DUHS records highest operating income ever in FY 2015

Major infrastructural expansions and upgrades coupled with expense reduction gave Duke University Health System the highest operating income in its history.

Duke University Health System, which is comprised of Duke University Hospital, Duke Raleigh Hospital and Duke Regional Hospital, reported an operating income of $355 million for the 2015 fiscal year. Kenneth Morris, senior vice president, chief financial officer and treasurer for DUHS, attributed the record-setting numbers to the culmination of a number of investments and changes made recently, including the construction of the Duke Medicine Pavilion and Cancer Center.

“It was an extraordinary year,” Morris said. “For the three or four years leading up to this past year, we had made a series of investments in facilities and information systems that helped to relieve capacity constraints limiting growth.”

Morris noted that the patient volume grew at a rate far greater than management expected. Although Duke Medicine administrators planned for capacity increases during the course of a few years, the unanticipated surge of volume forced management to rapidly open up capacity for patient use.

“Duke Medicine Pavilion added additional [operating rooms] and bed capacity, particularly in the intensive care units, which was where the constraint was,” Morris said.

New capacities were mainly apparent in fields such as intensive care, surgery and oncology. The $781 million construction of the Duke Medicine Pavilion and Cancer Center, which were completed at the end of the 2013 and 2014 fiscal years, respectively, added 160 hospital beds, 16 operating rooms and 25 clinic rooms among other additions.

“That contributed to an 18 percent growth of revenue yearly,” Morris noted. “So that 18 percent, that’s an extraordinary growth figure, after years of being in the two to three percent range.”

The health system also made a number of efforts to expand its reach regionally. In addition to its three main hospitals, DUHS has more than 80 outpatient and primary care locations within the Research Triangle area.

“We benefitted from growth in oncology, particularly in Wake County, as a consequence of the acquisition of a large group of oncology-related physicians and their assets,” Morris said, referring to the integration of a number of oncologists and their patients into Duke Medicine to increase its inpatient volume.

In addition to expansions to the health system, Morris explained that a large reason for the increased income came from a decreased cost of operation. Primarily, this came as a result of improvements in technological efficiencies.

“The investment in IT was significant because it gave us an enterprise-wide health record for the first time,” he said.

Morris added that changes to billing procedures also decreased costs.

“We strengthen revenue by doing a better job of coding and documentation so that we are getting paid for what we are doing. And we reduce expenses in areas like supply chain and labor management,” Morris said. “With our new IT capabilities, we are able to better manage care across the spectrum and become more efficient in that way.”

Morris said that Duke University Health System has a good academic and financial reputation. Duke University Medical Center ranks competitively with institutions such as Johns Hopkins, Vanderbilt and the Cleveland Clinic.

Although Duke does not compete for patients with these institutions, it does do so with other hospitals in North Carolina, such as Novant Health, WakeMed and UNC Health Care.

“We are acknowledged as the highest quality provider in the state of North Carolina,” Morris said. “Financially, we have formed at the top of that group. We are winning market shares from local competitors.”

Moving forward, Morris noted that the financial strategy of DUHS is spearheaded by the Transforming Our Future initiative. TOF entails reducing costs, upgrading technology, and shifting the reimbursement model to from a fee-for-service model to a population-based model, in which the health system would be paid a fixed fee per month, regardless of the level of medical care required.

“We’d be getting paid to make sure you don’t come in and you don’t get sick. That means providers at the hospitals and doctors may be asked to take risks for those populations.” Morris explained. “If we wind up with a very sick population, and we provide more care than the actuaries said we should, then we’re going to lose money.”