Novant Reports 2008 Financial Loss

Monday, April 20, 2009

CHARLOTTE / WINSTON-SALEM, NC – In the past, most economists believed that it took a year or so for a bad overall economy to adversely affect healthcare.  Some even referred to healthcare as “recession-proof.”  After all, people still get sick and injured and need hospitals and physicians to take care of them.  That line of thinking, though, is no longer valid, having been contradicted by current events.

Novant Health experienced a $187 million loss in 2008. The health system still produced a positive operating margin, but it was not enough to offset large investment losses that have plagued the entire country and world.

The organization earned $23 million in operating income but lost $210 million in investment income, producing a 2008 net income loss of $187 million. In contrast, the health system has a positive net income in 2007 of $205 million.

In 2008, Novant also recorded two, one-time adjustments: one to reduce the recorded goodwill for the acquisition of MedQuest in 2007; and the second for a loss on extinguishment of debt related to refinancing efforts. Both of those adjustments totaled $69 million.

"Like most organizations across the United States, we experienced the majority of the downturn during the last half of the year, especially September through December," explained Paul Wiles, president of Novant Health. "And we expect the poor economy that influenced last year's finances to continue in 2009 and possibly 2010.

"The capital markets' effect on our investments obviously impacted our overall financial performance," Wiles commented, "but we have three other annual goals of equal importance - one based on measuring the quality of our medical care, one on patient satisfaction, and one on employee satisfaction. We're proud of our staff's accomplishments last year in achieving national benchmark performance with these goals."

He also explained that four additional Novant hospitals achieved national nursing magnet status in 2008. The purpose of the Magnet program is to recognize healthcare organizations that provide the very best in nursing care. Novant Health also received the prestigious Ernest A. Codman Award in 2008 from The Joint Commission for improving systemwide the quality and safety of care provided to patients. The Codman award honored Novant staff for their successful efforts to improve hand hygiene compliance which resulted in a 53 percent reduction in hospital methicillin-resistent staphylococcus aureus (MRSA) infection rates across the healthcare system. "The reduction meant that 249 patients over a three-year period did not suffer the medical complications of MRSA," Wiles explained.

He also emphasized that Novant is proud of its outreach to the poor and uninsured. Novant facilities experienced a dramatic increase in the number of patients receiving free charity care through its financial assistance programs. Charity care increased 51 percent throughout Novant, which can be explained by two main factors: 1) increase in the number of uninsured patients; 2) the health system's decision in 2007 to further enhance its financial assistance programs.

"We expanded our financial assistance programs for uninsured patients," explained Wiles. "And now we're experiencing just how timely that decision has been for many of our patients and families." Novant improved its patient eligibility requirements for charity care from 200 percent of the federal poverty level to 300 percent. That improvement means that an additional group of patients began qualifying for charity care in 2008 who, prior to that change, may have struggled to pay their bill.

As a not-for-profit organization, Novant provides charity care and other financial assistance for uninsured patients who do not quality for government coverage in programs such as Medicare and Medicaid. In addition, Novant and its hospitals and clinics provide other community benefits such as community outreach, support of free clinics, uncompensated services for Medicaid recipients and other services. Last year, the health system provided a total of $267 million of community benefits and charity care.

From 2007 to 2008, Novant healthcare facilities still experienced increases in patient visits and services: emergency room visits increased 4 percent, outpatient cases 5 percent, surgeries 1 percent, inpatient days 2 percent, births 5 percent and physician clinic visits 8 percent. However, those increases were lower compared to 2006 to 2007, with the exception of births and maternity care which increased at a higher level in 2008.

Novant's employment grew 19 percent in 2008. The majority of that increase resulted from the continued growth of the Novant Medical Group, which consisted of 1,060 physicians and 6,300 clinic staff by year-end 2008.

"We're better prepared for this economic storm than many other organizations," commented Dean Swindle, chief financial officer of the health system, "We have a strong balance sheet. But adjusting to this downturn will still be challenging and at times painful. We already made the decision to not provide senior leaders with salary increases in 2009, which includes all department directors up through top management. We believe that step was the right thing to do based upon current conditions."

Swindle described several steps the health system is taking to adapt to the poor economy. All job openings are now being reviewed by senior management and each one will be carefully evaluated before the position is filled. "We're a large employer and we have approximately 300 to 400 openings a month, which means we are still hiring unlike other businesses that have been even more adversely affected by the worldwide downturn. However, our openings will now be more intensely scrutinized. This oversight is one of our best opportunities to adapt to a poor economy."

Novant Health recently re-structured its Salem Health Solutions division which provides data analysis and warehousing. The division scaled back from 22 to five jobs and made other changes that will save $3.2 million annually.

"These types of decisions are difficult but we try very hard to find staff other positions within the organization," Swindle explained. Of the 17 employees affected by the change, nine were able to accept jobs in other Novant departments, seven accepted severance and one was displaced.

Swindle commented that in addition to closely evaluating open job positions, the health system will continue to focus on supply and equipment expense management, and strategically prioritizing captial funding.

Novant plans to invest $1.5 billion in capital over the next five years. The health system is building three new community hospitals: Kernersville Medical Center; Brunswick Novant Medical Center, a replacement of Brunswick Community Hospital; and Presbyterian Hospital in Mint Hill. Presbyterian Hospital new downtown Charlotte is also undergoing a major construction project that involves a modernization and expansion of its main campus. The project will add a four-story additiona to the top of the existing cancer center that includes 90 new patient rooms, expansion of the emergency department, new operating rooms and other renovations. In addition, the Novant Medical Group is converting all of its physician clinics to a new paperless, electronic medical record system.

The health system has decided not to pursue a medical office building construction project in Charlotte based upon current economic conditions. Novant's part of the project on Hawthorne Lane included $37 million for construction of a parking deck, enclosed skywalk and a portion of the office building.

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Novant Health is a not-for-profit integrated group of hospitals and physician practices, caring for patients and communities in North Carolina, South Carolina and Virginia. The Novant Medical Group consists of 1,070 physicians in 361 practice locations. Hospital affiliates include Presbyterian Hospital, Presbyterian Orthopaedic Hospital, Presbyterian Hospital Matthews and Presbyterian Hospital Huntersville in the Charlotte area; Forsyth Medical Center and Medical Park Hospital in Winston-Salem; Thomasville Medical Center in Thomasville; Brunswick Community Hospital in Supply; and Rowan Regional Medical Center in Salisbury. Other Novant facilities and programs include nursing homes, outpatient surgery centers, medical plazas, rehabilitation programs, community health outreach programs and the national MedQuest organization with 103 diagnostic imaging centers in 13 states. Novant Health is ranked 12th nationally among the 2009 Top 100 Integrated Healthcare Networks, according to an analysis by the SDI health informatics company.

In 2008, Novant also recorded two one-time adjustments: one to reduce the recorded goodwill for the acquisition of MedQuest in 2007; and the second for a loss on extinguishment of debt related to refinancing efforts. Both of those adjustments totaled $69 million.