A $2.8 million buildout for a general surgical clinic utilizing $1.6 million in unbudgeted funds was one of two capital contingency requests approved at Phelps Health’s Board of Trustees meeting following the acceptance of the health system’s June finances.

A $2.8 million buildout for a general surgical clinic utilizing $1.6 million in unbudgeted funds was one of two capital contingency requests approved at Phelps Health’s Board of Trustees meeting following the acceptance of the health system’s June finances.

Phelps Health’s net operating revenue was over budget by 1.6 percent reaching $22.3 million in June of Fiscal Year 2019, Chief Financial Officer for Phelps Health Jana Cook said at Phelps Health's July 24 Board of Trustees meeting.

Cook said both the health system’s adjusted average daily census of 267 patient days coming in over budget by three days in June, and the volume in radiation oncology services running over budget by 37 percent in June, attributed to the $346,000 variance in net patient service revenue for the month.   

Operating expenses came in over budget by 2.4 percent in June reaching $22.9 million. Employee benefits and purchased services Cook said contributed to the $522,000 variance in operating expenses for the month.

Employee benefits ran over budget by $269,000, as there was an increase in employee health insurance expense in June, while purchased services came in over budget for the month by $248,000 due to agency personnel.

“Through the month of June, we had about 30 new nurses that are going through orientation. They are going through orientation, which is a 12-week process or more,” Cook said. “Both the agency personnel and nurses going through orientation, are a double hit on the budget there.”

The health system’s income from operations didn’t meet the $600,000 budgeted for the month, Cook said. Income from operations ran $176,000 below budget totaling $428,000 for the month, while income from operations through June of fiscal 2019 was under budget by $1.2 million totaling $3.3 million.

Phelps Health’s income from operations as a percentage of net operating revenues was 2.4 percent through June compared to the health system’s budget of 3.4 percent, while net income was over budget by $6.7 million reaching $15.3 million through the first six months of this fiscal year. Phelps Health’s net income as a percentage of total revenues was 10.4 percent compared to the budget of 6.3 percent through June.

Total operating expenses were over budget by $4.4 million through June of this fiscal year reaching $132.2 million.

“In total that is an operating margin of 2.4 percent the first six months of the year,” Cook said. “Not quite where we want it to be at 3.4 percent, but that’s a very aggressive budget as we headed into 2019.”

Phelps Health had non-operating income totaling $4 million in June, over budget by $3.2 million because of favorable market conditions, Cook said.

Total cash and investments have grown by $15 million from Dec. 31, 2018, and as of June 30 Phelps Health’s cash and investments totaled $156 million.

Phelps Health has been able to pay down roughly $2.4 million on its debt from Dec. 31, 2018. As of June 30, the health system’s debt totaled $58.5 million.

“This is the last month you will see it that low. We had our bond close at the beginning of July, so as of next month you will see that increase by $4 million for the amount drawn on the bonds,” Cook said.

Phelps Health’s debt service coverage ratio, Cook said, shows the health system can meet its principal due on its debt with the results from the investment portfolio for this fiscal year eight times, with an overall debt to capitalization ratio of 19.3 percent.

“The lower the ratio, the better,” Cook said.  “Even with the additional debt, we are going to bring into the organization that number is going to stay below 25 percent, so that means we will still have excess capacity and a strong balance sheet if we were to go back out and borrow additional funds.”

Following Cooks June financial report, the finance committee considered two capital contingency requests.  The first capital contingency request was for a $2.8 million buildout for the general surgery clinic in the Delbert Day Cancer Institute.

Phelps Health’s Chief Executive Officer Ed Clayton said the general surgery and orthopedics clinics currently share the same suite in the Medical Office Building. Both clinics are at maximum capacity, and both clinics anticipate future growth. The buildout of the new general surgery clinic will allow the orthopedics clinic to expand into the space vacated in the currently shared suite in the Medical Office Building.

Three contractors submitted final and full bids for the proposal following the bid opening in July, Phelps Health’s Senior Vice President and Chief Operating Officer Jason Shenefield said.

There was a difference of $16,000 between the highest and lowest bid, and McCarthy Building Companies, Inc. was the only company to include a cost contingency in their proposal, Shenefield said.

“They estimated $120,000 for their contingency, which is still within the total estimate," Shenefield said. “The other two companies didn’t include any contingency amount, which is concerning because if anything comes up, then we have nothing there to work with.”

Shenefield then recommended the finance committee accept the bid from McCarthy for $2.3 million, along with the additional line item for fixtures and furnishing coming in at roughly $465,000.

“So really we are asking for a total project of $2.8 million to build the general surgical clinic,” Shenefield said. “When we did our capital budget we budgeted for a couple of different projects, so we have $1.2 million in our capital budget to use towards this. This would be asking for an additional $1.6 million as a contingency for our cash reserves to go ahead and begin this project.”

Construction is set to begin sometime before the end of 2019, and the construction bid put forward by McCarthy was accepted.

The finance committee then considered a request for a $38,000 capital contingency for the purchase of a new lab analyzer.

“When we did our 2017-2019 capital budget, back at the beginning of 2017, we set aside around $1.4 million for equipment needs that we couldn’t quite foresee, but we knew might be needed as we got further in our approved capital budget,” Cook said. "The current equipment has a lot of issues maintaining connectivity with the organization’s current systems."

A motion was then made, and the finance committee accepted the $38,000 capital contingency request for the purchase of a new lab analyzer.