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Porter Medical Center is 'profitable,' but difficult financial decisions loom

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Posted on March 24, 2016 |
By John Flowers



Purter cushion with labels.jpg
The red line shows how dollars spent on capital expenses declined then rebounded. The blue line shows how Porter has grown by the number of days it could run with cash on hand from 39.7 four years ago to over 80 days this year.

MIDDLEBURY — Less than a week before it convenes its annual meeting on March 30, Porter Medical Center has pushed the proverbial reset button on its top executive position and on a new compensation plan for providers. PMC officials are also searching for more stability in the institution’s operating budget, which each year is thrown a financial life preserver through a federal drug subsidy program.

At issue is the 340B Drug Pricing Program, which requires drug manufacturers to provide outpatient drugs to eligible health care organizations at significantly reduced prices.

The program, funded by large pharmacy companies, has netted PMC around $3 million annually from 2013 to 2015, according to Steve Ciampa, Porter’s chief financial officer.

But unlike most hospitals in Vermont and New England, PMC has elected not to reflect 340B revenues within its operating budget. Some have argued that in doing this, PMC officials have been portraying a bleaker financial picture in order to justify recent austerity measures that have included the elimination of 17 positions, mostly nurses.

A review of the financials shows that Porter had a cumulative “operating margin” deficit of $10.8 million for the four years 2012 through 2015. The cumulative “total margin” for the same time period — when the 340B funds were included — was a $3.7 million surplus, which averages $936,000 per year “profit” for these four years. While that may sound like a large profit margin to some, for a hospital with gross revenues of over $80 million, it is below acceptable norms if the institution expects to reinvest in its equipment, software and aging facilities.

Porter administrators say PMC has maintained the same accounting practice for 340B funding since it qualified for the program in 2012, but a different emphasis has been placed on how that margin is being perceived as of the past several months.

“Consistently, from the inception, Porter has reported and budgeted 340B revenue as non-operating income,” Ciampa said. “It is in our budget, but it is considered non-operating income because it’s not considered core to the primary service offerings of Porter Hospital.”

Ciampa acknowledged hearing from industry colleagues that PMC “is in the minority” of hospitals that don’t reflect 340B funds in their operating budgets. But he qualified that by saying, “For most critical access hospitals, they have not optimized this opportunity the way Porter has. So the dollars are nowhere near as significant, which makes the decision less material for those other organizations.”

PROFITABLE, BUT CHALLENGES AHEAD

While the 340B funding has been pivotal in helping PMC remain profitable, Ciampa identified some crucial financial hurdles that the organization will have to overcome in the near future.

“In short, there must be enough total margin produced to meet all of the following key financial requirements: Appropriate level of capital reinvestment, annual required debt service payments, pension funding, and continued growth in days cash on hand.

“Days cash on hand,” Ciampa explained, is a nationally recognized metric used to determine the number of days that an organization could continue to pay its current operating expenses without the ability to generate additional revenue. Because Porter currently has approximately $13 million in outstanding bond debt (used to fund major building additions more than a decade ago), the organization has a covenant with its bond holders to ensure that its days cash on hand is maintained at a minimum of 55. Porter had only 40 days of cash on hand in 2012, a figure that has now grown to around 77 days.

“This growth can only be partially credited to the total margins that were generated in those years,” Ciampa said of PMC growth in days of cash on hand. “A major part of the growth in days cash on hand came because of suppressed and deferred capital reinvestment.”

Based on the overall age of equipment and its physical plant, Porter’s rate of capital reinvestment in equipment replacements and building renovations/improvements should have been approximately $3.5 million in each of fiscal years 2013 and 2014, officials said. Instead, Porter spent only $1.9 million in 2013 and $1.4 million in 2014, according to Ciampa.

“It is important to note that this strategy is not considered sustainable, whereas all buildings and equipment do routinely age and ultimately require replacement,” he said.

During fiscal year 2015, Porter generated a total positive margin of $2.2 million and reinvested $3.1 million in capital expenditures. This resulted in PMC’s number of days cash on hand to grow only by roughly three days to about 80, according to Ciampa. A more acceptable rate of annual growth in days cash on hand would be a minimum of at least five days per year, he said.

