“A Cent Makes Sense” is the message that South Central Kansas Medical Center officials spread during a series of recent town hall meetings.
SCKMC chief operations officer Clayton Pappan spoke May 9 to a group of nearly 20 at Veterans of Foreign Wars Post 1254, the last public meeting before ballots were mailed out this week asking Arkansas City voters whether to impose a one-cent, 10-year sales tax starting in October.
He started by addressing how the hospital reached its current predicament, as well as the measures it is taking to cut costs and generate more revenue in the future.
“I start the presentation with 2015 and the importance of that is that’s when Virgil (Watson) came on board as our CEO. He started in January of 2015, and actually that year was a very productive year for us,” Pappan said. “We accomplished a lot of things that started to get us back onto the right track.”
Some of those accomplishments include the recruitment of Dr. Adam Keesling, who replaced Dr. Robert Yoachim at the Ark City Clinic; becoming a Veteran’s Choice provider; being designated as a Sole Community Hospital, which allows the hospital to apply for other programs that will generate additional revenue for the operation of the hospital; and entering 340B pharmacy program to save on drug costs.
The Veteran’s Choice Program, in which both SCKMC and South Central Kansas Clinic participate, allows veterans to schedule their appointments through the VA, but the services can be performed in the local community. This program was designed to reduce wait times and overflow at the actual VA.
Depth of problem
“We already had 6,700 visits in 2015 and over 17,000 outpatient procedures … (but) it still wasn’t enough to keep us off of this list (a national report of Kansas hospitals facing closure),” Pappan said. “What we are facing is not just a problem here in Ark City — it is a national problem.”
Hospital closures across the country have gone up every year since 2010, according to Pappan.
“In 2010, only three hospitals closed across the country,” he said. “So far for 2016, there are already eight that have closed their doors or say they will be closing (their) doors by the end of this month.”
SCKMC gives away $1 million in uncompensated care every year and only collects 50 cents on every dollar that it charges, according to Pappan.
“To break that out to a daily value, it’s $44,000 dollars every single day that we write off to Medicare, Medicaid, insurance companies and to the individuals that can not or will not pay their bills,” he continued.
“We do about $250,000 to $450,000 — it varies each year — of actual charity care where we actually completely write it off and don’t expect any payment from the patients,” said SCKMC chief financial officer Holly Harper.
“About $1 million of that goes to bad debt every year for people that refuse to follow that process or pay their bills, and then the write-off … Clayton is talking about is about $14 million for the Medicare and Medicaid each year, and the other insurance companies.”
With the financial outlook of rural hospitals not being so rosy, hospital officials have made $750,000 worth of cuts and cost-saving measures.
“Almost all of them have already been enacted. There are one or two left that we’re still trying to get put in place,” Pappan said.
“But for the most part, that entire three-quarters of a million dollars worth of savings is being enacted at this point. Unfortunately, we are not in a situation where we are just going to be able to cut our way out of it. We are also going to have to generate additional revenue.”
Physician recruitment is one of the main ways the hospital is looking to increase revenue, and it already has added one physician this year.
Dr. Willie Posey, an internal medicine physician and non-invasive cardiologist, started practicing in Arkansas City and Winfield in March.
Orthopedic services are another area where the hospital is looking to recruit.
“Orthopedics really is an essential service for a rural hospital, particularly our rural hospital,” Pappan said. “At the old facility, we went for three years without a general surgeon and that entire department was run off of orthopedic surgery.
“Dr. (Christopher) Siwek … has since retired, but he practiced two and a half days a week at our facility, providing orthopedic services. Today, we have a half a day a week of orthopedic services. So we are losing a significant amount of patients to Wichita and we believe that a lot of that, if not all of that, could be recouped back and kept locally.”
The number of family practitioners is low in the community, which affects the hospital finances negatively.
South Central Kansas Clinic has started offering extended hours from 5 to 7 p.m. Mondays, Wednesdays and Fridays, as well as 8 a.m. to noon Saturdays.
“It’s something that we have heard a lot about in the community … an urgent care-type setting or after-hours clinic,” Pappan said. “This was the best option for us to kind of ease into that type of a program.”
These hours are not for appointments, but where walk-ins can go and see a medical provider.
“We think that is going to be extremely successful and as the program builds, we will add additional days and times,” Pappan said.
Other revenue generation
An expanded 340B program is similar to the program that the hospital is part of, but it would allow patients to see savings at the pharmacy level.
Currently, both Taylor Drug and Walmart are slated to take part in the program.
SCKMC officials expect to see $400,000 a year in revenue generated for the hospital once the program is developed fully.
The Rural Health Clinic designation that the downtown clinic is going to receive won’t impact a lot of the operation of the clinic, but it will impact reimbursement from the federal level.
