LMH finances take a turn for the worse as drug and labor costs mount; $3 million profit shifts to $4 million loss
photo by: Chris Conde
At the halfway point of 2018, Lawrence Memorial Hospital had posted an operating profit of $3.3 million. By the midpoint of this year, LMH had an operating loss of $4.2 million.
Yes, the hospital is a nonprofit business, but this type of performance isn’t what it expects. The hospital always seeks to have its revenues outpace its expenses so it can invest in new equipment and services — and ensure that it doesn’t have to get a subsidy from local governments, which is a common model in many Kansas communities.
LMH for more than a decade has been a consistent producer of such profits. It routinely has booked between $5 million and $15 million a year in profits that it reinvests back into the hospital.
Don’t expect those types of results in 2019. The hospital technically is profitable in the first half of the year, but that fact has more to do with financial markets than hospital operations. Interest earnings and the value of LMH’s investments grew significantly in the first half of the year. Those nonoperating revenues allowed LMH to eke out an approximately $55,000 profit through the first six months.
The downturn has the attention of hospital executives.
“It is enough that we have our whole organization thinking about how we can operate more efficiently,” Russ Johnson, president and CEO of LMH Health, told me recently. “I’m not anxious that the wheels are coming off, but we need to be thoughtful.”
The downturn comes at a time that LMH Health is making its biggest bet in recent memory — an approximately $100 million outpatient health building near Rock Chalk Park in northwest Lawrence. Construction is underway, and the building is expected to be open in the summer of 2020.
But here is an important thing to know about the building: Its construction costs aren’t yet showing up on LMH’s profit and loss sheet. The financial impacts of the building won’t start hitting LMH’s books until next year, Johnson told me. While the new building — which will house an outpatient surgery center, OrthoKansas and a variety of other providers — will add revenue to LMH, it also certainly will add costs.
It is important to get LMH’s finances back in order before the cost of that new building starts hitting LMH. That is one of the reasons LMH Health has decided to spend big money to hire a consultant to find ways to make the operation more efficient. Thus far, LMH has spent about $3.6 million on a consulting firm that it hopes will eventually find about $25 million worth of efficiencies in LMH operations.
Johnson is predicting the hospital will be able to avoid posting actual financial losses for the year, and he said there is little to no risk that LMH is ever going to find itself in a situation, like hospitals in smaller communities, where it has to ask government for a subsidy. For some perspective, LMH ended June with $103 million in cash and investments. (But for further perspective, remember that LMH’s budget is also huge. It had about $145 million in expenses through the first half of the year.)
“We have a very strong balance sheet and we have a very strong hospital,” Johnson said. “I don’t think this puts us in jeopardy. Some of the things we knew would hit us in the future are now upon us.”
So, what’s hitting LMH? In really broad terms, expenses that are growing a lot faster than revenues. Net operating revenues are up almost 4% in 2019, but the hospital had budgeted them to grow by about 7%. Expenses, on the other hand, have grown by almost 10%. The hospital had budgeted them to grow by about 6%.
More specifically, Johnson said he thought five major areas were leading to some of the negative numbers:
• A slower flu season. The flu is a significant driver of hospital admissions. The past several seasons have produced a lot of cases, but that wasn’t so this year. That’s a positive for the community but has hurt revenue, Johnson said.
• Insurance companies are paying significantly less for the pharmaceuticals that LMH is using on patients. Johnson estimates that has been about a $3 million hit for the hospital. Johnson said LMH was in discussions with the big health insurance providers in the region to try to get better reimbursement rates.
• LMH employees are using more health care services. The hospital is self-insured for the most part. As employees use more services, that means the hospital has to pay for more services. Johnson estimates that has affected LMH finances by about $2.4 million. Interestingly, pharmaceutical costs are a big driver of those increased costs, he said.
• The amount that LMH has to pay drug companies to keep pharmaceuticals stocked at the hospital has increased. That has had about a $1.25 million impact on the hospital’s finances.
• A tight labor market is forcing LMH to use more contract, temporary workers to fill needed positions at the hospital. That has increased contracted labor costs by about $1.4 million.
As an independent hospital in a relatively small community, LMH isn’t in the best position to get insurance companies and drug companies to give them better deals. Finding efficiencies within the hospital will be important, Johnson said.
“This is more than a blip on the radar for us,” Johnson said of the financial results. “It is a little bit of the shape of things to come, but it maybe has been a bit more abruptly than we expected.”
On the horizon are changes in how the government pays for health services too. In broad terms, hospitals are going to get paid not just on a single procedure but rather based on the continuum of care a patient receives. That means hospitals need to evaluate how they are providing total care in a number of areas.
Johnson said if LMH eventually decided to partner with another health care organization, it probably would be because of those types of issues. In general, the new payment system will involve more risks for hospitals.
“As you take more risk, you have to have more size,” Johnson said.
He reiterated, though, that the hospital isn’t looking to sell to another entity. A partnership where certain types of services are provided either by or in conjunction with another entity is more likely.
Expect that type of exploration of partnership possibilities to continue into next year. As for the more immediate financial issues, expect more changes to LMH’s operations. How visible those end up being to the public will become evident in time.
“We know the game will be hospitals have to figure out how to cost less, and we are going to figure out how to do that,” Johnson said.