Carilion financials should return to black in ’24, CEO says

Carilion, with 1 million patients in Southwest Virginia and annual revenue exceeding $2 billion, posted a negative 2.5% operating margin during the 2021-22 fiscal year and anticipates losses equal in scale this fiscal term, which ends this month.

But CEO Nancy Agee anticipates Carilion will return to profitability in the 2024 fiscal year. It is still advancing longer term infrastructure projects, including plans for an enhanced psychiatric hospital and new cancer treatment center, which are undergoing preliminary design, she said. A new heart unit and expanded emergency room are under construction.

And it remains not-for-profit, its mission to advance the health of the communities it services exempting the organization from paying income taxes. Officials said they bolstering the health system by spending excess cash on staff and capital projects.

Executives in recent days released financial results, an annual undertaking, by emailing IRS 990 forms to media organizations and meeting briefly with reporters Wednesday.

In general, like other not-for-profit health care centers, Carilion says costs have increased faster than payments, officials said. Salaries stand 27% higher than before the pandemic began. Carilion can’t simply raise prices proportionately, not when three-fourths of its revenue comes from Medicare and Medicaid, whose reimbursement rate increases lag the inflation rate, officials said. Meanwhile government grants of about $54 million a year to buffer cost pressures that coincided with COVID-19 have ended, but the pressures have not, officials said.

Carilion is profitable overall, said Don Halliwill, chief financial officer and executive vice president. Its overall results factor in investment returns and revenue from services provided outside of clinical care. But there’s a major push underway to restore the profitability of its health care, Agee said.

“Can you continue at a negative operating margin long term? At some point you’re pulling too much out of your balance sheet to cover your costs. You’ve got to get back,” she said. “What we’re doing is watching every dollar and tightening our belts.”

Agee said use of expensive contract labor has decreased, a way to cut costs. The health system is acting on a pent-up demand for treatment by bringing in more patients for care, a way to raise revenue, she said.

In a related business strategy, the embrace of technology, Carilion expanded use of telemedicine, is experimenting with drone delivery and has engaged with Microsoft on a pilot project involving ChatGPT, Agee said.

“It’s a myriad of things … that we’re doing to improve those financials. So we’re very much in process and we will get stronger with them,” she said. “We sold the laundry. We’re doing things trying to be very focused on what’s core to the provision of services and doing it as effectively and efficently as we can.”

It seeks an annual operating margin of a positive 3.5% to 5%, the level needed to generate capital and build up staff, and reached it annually for 10 years before the margin turned negative, she said.

“In FY 2024 we will return to a positive operating” margin, Agee said. “I’m making that statement because I want it to be true.”

Meanwhile, a major expansion of its flagship institution, Carilion Roanoke Memorial Hospital remains on track for completion in 2025.