Cost-cutting measures and a refocus on the local patient-market over the past three years have strengthened the financial stability of Southwest Memorial Hospital, managers reported recently.

A set of three financial ratios that compare Southwest against other rural hospitals of similar size and scope have shown substantial improvement since the ratios were first initiated by the Montezuma County Hospital District in 1996.

The fiscal yardstick is less a measure of profitability than an indicator of where Southwest ranks compared with hospitals statewide, and lately they have moved toward the top of the list.

The complex topic of the hospital’s operation deserves some background.

In September, 1996 the district board voted to cede operations and assets of the public hospital to Southwest Health System (SHS), a private non-profit corporation, under a 50-year operating lease agreement.

The arrangement puts MCHD as the "landlord" over SHS, which oversees the hospital’s day-to-day operations.

The controversial restructuring was based on the premise that as a private corporation SHS could react quicker and with more flexibility in positioning Southwest to succeed in the rapidly changing health-care industry.

Supporters of the restructuring argued that reacting to such changes was difficult when governed through a publicly-elected board.

But public outcry that the MCHD board was "selling the farm" without accountability for taxpayer-owned assets prompted checks-and-balances to be added into the operating lease specifying performance levels in the following three key ratios.

• The Return on Assets ratio is a measurement of the hospital’s net income over the last four quarters divided by the total assets at the end of the last quarter and expressed as a percentage. It gauges how much money the hospital is earning on its investment.

• The Current Ratio, or an indicator of the hospital’s ability to meet short-term bills, is represented by comparing the hospital’s total current assets to its total liabilities.

• And finally, the Acid Test Ratio, which compares of the hospital’s cash and temporary investments divided by the total current liabilities at the end of the last quarter.

SHS is required under the operating-lease agreement to keep these ratios at certain benchmark levels when compared to other hospitals in the sole community provider category.

They are measured on a percentage scale, meaning that if SHS performs at the 75th percentile (the optimum under the lease), for example, then only 25 percent of all hospitals in that category performed better. Likewise at the 50th percentile, half are better and half are worse off, and so on.

First-quarter ratios for 2000 show that Southwest is on track. The Return on Assets is nearly at the 75th percentile, up dramatically from 1998, while the Acid test has climbed above that mark.

The Current ratio is below the 75th but well above the 50th percentile and is rising.

According to the hospital operating lease, if the Return on Assets and either the Acid test or Current ratio fall below the 75th percentile then the district shall request that SHS give special attention to the areas contributing to the low ratio.

If the Return on Assets and either of the other two fall below the 50th percentile, then SHS is required to submit to the district a memorandum of understanding setting forth the actions that will improve those areas. If those numbers fall below the 37.5 percentile then SHS is required to turn in a corrective action plan with results by a specified date.

The lease could be terminated if the deadline is not met. And finally, in the unlikely scenario that that combination of ratios drop below the 25th percentile, then the district has the option of terminating the lease agreement.

Since 1996 those numbers have slowly crept up due to internal cost controls, and the abandonment in 1998 of a failed plan to increase patient volume through outreach clinics, said George Brisson, Southwest’s Chief Operating Officer since last October. That effort included clinics in Monument Valley, Naturita, Montezuma Creek, and Telluride, but never materialized into an increased patient census at Southwest.

"Let’s not go there; those outlying clinics were a large drain," Brisson said. "The trend of attracting patients outside the immediate market area is gone."

The financial improvement is also attributed to stricter cost controls and cutbacks within Southwest, he said.

"It was a matter of getting our financial house in order," he said. "We made some staff cuts last year and reduced some employee benefits; no salary increases were given last year either. Also we discontinued some contract services which are expensive."

Part of the reason the ratios had been showing low performance was because current levels were being compared to 1997 data, the latest available at the time. The trickle-down effects of lower reimbursement rates had not reached Southwest by the time that data came out, Brisson said, skewing the numbers unfairly.

Last month 1998 numbers on sole community providers were finally released by the firm Deloitte and Touche.

"When we compared us with the 1998 data, the ratios rebounded, showing we were doing better than they were showing," he said.

Brisson gave much of the credit to hospital staff who "had to take some lumps to get us where we are today. It is very admirable how the employees have pitched in — they have really pulled together."

The challenges rural hospital’s face across the nation are difficult, Brisson said, largely because shrinking Medicare/Medicaid reimbursements due to the Balanced Budget Act of 1997 have hurt hospitals nationwide. More than half of all business at Southwest Memorial is derived from government health-care programs, he said, but those bills are not always paid in full, leaving SHS to take the loss.

"Our physicians are dedicated to giving the very best care possible for the patient, and to protect themselves from malpractice suits," Brisson said. "In doing so a lot of charges like lab fees, prescriptions, tests and so on are racked up, but because of the Balanced Budget Act those costs are not always reimbursed as they once were, so it is a real struggle. It is a national phenomenon."

High indigent-care costs in Montezuma County, totaling $1 million per year in write-offs, have also been a challenge for Southwest to absorb, Brisson said.