Looking at the industry as a whole, Ciampa said the financial services company Standard & Poor’s suggests that critical access hospitals with publicly funded debt that have the lowest possible bond rating of BBB- should still have a median days cash on hand of about 127.

“Also noteworthy is that per Green Mountain Care Board records, Porter is among the lowest hospitals in Vermont for days cash on hand,” Ciampa said.

Meanwhile, Porter will need to spend roughly $2.5 million annually during next three years for what might be considered “routine equipment replacements and ordinary building improvements,” according to Ciampa.

A recent assessment by the architectural firm Lavallee Brensinger identified that the medical office building at the rear of the campus requires approximately $2 million in repairs and infrastructure within the next two years.

“Further, the timing is appropriate for Porter to consider a substantial upgrade to its electronic health records system, which is now four years old, and which will likely cost approximately $3 million,” Ciampa said. “On average, total capital spending needs for the next three years should be more like $4 million per year.”

That medical records system cost $7 million, for which PMC has been reimbursed $4.1 million.

Then there’s the hospital’s pension system.

Porter’s pension liability stems back to 2007, the year in which Porter froze its Defined Benefit plan, according to Ciampa. The plan has been, and continues to be, underfunded.

“However, the level of underfunding has worsened in recent years,” Ciampa noted. “The liability changes annually based primarily on three components — market performance of pension assets, changes in interest rates, and contributions made by Porter. The audited financial statements show an outstanding liability of $6.5 million… If Porter wanted to simply pay off this liability today, the actual liability in present value dollars is more like $8 million. In working with our pension consultants and actuaries, we have estimated that this liability could be eliminated in seven years if Porter were able to provide $1 million in annual contributions above and beyond the minimum annual funding requirements.”

CHALLENGING FINANCES

So here is the sobering financial equation that Porter will have to solve in order to get back on firm financial footing, according to PMC officials: With annual financial requirements such as appropriate capital reinvestment of approximately $4 million; annual debt service of approximately $1.3 million; and days cash on hand growth of at least five, which translates to approximately $1.1 million, Porter’s total margin target should be more in the neighborhood of about $3.5 million. And that figure still does not help to address the underfunded pension issue, according to Ciampa.

“This represents a gap versus our most recent margins of about $2 million,” Ciampa said. “Through five months of fiscal year 2016, Porter’s total margin is currently a very modest $79,000, thereby making the gap in the current year more like $3.5 million.”

Bottom line: Porter needs to identify a minimum of $3 million in sustainable annual financial improvement in order to meet all of its financial obligations and to properly reinvest in itself to ensure its long-term sustainability, according to Ciampa.

A review of the financial performance among the services provided by Porter Medical Center shows that the portfolio of physician practices generated an aggregate loss (“investment”) of $7.3 million during fiscal year 2015. The Medical Group Management Association — which provides guidelines for both privately owned and fully integrated medical practices — suggest that a more reasonable investment should be approximately $4.5 million for those same practices, Ciampa said.

“This gap of approximately $2.8 million is the reason that Porter’s administration has been so focused on trying to improve the economics of its medical practice portfolio,” Ciampa said, referring to changes in the providers’ contracts and realignment of nursing personnel.

“To put this in everyday terms, this is like the average family trying to pay their routine monthly bills, keep up with their mortgage and care loans, make payments significantly higher than their minimum credit card payment, being able to afford the replacement of key appliances and some major home repairs, while trying to build their savings at the same time,” he added. “In keeping with this analogy, Porter’s margin currently is only satisfying routine expenditures, monthly debt payments and some key equipment replacement.”

Patrick Norton, treasurer of the PMC Executive Board, said he and his colleagues are taking PMC’s challenges very seriously.

“We have 2.2 months of reserves; that’s it,” Norton said. “In 2012, it was 1.1 months. We have made some progress, but at the end of the day, 2.2 months for an institution that has been around for 90-plus years is probably not a strong balance sheet. That’s the takeaway for me.”

