A poor performance in 2007 has resulted in belt tightening at Cascade Healthcare Community and left executives concerned about the financial health of its hospitals.

After making more than $9 million in 2005 and $17 million in 2006, Cascade Healthcare, the parent company of hospitals in Bend and Redmond, made just $1.5 million last year.

“It’s not enough money to sustain an organization this size,” said Mike McGinnis, the interim chief financial officer. McGinnis said that unless the hospital had better numbers, it would have trouble maintaining facilities and technology and recruiting or retaining talented staff.

Even given the $15.5 million drop in operating income — the amount left after operating expenses have been subtracted from revenue, which is often used as a gauge for the financial health of the hospital — executives said the hospital is still doing fine. “The good news is that the hospital has the financial wherewithal to sustain” the current bumps, McGinnis said. “The organization is not in a financial crisis by any means.”

McGinnis pointed to the fact that the hospital still controls a half-billion dollars in assets, including $276 million in net assets, the amount left after debt and other liabilities are taken out.

That’s not to say there haven’t been consequences of the downturn. Internally, the hospital has undertaken measures that include cutting costs and raising prices. Externally, Moody’s Investors Service Inc., which rates the bonds that organizations use to borrow money, downgraded the hospital’s bonds one step to A2, citing, among other things, the 2007 financial performance.

Executives said the current slump is due to a number of factors that pushed expenses up faster than revenue. The hospital makes the bulk of its money from providing patient services, and its 2007 total revenue was $367 million, an increase of about eight percent over the year before. But, an even greater increase in total expenses, up 14 percent to $365 million in 2007, led to an overall drop in operating income.

Though executives said they hope to see higher operating income in 2008, they did not expect the hospital to rebound to 2006 levels. Cascade is not the only hospital organization struggling with its bottom line.

“It’s a tough period for hospitals both in Oregon and nationally,” said Kevin Earls, vice president of policy and advocacy at the Oregon Association of Hospitals and Health Systems. Earls said hospitals are hurt by low federal reimbursement rates and an increasing number of patients who can’t pay.

In Oregon, 28 percent of hospitals lost money in operations in fiscal year 2006, according to the Oregon office of Health Policy and Research. The office did not yet have numbers from 2007.

At Cascade Healthcare, patient revenue was not as high this year as executives expected, in part because the hospital did not receive about $8 million it expected from Clear Choice Health Plans. In the past, McGinnis said, the hospital has gotten a portion of federal and state money received and set aside by Clear Choice in a reserve fund. If health care expenses are within the insurer’s targets, the hospital gets a portion of the reserve. In 2007, Clear Choice said, health care expenses were higher than expected and none of the reserve fund was distributed to health care providers.

Expenses were pushed up by a number of items. Cascade built expansions on the Redmond hospital and the Family Birthing Center in Bend. Those expansions increased depreciation expenses by about $4 million between 2006 and 2007. Construction costs were primarily financed through $124 million in bonds that were issued in 2005.

In addition, the hospital is spending $35 million to upgrade its computer and information systems, said Tim Bricker, the vice president of operations. “We are making significant investments in infrastructure,” he said, adding that those expenses, “started to hit in a significant way in 2007.”

The hospital also began paying physicians for being on call in the emergency department. That plus consulting fees for the new information system increased the hospital’s professional fee expense by about $10 million.

An increase in patients, while pushing up revenue, also increased the cost of medical supplies by about $12 million and staff salaries by about $19 million. The hospital overstaffed some areas, particularly in surgical departments at the Redmond hospital, where they did not see growth as fast as they anticipated, Bricker said. “Our salaries went up faster than our revenue went up,” he said. “That’s a real challenge for health care organizations.”

Staff wages were also pushed up by an average four percent rise in wage rates, according to documents released by the hospital.

Executives also said the cost of providing charity care, free care given to patients who are unable to pay, increased in 2007. According to the hospital’s financial statements, the cost of providing charity care in 2007 was $10 million, about double the cost in 2006.

“We as a nonprofit serve those who come through our door,” said Spike Biggers, until recently the chairman of Cascade’s board of directors. Financially, he said, “that throws us at a huge disadvantage.”

In response to the low margins, the hospital is now doing some belt tightening. “We’re taking a hard look at expense management,” Bricker said, including the cost of staff, supplies, equipment and discretionary spending. “We’ve taken a look at pretty much every expense category,” he said.

The hospital is also trying to do a better job of collecting on accounts where it is owed money; in 2007 the hospital wrote off about $19 million in bad debt, down from $21 million in 2006. Bad debt and charity care both represent cases in which the hospital provides care without pay, though the hospital does not attempt to collect money for charity care. The line between the two, however, is sometimes blurry, executives acknowledged.

The hospital is also raising prices on services to meet statewide averages, according to hospital financial documents. In 2008, prices increased 7 percent, hospital spokeswoman Janette Sherman wrote in an e-mail.

To cut staff expenses, Bricker said, the hospital has eliminated between 20 and 25 positions since the beginning of this year, most of which were unfilled, though some, he said, were job changes. At the end of 2007, the organization had about 2,700 employees. The hospital also plans to reduce its use of contract labor and look for places to reduce supply expenses.

Executives say that the organization is now assessing its situation and looking at where it wants to go in the future. After the struggles last year, McGinnis said, “we’re kind of catching our breath a little bit.”

Operating income declined significantly for Cascade Healthcare Community in 2007

2006 revenue: $337,987,000

2007 revenue: $367,134,000

2006 expenses: $320,827,000

2007 expenses: $365,620,000

2006 operating income: $17,160,000

2007 operating income: $1,514,000

Expenses increased because:

•salaries went up

•physicians are now paid to be on-call

•supply costs rose

•new expansions began depreciating

•charity care costs increased

Source: Cascade Healthcare Community, 2007 consolidated financial statements