2014-04-10 / Front Page

SMH ends 2013 with loss, looks to improve in 2014

Audit report reflects one-time expenses

MANISTIQUE – Schoolcraft Memorial Hospital ended 2013 with a net loss of $1.8 million – most of which was associated with two one-time costs. The loss was reported as part of the audited financial report presentation, given during a recent meeting of the SMH Board of Trustees. Steve Thompson, a CPA with Wipfli LLP of Green Bay, Wis., the hospital’s auditor, led the presentation, pointing out that the hospital has been busy since 2012. “Certainly, over the last few years, you’ve had a lot of changes going on,” he said. “In preparation of building this facility and then moving into this facility; there’s a lot of things that happen when you move into a new facility.” Thompson noted that the hospital’s audit reflected losses that were not continuous, and that the 2014 audit would likely paint a better picture of the facility’s financial status. “Some of those impacts were onetime events that, hopefully, we’ll be able to show a much brighter future in 2014,” he said. “There were some costs involved in relocating to the new hospital, and some onetime expenses that will not occur into the future.” According to Thompson, the hospital saw a loss in operations of approximately $934,000, as compared to 2012’s loss of $623,000. “Moving into a new facility and maintaining … somewhat similar financial results, it is probably commendable,” Thompson said. As for net patient service revenue, this portion of the SMH’s financial portrait increased 10.6 percent as compared to 2012. This, Thompson said, was primarily due to an increase in inpatient and swing bed volumes. On the expense side of the report, Thompson explained the hospital increased its expenses by 12.3 percent over 2012. This increase was attributed to salary costs, supplies, and other expenses associated with the hospital opening, he added. “Primarily, you had a significant increase in depreciation expense in 2013, as you brought the new facility online and started to depreciate that back in April,” Thompson said. He noted that since the facility is now finished and up and running, the administration and board will be able to monitor the operations effectively. “There’s no excuses anymore; now is where we start in and really start to fine-tune some of the operating,” Thompson said. While addressing the hospital’s operating margin, Thompson explained that the reflected loss is common for many replacement facilities. He noted that the increased interest and depreciation reported on the income statements will not mean as much, but is “going to look bad.” This negative long term debt to equity ratio will continue to increase until the organization begins to report “favorable, positive financial numbers on the income statement and continue to pay down its debt”, he added. To avoid a statement not truly reflective of the facility’s finances, Thompson recommended using another revenue ratio called EBIDA, or earnings before interest, depreciation, and amortization. “You take out those things that now you have really no control over, and really focus on this EBIDA … as a percent of your total revenue,” he said. “That will reflect at least what your true operations is doing year after year.” Thompson explained that SMH’s total assets went from approximately $14 million in 2011 to approximately $29 million in 2013 – due in most part to it’s new facility. “Over that span, you basically have now doubled your total assets,” he said. “Correspondingly, you’ve increased your debt significantly as well.” The two most prominent debts were items that were expensed instead of capitalized, Thompson said. One involved taking a reimbursement for Medicare immediately, rather than spreading the reimbursement out over three to five years. This amounted to a $400,000 loss, he explained. A second hefty expense was attributed to a utility line that was constructed from the city of Manistique out to the hospital. “Per your agreement with the city, you basically paid for the building of the utilities out here, and then at the completion of the project, you turned that over to the city, and they will maintain it going forward,” he said. “That loss that you basically had to book was a little over $700,000.” These two one-time expenses reflected poorly on the hospital’s finances, but would not be ongoing, Thompson said. “That’s … $1.2 million that won’t be there next year,” he explained. “I think that makes 2014 seem at least optimistically rosy.” Thompson noted that the hospital’s revenues were also increased in 2013, as well as their capital assets. “Your total revenues have consistently increased over the last couple years, and your expenses have kept pace, but haven’t outpaced that growth,” he said. “All in all, I think you’ve held the expense increase to be very consistent with the revenue increase.” Thompson ended by saying the future success of the hospital would be hinged on maintaining a balance between the expenses and revenues. Following the meeting, SMH CEO Tanya Hoar stated the hospital would focus next year on the EBIDA ratio.

“One of the hospital’s financial goals this year is an 8 percent EBIDA to total revenue ratio. This ratio measures the financial performance of a facility without the depreciation and interest expense – a good measure for new facilities that have high capital expenses,” she said. “Ideally, the hospital should strive to be in the 8-10 percent range, which would reflect a strong performing organization.” An 8 percent EBIDA to total revenue ratio was included in the hospital’s 2014 budget, she added. As for 2013, Hoar said the audit was actually better than it looked. “In the beginning of the year, SMH experienced significant one-time expenses due to the move,” she said. “Operationally, the third and fourth quarter of 2013, when adjusted for capital expenses, had the best financial performance than in the previous three years.”

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