Duke University Health System's financial outlook remains negative, according to a recent report from Moody's Investors Service. Although Moody's did not lower the rating on the bond debt Duke incurred for its recent expansions into Durham and Raleigh, the Health System needs to show significant improvement within the next year to avoid a downgrade.
"Management's ability to improve operating results remains a core credit issue for Moody's," the report reads.
In fiscal year 1999, Duke lost $2.3 million, but through the first eight months of this fiscal year, the Health System incurred a $22.8 million deficit-nearly 2 percent of the overall operating budget.
"The disappointment was that the results that we are experiencing in the current year are less than the results that had been modeled in the plan when we borrowed the debt," said Kenneth Morris, the Health System's chief financial officer.
Morris added that the Health System is working assiduously to close the yawning operating deficits. Although officials expect to narrow that gap to $13.5 million by the end of the fiscal year, the financial environment created by 1997 federal cutbacks still dogs the Health System and all academic health centers.
"Moody's has pretty much a negative outlook on the entire industry right now because of the pressures we're under," Morris said.
Lisa Goldstein, the Moody's analyst who met with Duke officials in New York earlier this spring, acknowledged that the federal cutbacks have been devastating nationwide.
"Academic medical centers across the country have really taken it roughly...," said Goldstein, who stressed that the report does not reflect on the Health System's quality of care.
Morris said that going into the meeting with Moody's, "We actually knew that we were going to have a difficult time given where we were.... It was to Duke's credit that the rating services were willing to hold off and give us more time."
With the ultimatum of a possible bond rating downgrade-which would make financing future Health System projects more expensive-Morris and other senior administrators are working to boost the Health System's bottom line.
Duke Hospital recently eliminated 170 positions in an effort to cut its operating costs and reconfigured its senior administration. Still, the Hospital's fiscal 2000 operating margin is expected to be $17.5 million, down from $29.3 million the year before, a figure which the report called "adequate but below recent historical and anticipated results."
The larger problem has been at Durham Regional Hospital, which lost $12.7 million last year, a much-larger-than-expected hole discovered after an audit.
"When the audit issues first appeared, management immediately began inserting itself into the operations of that facility...," Morris said, explaining that officials are using personnel attrition, improvements in bill collection and changes in supplies purchasing to improve the hospital's performance. "We have seen improvement there-not as much as we'd like, but we are improving." Durham Regional is expected to lose $15.7 million this fiscal year.
Both of the large hospitals were hurt this year by the inclement winter weather, which kept some patients out of the hospitals and stranded others there after their insurance companies stopped paying, Morris said.
The Health System also lost about $12.8 million from its HMO, WellPath, which had an "unfavorable" contract with state employees, according to the Moody's report. But WellPath has improved this year and is expected to lose only $4.1 million.
On the positive side of the ledger, the Health System benefits financially and in its Moody's rating by its relatively strong investment performances-$82.9 million in fiscal year 1999 and $97.2 million this year.
Morris said he expects the ongoing changes to put the Health System's operating budget back in the black by fiscal year 2001. But, as the Moody's report pointed out, a dramatic turnaround in the Health System's financial state will be difficult.
"Our concerns are further compounded by two critical factors," the report reads. "Firstly, the tight labor market and use of agency and traveler nurses, making the material staff reductions difficult; and secondly, the escalation of debt with the 1998 financings without a corresponding increase in cash flow."
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