New London - Lawrence & Memorial Hospital's fiscal 2012 operating margin of 3.8 percent fell short of its goal, as higher-than-anticipated costs for drugs and implementation of electronic medical records combined with changes in Medicare reimbursements shaved about $6 million off the bottom line.

Fred Conti, chairman of L&M's finance committee, reported the year-end results Wednesday during the hospital's annual meeting. Gross revenues for the year were $340 million, while expenses totaled $327 million. While that left the hospital $13 million in the black, it was considerably below the 5.8 percent margin the hospital's board had set as a goal for the year, and behind the 8 percent operating margin it achieved in fiscal 2011, Conti said.

Despite the weak performance, he said, the hospital fared relatively well considering the challenges it faced and the new projects it undertook in the past year.

"You might not think so when you look at the bottom line, but in terms of what we accomplished, (fiscal 2012) was a tremendous success," Conti said. He added that L&M still enjoys an "A" rating on bond markets.

For the L&M corporation overall, which includes the hospital and affiliates including L&M Physicians Associates, the Visiting Nurse Association of Southeastern Connecticut and Hospice Southeastern Connecticut, the hospital edged out just a 0.2 percent margin of revenues over expenses, short of the 3 percent target set by the board, Conti said. One of the main causes was the $2 million spent on financing various fees associated with the pending purchase of The Westerly Hospital. L&M expects to close on the deal in January.

In 2013, Conti said, the hospital is planning several major capital expenditures and is planning to take advantage of low interest rates by issuing a bond offering to finance the projects. They include $23 million toward a Dana-Farber cancer center under construction in Waterford; $12 million in routine equipment replacement purchases; $6.9 million to renovate the office building the hospital purchased this year on Howard Street in New London into medical offices; $5.3 million for a new center specializing in joint care; $6.2 million for electronic medical records equipment; $4.5 million for facilities infrastructure; and $21.5 million to finance The Westerly Hospital purchase.

Bruce Cummings, hospital president and chief executive officer, said L&M must brace for flat or declining Medicare revenues and reimbursement rates based on "outcomes or value versus fee for service or volume" that will have a major impact on revenues. Strategic investments such as the new cancer center and Westerly Hospital will bring in new revenues, but these must be combined with cost containment, he said.

"This is our new imperative, to adapt or die," he said.

Without the growth initiatives, he said, L&M would face future negative operating margins of 4.5 percent of expenses over revenues. Even with the additional revenues from the new initiatives, he said, L&M will still fall short of a 3 percent operating margin, "so we're going to have to make some dramatic changes. We'll have to continue to look at ways to cut costs."

As part of that effort, he said, the Division of Care Transformation has been created as a kind of internal consulting division within the hospital to figure out how the hospital can weather the coming changes.

j.benson@theday.com