Duke University Health System's budget for fiscal year 2003 showed its strongest performance since the creation of the Health System five years ago.
DUHS' operating margin for the year was $43.4 million and its operating cash flow was $147.5 million out of a $1.2 billion net revenue, a 179 percent and 54 percent increase over fiscal year 2002, respectively. "The overall health improved significantly over the past year," said Ken Morris, chief financial officer of DUHS. "We did as well, or better than most academic medical center-based health systems."
The strategy employed by DUHS relies on assets growing faster than liabilities to produce a high liquidity, which is then used to make substantial investment back in the facilities, pay down the outstanding debt from the acquisitions that occurred through the organization of DUHS and commit resources to outside investment.
DUHS is mainly comprised of Duke University Hospital, Durham Regional Hospital, Raleigh Community Hospital, Duke University Affiliated Physicians, Inc.--14 other primary care physician practices in the area--and Duke Health Community Care, which provides community services such as hospice care or bereavement services around the Durham area.
Under the DUHS umbrella, DUH had a margin of $44.4 million; DRH, $3 million; DHCC, $1 million; RCH, a negative $3.6 million margin; and DUAP, a negative $5.9 million, although DUHS' corporate activity, primarily transactions with the Private Diagnostic Clinic, reaped $5 million, essentially negating the loss, Morris said.
DUHS' buyout of Raleigh Community has resulted in the amortization of goodwill at the hospital over the 20 years since its $200 million purchase in 1998. Without this amortization cost, RCH would not have as negative a margin. However, the hospital must still climb into the black, and preliminary financial results from the first quarter of fiscal year 2004 show an almost break-even point, Morris said.
Durham Regional's strong numbers are its first in the black since 1999. Administrators at DRH have worked to eliminate excess costs and increase productivity, trimming the budget to a manageable size. Morris said another contributor to the turnaround of the hospital was DUHS' writing off the hospital, a move which would not be suitable for RCH at this time.
"We need to see the return based on what Duke paid," Morris said.
"There's value to be in Raleigh; Wake County is the highest growing market around here."
DUHS' performance has also been affected by a six percent return by Duke University Management Company's investments, a significantly better performance than the negative four percent returns of the two previous years. In fiscal year 2000, DUMAC had a 58 percent return due to the bullish stock market, but despite this high return, DUHS' overall performance was better in fiscal year 2003 due to better management, Morris said.
Morris said DUHS has done a much better job decreasing its accounts receivable, an accounting term that describes outstanding payments from patients. The decrease in accounts receivable has allowed DUHS to transfer the increased cash into long-term investments and to manage this capital more effectively.
Of the $147 million operating cash flow for the year, DUHS invested $73 million into facilities and equipment, paid down the debt by $28 million--in contrast to the usual $10 million--and gave the School of Medicine $23.5 million. The remaining cash surplus was invested, netting a $6 million return.
The fiscal year 2003 cash flow is the largest yet, with a $3.8 million operating cash flow in fiscal year 2000 and $95.7 million in fiscal year 2002.
DUHS has lofty goals for FY '04, with a budgeted operating margin of $50 million. Through the first quarter, Morris said, DUHS is very close to one-fourth of that margin.
Morris said the continued improvement of the financial health of DUHS was sustainable provided that the stock market continued its upward trend and the debt continued to be paid down.
"The level of performance achieved last year was solid, and, if continued, would keep us in a comfortable position going forward," Morris said.
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