaging $936,000 per year “positive margin” over the past four years.  But how can Porter post that much of a surplus, and still have its former CEO claim $11 million in losses? Well, that’s part of the story that’s a bit irksome.
In today’s front-page story, we clarify that apparent contradiction —which Porter officials willingly told anyone who asked, and theIndependentdid report it correctly weeks ago without exaggerating the deficit, though most state news outlets did not — and go on to explain some of the more important financial challenges that Porter faces. Like all things in the medical industry, it’s complicated and detailed. But, from 30,000 feet, here’s the big-picture view of Porter Medical Center’s financial status:
• PMC is financially profitable. Over the past four years, it posted a $3.7 million positive balance. Its operating budget was roughly $11 million in the red, but that is not accounting for more than $12 million in 340B money (see story) that helped create the surplus. Most hospitals in the state count the 340B funds in their operating budgets, so it’s unusual that Porter does not, but Porter never has since the program went into effect in 2012. What’s different this year is management chose to make a big deal of its operating deficit, even though there was a corresponding surplus that more than made up for the shortfall.
• Even though a positive margin of $936,000 annually seems flush, it is not. To be financially secure and grow as a medical institution, Porter needs an annual positive margin of about $3.5 to $4 million. That would allow Porter to reinvest in capital expenses, software updates and medical equipment; fully fund its pension; build a Daily Cash On Hand balance of 127 days rather than the current 77; as well as other strategic goals. Our story explains those needs.
• The financial trend for Porter is on the upswing, and has been for the past two years. As the chart on Page 2A shows, the fiscal decline from 2012 to 2014 shows Porter at its lowest with just 1.1 months of Daily Cash On Hand. Since 2014, it has improved significantly to almost 80 days cash on hand. Similarly, while the annual average positive margin for Porter has been $936,000 over the past four years, in fiscal year 2015 Porter posted a $2.2 million positive margin and reinvested $3.1 million in capital expenditures. That’s a very positive trend.
• While Porter’s physician practices will need belt-tightening, the practices are key to Porter’s prosperity. Much of the belt-tightening happened with the cuts of 17 nurses earlier this year. Changes in the physicians’ contracts will also help address current shortfalls. Specifically, Porter’s practices are running at an annual shortfall (or investment) of about $7.3 million, compared to what consultants say should be roughly $4.5 million in operating expense. That gap of $2.8 million is one of the reasons Porter’s management team targeted changes within those practices.
While it is a worthy goal to close the gap, it’s important to note the distinction between a “$7.3 million shortfall” and a “$7.3 million investment.” Which is it? Both. That is, while the provider practices are running a collective deficit of that amount (the shortfall), the practices also provide the bulk of the referrals to the hospital (the investment). In a business sense, the providers are the primary sales force for the hospital, though they are not compensated for the business they send. In a holistic sense, a business would not separate its sales force from its production department and suggest one creates a loss while the other segment is profitable. To be successful, one needs the other. So the very notion that these physician practices are creating losses is a misnomer; more to the point is to say Porter needs to improve its physician practices to be as cost-efficient as other comparable practices statewide.
None of these points are to suggest there are not critical issues to tackle at Porter. There are, but that is also true at most rural hospitals with 780 employees, annual gross revenue of about $82 million, and a shifting political landscape that messes with your funding sources. Nonetheless, it’s likely Porter can make the necessary changes to achieve the $2 million to $3 million additional surplus needed to put the hospital on a solid financial ground. The hospital’s finances, in other words, are weaker than they should be, but they are not in dire straights.
What was dire a week ago was the mutiny brewing within the medical community that could have sunk Porter’s ship. The heart and soul of Porter is its superior medical staff and excellent care provided by Porter’s nurses and support staff. That’s Porter’s golden goose.
Fortunately, interim CEO Fred Kniffin, MD, knows that having a good working relationship between the administration and medical personnel is critical, and addressing that is his immediate priority. With his medical background and support of the medical staff and board, we’re confident he will be able to rebuild that relationship, and then turn his focus to the changes that need to be made — at a pace that brings everyone along for the journey.
That’s good news for Porter, for Middlebury and for Addison County.
Angelo S. Lynn 

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