UNC, Duke hospitals post record 2015 revenue as WakeMed reports loss

Duke Raleigh Hospital Chaplain Adrian Dixon, right, holds a patient’s hand during prayer on a recent Friday morning.
Duke Raleigh Hospital Chaplain Adrian Dixon, right, holds a patient’s hand during prayer on a recent Friday morning. Raleigh

WakeMed Health & Hospitals, one of Wake County’s largest employers, next month will post its second operating loss in the past three years, at at time when the Triangle’s two university hospital networks are thriving economically.

WakeMed’s chief financial officer, Michael Browning, characterized the $49.9 million operating loss for the fiscal year ending Sept. 30 as “one-time expenses,” caused by a series of major financial outlays coming due at the same time; WakeMed is projecting it will return to profitability in 2016.

“The thing about numbers,” Browning said, “is they can be very deceiving.”

It’s only the second operating loss in WakeMed’s 54-year history but a potentially troubling sign as the 8,400-employee organization deals with the fallout from the defections of doctors who in recent years took their multi-million-dollar neurosurgery and cardiology work to rival hospitals.

Meanwhile, the region’s two giant hospital networks, which compete with WakeMed for patients and doctors, both posted record revenue in fiscal 2015. Duke University Health System, which operates three hospitals in the Triangle, reported $3 billion in revenue and an operating profit of nearly $355 million, up from a profit of $96 million the year before.

The UNC Health Care System, which owns or is affiliated with nine area hospitals, has reported $3.2 billion in revenue and nearly $119 million in operating profit. The 22,000-employee organization’s profit comes on the heels of an operating loss of more than $19 million the year before.

As its larger rivals rebound, WakeMed’s operating revenue has remained flat in recent years at about $1 billion. In a bid to boost revenue, the Raleigh health care system has been collaborating on potential projects with Duke Medicine in Raleigh, Wake Forest Baptist Medical Center in Winston-Salem and Vidant Health in Greenville.

WakeMed’s ongoing talks with Duke involve a potential collaboration in cardiology services, said Duke chief financial officer Kenneth Morris. He noted that WakeMed has lost heart patients to cross-town competitor UNC Rex Healthcare, while Duke does not have regulatory approval to perform open-heart surgeries in Wake County and would need a partner to expand those services in the county.

WakeMed is Wake County’s only Level I trauma center and operates hospitals in Raleigh, Cary and North Raleigh.

Costly investments

WakeMed, which had its credit rating downgraded by Moody’s in May on account of its “weaker and variable financial performance,” is not the only one feeling the strain of its financial outlays. All three health care systems in the Triangle have been aggressively adding hospitals, medical practices and outpatient clinics in the area, as well as investing millions in electronic medical records technology.

Rex, the Raleigh hospital owned by UNC, froze employee pensions earlier this year and also saw its credit rating downgraded by Moody’s in March. Rex’s long-term debt has swelled to $208.5 million to raise money to help pay for an 8-story, $235-million N.C. Heart and Vascular Hospital, set to open in 2017.

Browning, WakeMed’s CFO, said the Raleigh organization was hit with a trio of expenses in the 2015 fiscal year. The expenses stemmed from launching a costly system-wide Epic software installation; opening a 61-bed hospital in North Raleigh; and operating an intensive program that uses about 50 nurses and care managers to track and assist more than 200,000 chronically ill patients.

WakeMed’s fiscal year ends Sept. 30 and the organization expects to complete its 2015 financial report in December. Browning said the financial report will show that three programs cost WakeMed about $52 million in 2015.

“It’s actually an investment into the future,” Browning said. “That’s why the loss is not as alarming to us. These three just happened to hit in one year.”

Paying dividends

Duke University Health System executives said the organization’s recent investments and cost-cutting initiatives are now paying dividends. Morris, the system’s CFO, attributed Duke’s financial performance to the addition of 160 hospital beds and 16 operating rooms at the Durham campus. The additions were completed in June 2014, coinciding with the beginning of Duke’s 2015 fiscal year, which ended June 30.

Morris said that as a result of the expansion, Duke saw a surge in patient volume, particularly out-of-state patients seeking high-cost medical services, such as orthopedics, heart treatment, cancer treatment and organ transplants.

Morris said that the year before, when the 28,000-employee organization had posted operating income of $96 million, the Duke system had experienced significant productivity losses from the installation of the same Epic digital billing and medical record system that WakeMed launched in February. Installing the complex software required months of preparation for Duke, but is now finally delivering results in terms of efficiencies and savings, he said.

All three Duke hospitals posted increased revenue and improved operating profits. For example, the 186-bed Duke Raleigh Hospital’s operating income rose to $60.4 million in the 2015 fiscal year from $18.1 million in 2014. Morris said Duke has been preparing for an era of increasing financial pressure on hospital systems and noted that seven years ago Duke could expect routine annual markups of 7 percent in its reimbursement contracts with insurance companies. Now, he said, insurance reimbursements are often flat or decreasing.

UNC’s two flagship hospitals in the area – UNC Hospitals in Chapel Hill and Rex in Raleigh – performed strongly in the 2015 fiscal year, which ended June 30. The 433-bed Rex hospital’s operating profit grew to $47.3 million from $13.4 million, and revenue also increased, to $853.3 million from $749.8 million.

UNC Hospitals, with 830 beds, more than doubled its operating profit of $185.1 million, up from $74.7 million a year earlier. Revenue increased to $1.42 billion from $1.26 billion.

Rex’s financial report showed increased reimbursement from its insurer contracts, and at the same time saw an increase in the volume of patients with complicated medical conditions.

UNC’s financial report credited the Chapel Hill organization’s year-over-year revenue growth by $162.3 million to expanding patient services, including a $43.4 million increase in outpatient pharmacy revenue, as well as better deals for the hospital on pricing and improved debt collection.

John Murawski: 919-829-8932, @johnmurawski