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Last week, the Paynesville Area Hospital District Board of Directors approved a budget for its 2007 fiscal year that calls for a profit of $1.35 million for the Paynesville Area Health Care System (PAHCS), the district's trade name.

PAHCS posted profits of $1.4 million in 2004 and $0.775 million in 2005 and expects to have a profit of $1.0 million in 2006. Its 2006 fiscal year ended on Sept. 30, 2006, and its 2007 fiscal year started on Oct. 1, 2006. Its 2007 fiscal year runs til Sept. 30, 2007.

A profit of $1.35 million would represents an operating margin of 4.4 percent. PAHCS also plans to spend $1.5 million in capital purchases during its 2007 fiscal year and to put another $1.0 million into reserves. After funding its reserves - or board designated funds - at $1 million for the last two fiscal years, PAHCS now has over $2 million in cash reserves.

Prior to 2004, PAHCS had operated in the red for two straight years, which strained its finances. Now, chief operating officer Kirk Johnson told the board last week, the board will need to decide when it has sufficient reserves, when money in the bank might be better spent on improving operations.

In 2006, PAHCS has averaged 51 days cash on hand, a measure of cash flow, and its 2007 budget calls for having 66 days cash on hand.

PAHCS also found itself highly leveraged a few years ago and struggled to cash flow due to its high debt. PAHCS refinanced its debt and has maintained a policy of no new debt for several years, but PAHCS might have to revisit that, too, in the future, said Johnson, since debt is a tool that should be utilized when appropriate.

In refinancing its debt, PAHCS agreed to a set of conditions whereby its primary lender had to give approval for any significant capital purchases. If the 2007 budget is reached, said Johnson, all the conditions will be met and these restrictions lifted.

Key assumptions in the PAHCS budget are an average five percent increase in hospital and clinic charges and an increase of three percent in overall clinic and hospital volumes, yielding an increase in gross revenue by 8.5 percent. (PAHCS also should get an additional $200,000 in nursing home revenue due to rate increases from its bed closures at both the Koronis Manor in Paynesville and Hilltop Care Center in Watkins. Also, due to a formula change by the state for nursing homes in Stearns County, the Koronis Manor should see another $250,000 in rate increases.)

While PAHCS expects to have total revenue of $46.7 million in 2007, its allowances (discounts to government programs and insurance companies) if $16.0 million reduce its net revenue to $30.7 million. This is an increase of 5.0 percent from 2006.

Expenses, meanwhile, are expected to total $29.5 million, up only 4.4 percent, yielding a profit from operations of just under $1.2 million. With non-operating revenue, PAHCS expects to reach a profit of $1.35 million in 2007.