When Duke University Health System took over management of Durham Regional Hospital in July 1998, Durham Regional was plagued by financial problems. After a year of smoother sailing for the community hospital, the waters have again become rough. Officials thought the hospital had a $1.2 million surplus last year but have discovered that this figure contained an auditing error and was actually a $5 million deficit.
Michael Israel, CEO of Duke Hospital, said this discovery will likely force cuts of about $10 million from Durham Regional's $150 million operating budget, although no employees will be laid off.
An error in accounting for payments from managed care apparently caused the discrepancy.
"The formula that was being used for calculation of managed care allowances was not accurate, and in effect, it led to an overstating of net revenue," Israel said.
The board of county commissioners, which unanimously approved Duke's bid to establish the partnership, did not meet formally to discuss the situation.
Board chair MaryAnn Black, after speaking to top Duke officials said she "came away feeling confident that Duke and Durham Regional Hospital would be working together to resolve this issue."
Charles Blackmon, chair of the board of directors at Durham Regional, said the board has received audited statements each year. "We had no prior knowledge of any irregularities or differences in accounting methodologies," he said.
Durham Regional's chief financial officer, Bob DeFilece, has resigned, although it is unclear how closely the resignation and the error are connected.
Officials from Duke and Durham Regional attended an executive board meeting last Thursday to discuss what Israel referred to only as "strategic implications" of the deficit.
He described various possible plans of action to ease the deficit. Duke will help Durham Regional management examine salary expenses and evaluate opportunities for savings, on "everything from pencils to orthopedic implants," Israel said.
DUHS will work with the medical staff at Durham Regional to help them practice medicine in an efficient and effective manner. Finally, DUHS will assess the importance of the programs the hospital provides.
Israel said Duke would uphold its commitment to no layoffs in the first three years of the partnership.
"From a moral perspective, we [will] do everything we possibly [can] not to turn people's lives upside down. We've got a responsibility not only to the patients that we serve, but to our employees," he said.
Ellen Reckhow, a county commissioner, welcomed the renewed commitment. "We've been assured that [the situation] will be dealt with in a way that will not affect patients' care and that will not lead to layoffs," she said. Instead of layoffs, Israel pointed to the alternatives of attrition, transfers within the Health System and employee re-training.
Although DUHS is non-profit, Israel said the excess revenue it creates, some of which goes back into Durham Regional, is necessary for the system's survival.
"Even though we're not-for-profit, there's a saying of 'no margin, no mission,'" he said, emphasizing that the partnership between Duke and Durham Regional remains sound. "The Durham community has benefited from the partnership. We are all very committed to it."
Officials also noted that the overall health of DUHS, while perpetually affected by the changing health care system, is not in danger.
"I think if the problem had been of a different sort, then we might be concerned," said President Nan Keohane. "In this case, since it's really just about the audit and a difference of methodology, I don't think we're really concerned about that."
Several well-known institutions nationwide have lost a significant amount of funding due to the federal Balanced Budget Act, including the health systems of the University of Pennsylvania and Stanford University.
"Am I concerned when I take a look at the Penns and Stanfords?" Israel said. "It is a concern. If and until that relief comes, we have to understand what the constraints are," Israel said. "We believe we have done that and we will do that going into the future."
Dr. Ralph Snyderman, president and CEO of the Health System, agreed that this problem should be more of a learning experience than a threat. "I think we'll come out a stronger hospital because of this," he said.
Katherine Stroup contributed to this story.
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