The numbers, as always, are grim. The District is required to project a balanced budget which is easy with a spreadsheet. You have the luxury of being able to work the numbers until they come out right. Of course, the more than 5.7 million dollar subsidy from the taxpayers is essential to a balanced budget for the District. (You can count on my “No” vote when it comes to assessing the parcel tax, but it will be 4-1 in favor.) Even then, two fortuitous events (that were not part of the original budget) have been required to get to a positive net income the last two years. In 2009-10, the IGT unexpectedly provided more than 2 million dollars to the District. Without that boost, there would have been a loss. In other words, the vaunted financial turnaround for that year was the result of identifying and applying for additional subsidies from the state of California. The agency that granted that additional funding had Alameda resident and big supporter of the Hospital, Wilma Chan, on it’s Board. (That agency has since been restructured or dissolved.) In 2010-11, the recognition of extraordinary income from an old 3rd party liability that can no longer be collected will turn a more than 1 million dollar loss (that is post subsidy) into a gain. So the last two years have been no better than the average if you consider the actual operations of the Hospital. In fact, capital expenditures will likely mean the cash position of the Hospital at year end 2010-2011 (June 30, 2011) will be worse than at year end 2009-2010.
For the budget, the starting point will be the FY 2011 projected results presented at the last Board meeting – profit of 196k. Some modifications need to be made to that projection. For example, I am going to guess that any month where the ADC was around 34 is a month that did not have a 125k loss (excluding the extraordinary income). So March will be better than projected. My guess is more like a 50k profit so add 175k total to the projection. Similarly, I am going to guess that the last quarter (Apr-Jun) will not yield over a 3/4 million loss. I think a more realistic number, even being conservative, is -450k. So add a total of 475k to the relatively pessimistic year end projection – thus an accounting profit of 671k seems more likely. Now from that 671k, it is necessary to subtract the 1473k in extraordinary income to obtain a baseline budget projection for 2011-12 of an 800k loss.
More bad news to be factored into the process is the state budget crisis which impacts IGT funds and the Medi-Cal reimbursement rates. The net negative for those, even being optimistic, is likely to be at least 1000k. (if nothing changes, then the number is greater than 2000k.) So the budget process begins with an adjusted baseline of a loss of 1800k (and very possibly almost 3000k).
Maybe the wound care center can contribute 50k in direct profit so now we are at 1750k loss. Although recall, the wound care center’s short-term impact on the cash/debt position is negative in my opinion.
Everything else is up for grabs. The budget game works this way. The areas where increases can come is by assuming you can raise prices or increase volumes. Typically, the number for price increases is in the low single digits as a percentage. A 3% increase (on a little over 60 million net revenue) gives you enough to turn a small profit if expenses do not rise. Keep in mind that the combination of this price increase and the change in state reimbursement would offset each other. One can forecast that expenses will rise more slowly than revenue (or even that cost cutting could yield positive results). In last year’s budget, the Hospital made the assumption of high single digit (percentage of total) reduction in expenses from the prior year to the current year. I think that cutting expenses again at that aggressive rate is not a reasonable assumption and arguably only was partially successful in the present budget. Instead, I think anything more than a flat expense picture is unrealistic so the budget projection is a profit of about 100k given these assumptions. I do not believe that volume increases are reasonable to forecast, but perhaps I can be convinced by Management.
New services could increase these numbers. But for a profit to happen in actuality (instead of the world of budgets) all of the following has to happen:
1. The projection to year end has to be almost 500k too pessimistic. I will randomly assign a probability of about 0.7 to this event.
2. Loss in state of California revenue(and CMS revenue as well) is limited to 1000k compared to the present year. I am guessing this has a probability below 0.5.
3. The Hospital can realize the 50k in profit from the wound care center. I think that we can ignore this since it has minimal impact either way. So for purposes of ignoring it, I will give it a probability of 1.
4. Finally, revenue in the non-government reimbursement arena must be enhanced by over 5% (in order to get a 3% total price increase, the subset of the other payors has to have an outsized increase.) I think that 50/50 or a probability of 0.5 is generous.
5. Can expenses be flat? I don’t think so; I will give this a probability of 0.5 in an effort to compensate for my bias.
6. I am unaware of any new services that will materially impact the financials for the next year that are close enough to realization to be included in the budget.
So for the budget to be balanced, numbers with the appropriate assumptions just need to be put into a spreadsheet, but for the District to actually not have a loss next year, the stars would have to align with a probability of 0.7*0.5*0.5*0.5= 0.0875 or less than a 1 in 10 chance. That is my estimate of the chance that a profit can actually be realized in the next year despite a budget which will/must forecast a profit. This is just for a single dollar of profit; for the district to obtain financing for the seismic retrofit, the profit would have to be somewhere above 1.5 million dollars – no chance of that. Finallly, the chance that the subsidy can be reduced or eliminated and the District realize a profit is essentially zero, unless, of course, we close the Hospital.
I will certainly point this out to my fellow Board members, but am not sure how much impact the grim reality of the numbers will impress them. Witness Mayor Gilmore’s outrage and denial when the “two Kevins” with intimate knowledge of the city’s finances pointed out similarly obvious facts to the City Council.
When it comes to politics, denial seems to be a popular strategy.
Updated to clean up the wording and clarify some statements (4/10/11).