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PAHCS's 2001 fiscal year ran from Oct. 1, 2000, to Sept. 30, 2001. During that time, PAHCS earned $309,000 from its operations and $96,000 in nonoperating gains, yielding a total profit of $405,000.

Total revenue was up $2.5 million or 17 percent in 2001. Total revenue in 2001 was $17.3 million, rising from nearly $14.8 million in 2000.

Patient revenue gains, which produced most of the total revenue gain, were due to general charge increases of five to seven percent and volume increases, said Jesse Heft, manager at Deloitte and Touche, PAHCS's auditing firm.

The biggest gains in revenue came at the hospital, which produced $15.6 million in gross charges in 2001, up $3.3 million (from $12.3 million) in 2000. Outpatient charges were up by $2.5 million and inpatient charges were up $0.8 million.

Altogether, inpatient and outpatient hospital revenue accounted for 65 percent of the patient revenue for PAHCS in 2001. Clinic revenue accounted for another 23 percent of patient revenue.

PAHCS wrote off $7.2 million in charges as uncollectible in 2001. Most of this is due to contracts with third-party payers who pay discounted rates. In all, PAHCS charged $24.3 million but actually received only $17.0 in revenue from those charges.

PAHCS earned another $0.3 million in other revenue, yielding a total of $17.3 million.

While revenues grew by 17 percent in 2001, expenses grew by 20 percent. Part of this was the addition of three physicians and a physician's assistant. Salaries have also increased generally in health care in 2001. PAHCS - despite self-insuring most of its medical care - still saw its health insurance costs for employees rise in 2001.

The rise in expenses reduced PAHCS' operating profits from $746,000 in 2000 to $405,000 in 2001. PAHCS's operating margin dropped from a 4.4 percent profit in 2000 to 1.8 percent in 2001.

Willie LaCroix, system administrator for the past two decades, said it's getting tougher and tougher to hold expenses in health care. "It's not the same anymore," he said. "You just can't do it."

PAHCS did a great job in collecting its received on accounts in 2001, said Heft, doing better than the state and national averages. This is important for the system because their large debt load causes some cash flow concerns. The auditors recommend keeping 100 days of cash on hand, but PAHCS had only 28 days of cash on hand in 2001.

PAHCS also assumed another $6.9 million in debt in 2001 for the current building and remodeling project. Overall, its long-term debt increased to $11.7 million in 2001.

PAHCS is carrying more debt than most health care facilities, but this is a conscious strategy as the system continues to expand.

PAHCS does have a relatively new facility, better than state and national averages. With the new construction, PAHCS could move into the top quartile nationally in age of facility in 2002, predicted Heft.

Board member Doug Ruhland wondered how the probable merger of two Good Samaritan Society nursing homes would affect PAHCS's finances in light of the audit. The administration said that the projections show that the new acquisitions - the Hilltop Good Samaritan Center in Watkins and the Good Samaritan Care Center in Paynesville - will cash flow.

The auditors will be doing a comparison of PAHCS's budget expectations to its audit results. This will be presented to the hospital board at their meeting in January.

The auditors did warn that the system needs to keep its debt load and cash flow constantly in mind. "Every new thing you do, you need to focus on these things," said Tracey Mostaert.

LaCroix pointed out that the Koronis Manor still has 15 empty beds, a typical number for the past month. At $100 per bed per day, this is an income loss of $3,000 per bed per month. Having 15 empty beds means a monthly revenue loss of $45,000, he concluded. "We need to turn that around," said LaCroix. "One way to do that is to get into the long-term care business."

"Is it going to be easy? No, it's not," he continued. "But it's the right thing to do. Now we need to do it right."

The only fault the auditors found was that PAHCS had put $5.5 million in construction funds in a bank without getting 110 percent collateral pledge, as required by a government entity. (PAHCS is owned by a hospital district comprised by seven area cities and four townships.)

State law also requires PAHCS to use checks with a restrictive endorsement, which it originally did not have for the new construction account.

Ruhland pointed out that PAHCS had the same problems during its last construction project: a new clinic in Richmond. He hoped this would be the last time.

New checks have been ordered, and PAHCS administrators are still working for the collateral pledges.

The auditors also recommended that PAHCS keep working on compliance with new HIPAA requirements (the first of which take effect in October 2002); keep developing a corporate compliance program; look into the new financial reporting requirements that will take effect in fiscal year 2003; try to build its cash reserves; and develop formal procedures for its pharmacy inventory.