He acknowledged that Porter, through the years, “probably should have been a little more explicit on how 340B (funds) were treated.”

Norton agreed that board members share a sense of urgency in getting Porter’s financial house in order. That will include negotiating a new compensation schedule with PMC’s approximately 75 medical staff providers. Like at most other hospitals in Vermont and around the country, compensation will increasingly be predicated on performance and patient outcomes, he said.

Porter administrators acknowledged they tried to roll out the providers’ contracts too quickly under former CEO Lynn Boggs, and have agreed to work with providers on a more collaborative basis to devise an acceptable contract for all parties.

HOW PORTER COMPARES

Al Gobeille is chairman of the Green Mountain Care Board (GMCB), which among other things regulates health insurance rates, hospital budgets and major hospital expenditures. He cited the University of Vermont Medical Center as an example of a Vermont hospital that has “for a long time now” been paying its physicians according to a formula that reflects salary and bonuses based on productivity.

“Very candidly, what is happening at Porter right now is that literally, ‘Change is hard,’” Gobeille said. “Whenever you take an entire workforce and change the way they’re paid, you had better do that with an incredible amount of skill, or you can end up with a lot of animosity.”

Gobeille is very familiar with PMC’s budget and how it reflects 340B funds. He noted the GMCB two years ago began trying to get hospitals on the same page in accounting for 340B funds. It wasn’t as simple a request as the board thought it might be.

“The problem is, (the hospitals) all have different auditors who are telling them to do different things for different particular reasons,” Gobeille said. “I would prefer that all hospitals do it the same way,” Gobeille added. “That makes it easier for me. But there is a lot that goes into (deciding) what is operating revenue … ”

Gobeille acknowledged the vulnerability of 340B funds as one of the financial chips that are negotiated in Congress.

“If I was on the Porter Hospital board, I’d be concerned that 340B was a big part of our equation,” Gobeille said. “If I was running a hospital, I would start thinking, ‘What would happen if (340B funding) went away?’ Or what if it was cut in half, or by 25 percent? Being dependent on one revenue source that is completely based on federal policy is not necessarily sustainable.” Big pharmaceutical lobby firms are constantly attacking the 340B funding and trying to get it eliminated so their clients can make still higher profits.

Kirsten Hartman, communications director for U.S. Rep. Peter Welch, D-Vt., gave this appraisal of the current status of the 340B program: “We’re hopeful that the 340B program will not be cut. Congressman Welch will be fighting hard to make sure those going after the program are not successful.”

Alice Leo, president of Porter Federation of Nurses and Health Professionals, the union at PMC, said in an emailed reply to the Independent, that she sees no indication that 340B funding is at risk, and that Porter needs to earmark more resources for primary care, prevention and early detection of health issues.

“Morale among nurses has been at an all-time low,” she said of the effects of recent layoffs and cost cutting since this past October, but without reflecting on the recent change in administration.

The Independent has sought communication with PMC providers to get their take on the impending change in compensation and the organization’s financial health, but few were willing to speak publicly of contracts that were back on the board for consideration.

PMC spokesman Ron Hallman noted that while employees are asked to sign a longstanding “code of conduct” that reflects an expectation of “moral and ethical standards … everyone has a right to free speech. Our hope is that if people have concerns, they would exhaust all internal vehicles for resolving them and that speaking publicly would be a last resort.”

That said, interim CEO Fred Kniffin, MD, noted the trend lines looked positive for Porter and he was “optimistic” that the board and administration would be able to devise a providers’ contract “that everyone would be happy with and that would work to Porter’s benefit as well.”

“Everyone knows we need to make changes, and most are eager to do that,” Kniffin said in a Monday interview. “We know we have to move forward.”

On the issue of employee morale, Kniffin was equally upbeat: “I think it will bounce back … We’ve made some big steps recently and I’m committed to listening to the nurses and doctors and collectively coming up with a win-win scenario for all of us. I may be naive, but I’m optimistic we can get it done.”

Reporter John Flowers is at [email protected]

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