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New London - The parent company of Lawrence + Memorial Hospital ended the fiscal year in the red for the first time in at least a decade, as patient volumes and state and federal support both declined.
"We've had cuts in reimbursement and a softening of volumes," said Lou Inzana, chief financial officer of L+M.
L+M Healthcare Corp., which includes the main hospital, The Westerly Hospital, affiliated physician practices and the Visiting Nurse Association of Southeastern Connecticut, had a negative operating margin of expenses over revenues of 1.76 percent for the fiscal year that ended Sept. 30. That compares to a two-tenths percent positive margin in fiscal 2012. The L+M board of directors had set a goal at the beginning of fiscal 2013 of achieving a 3 percent operating margin.
Total revenue for the year increased over last year, largely due to the addition of The Westerly Hospital in August, Inzana said, but expenses outpaced revenue by about $7 million.
L+M's financial condition will be the main topic at its upcoming annual meeting, the first since it acquired Westerly Hospital. The meeting is scheduled for Dec. 12 at the Mystic Marriott, a departure from the former practice of holding the meeting in the conference room at the main hospital. The addition of Westerly Hospital board members and staff meant that L+M needed a larger space that was more central to both institutions, L+M spokesman Mike O'Farrell said.
Stephen Frayne, senior vice president of health policy for the Connecticut Hospital Association, said many hospitals statewide have seen a deterioration of their financial condition since 2012. Patient volumes declined from 2012 at 17 of the 29 acute care hospitals in the association, one as high as 21 percent. L+M's patient volume was down about 3 percent, while The William W. Backus Hospital in Norwich saw a 5 percent drop.
In addition, hospitals are absorbing the impact of reductions in Medicaid reimbursements from the state, as well as a new state tax on hospitals that took effect in July, Frayne said. Altogether, this meant a $100 million loss of income to hospitals, Frayne said, and that number is slated to increase next year. The majority of the state's hospitals, including L+M and Backus, either have laid off employees in recent weeks or eliminated vacant positions, Frayne noted. L+M also cut programs.
"Sadly, this is reflecting what we anticipated would happen," he said. "Hospitals are churning back on employee wages and benefits, and re-evaluating their commitment to supporting programs in the community."
Despite financial struggles facilities throughout the state, the region's other hospital continued its longstanding pattern of financial health. At its annual meeting Wednesday, leaders at Backus hospital announced a 9 percent operating margin of revenues over expenses, achieved by curtailing costs and reducing waste.
At L+M, Inzana said state cuts, coupled with losses in Medicare reimbursements, combined for an $8 million impact on L+M. Increasing pressure from Medicare to place patients on "observation" status rather than admit them as inpatients was a major factor, Inzana said. Reimbursement for patients who come to the emergency room but stay at the hospital under the "observation" label - in which they receive virtually the same level of care but are not considered inpatients - is on average $5,000 less each, Inzana said.
"The same patients are coming through our doors, we're just receiving a lot less payment," Inzana said.
U.S. Rep. Joe Courtney, D-2nd District, is among the legislators working for a change in Medicare policy regarding observation status, which can have a significant impact on patients' finances because of higher out-of-pocket costs. In addition, nursing home care after a hospital stay is not covered by Medicare unless the patient is first a hospital inpatient for at least three days.
In addition to overall patient volume declines, the hospital also saw a drop in outpatient surgeries at Pequot Medical Center in Groton, and a leveling off of inpatient surgeries at the main hospital.
"These volume decreases are not going to just come back," Inzana said. "We're seeking a lot of constriction in the marketplace."
He attributed the declining patient volumes at L+M and other hospitals to the rise of high-deductible health insurance plans, which he said are causing patients to defer elective surgery because of high out-of-pocket costs.
He noted that L+M essentially retained its 70 percent market share of patients from its core towns. Most L+M patients mainly come from Lyme, Old Lyme, East Lyme, Waterford, New London, Groton, Montville, Ledyard, North Stonington and Stonington. The hospital's secondary market extends to Colchester, Salem, Bozrah, Franklin, Norwich, Preston, Griswold, Lisbon, Voluntown, Westerly and Hopkinton, R.I.
Despite what he characterized as a "difficult" year, there has been no impact on patient care, and patients will not notice anything different, Inzana said.
"We're in a transition year," he said. "The hospital historically has had a strong financial position, and it still does."
A negative operating margin will not cause a significant downgrade of the hospital's ratings with financial intuitions, he said, but if the situation persists, it could.
"For 2014, we've presented a plan to the board and senior management to return the hospital to profitability through a number of initiatives," he said.
He declined to give details about the plan, which is still under review. No further layoffs or program cuts are planned for the remainder of this year, however, he said.
Revenue: $395 million
Expenses: $402 million
Operating margin: -1.76 percent
Revenue: $370 million
Expenses: $369 million
Operating margin: 0.2 percent