It changes the reimbursement numbers by a significant amount and the clinic expects to receive $400,000 from that program just for seeing the same number of patients that it currently is seeing.
Planning for the future
Besides recruitment of additional physicians and expanding the 340B program, SCKMC is looking at eventually creating a women’s health program.
“We think that women’s health is the other area especially where we are really missing some local services that are going elsewhere,” Pappan said. “We have one of the world’s highest credentialed OB-GYNs in our town practicing full-time.
“Dr. Perry Lin is one of 1,500 physicians with his level of credentialing in the entire world. So he is the perfect foundation to build this women’s health program off of. If we can partner him with a family practice provider who really wants to specialize in women’s health … we can capture a lot of services that are going outside of the community.”
‘A Cent Makes Sense’
While the cuts to save costs and additional revenue the hospital is looking to enact make it appear that the hospital could reach a comfortable profit margin, the numbers are misleading because they do not take into account any equipment failures or any part of the facility that might need to be repaired by the year 2020, Pappan warned.
“That’s where the 1-percent sales tax comes into play. Not that that money would be used for those purposes, but currently we have a $1.9 million bond payment that the hospital is responsible for every year,” he said.
“We have the half-cent sales tax that generates about $800,000 and the rest comes out of operations, except for the last two payments, where we have had to have additional loans from the City (of Arkansas City).”
The funds raised by the one-cent sales tax could only be used for the purpose of making the bond payment.
“They can’t be used by the hospital for any other purpose … and they can’t be used by the City for any other purpose,” Pappan said. “Only for the bond payment and only for 10 years.”
A total of 67 percent of all Kansas hospitals receive tax support, generally either through mill levies or sales tax.
“We personally believe that the sales tax is the fairer tax of the two because our facility does not just serve the people within the city limits of Arkansas City, but all of Cowley County and the surrounding counties, as well,” Pappan said.
“We believe that it is fair to have those other individuals to also participate in paying for that facility.”
The average household income in Arkansas City is approximately $37,000, and approximately $8,000 of that goes to taxable purchases each year.
One percent of that amount is approximately 23 cents per day per household, according to Pappan.
But what happens if the sales tax fails?
“The City Commission has discussed on several occasions that an increase in property tax is very likely,” Pappan said.
“They’ve talked anywhere between 10 and 40 mills. In addition to that property tax, they will have to reduce some city services, and obviously the hospital will have to reduce some services as well.”
SCKMC officials estimate that they will have to cut 15 full-time employees from their staff of 200, or nearly 10 percent of the staff.
“In fact, it is to the point where if you start cutting that number of employees, you are selecting which services that you are no longer going to offer,” Pappan said. “For a rural hospital, starting to take out complete departments of your facility is really just delaying closure.”
Another option if the sales tax fails is to sell the facility, one that comes up quite often when people discuss the hospital’s predicament.
“With the amount of debt that is owed on that building at this point, it would be almost impossible to get that entirely paid off through a sale. We believe more realistically, it would be pennies on the dollar,” Pappan said.
“And again, the community would still be responsible for the difference not made up by that sale. So you’d still be looking at the property tax and a reduction in city services.”
“In addition, (we’d) no longer have local control of the health care in the community,” Pappan added. “Once you lose that local control, the new owners can do, really, whatever they want to do.”
Regional cautionary tales
If SCKMC were to be sold, the new owners could choose to allow only certain people to use the facility, to offer only select services or to close the facility and sell off the equipment.
The latter is what happened in Independence, Kan., last year and also is the situation currently facing Blackwell, Oklahoma.
Blackwell’s new owners have reduced services to the extent that they are only offering an emergency room and surgery department.
Even those who never use SCKMC and have no intention of using the facility could be impacted if it closes, Pappan explained.
“For every dollar generated by the local hospital, an additional 54 cents is generated within the community,” he said.
“That’s for all the payroll that our staff is making, turning around (and) buying groceries, buying gas, paying utilities — whatever the case may be. Not to mention the services we buy locally.”
SCKMC generates $30 million annually, making the additional money being generated amount to $16.2 million that goes back into the local community due to its continued presence.
Raising the levy?
One audience member asked if the sales tax passed if the city would guarantee that they would not raise the mill levy if the sales tax wasn’t quite covering the payment.
“For the first three years … between the half-cent and the one-cent, there will be an overage of more than what the bond payment is,” Pappan said.
“That will just stay in the account until it needs to be used for the bond payment. … You wouldn’t have to worry about that for the first three years from a bond payment perspective, for sure.
“After that point, it will make up all but $300,000 of (the payment), which sounds like a lot — and it is a lot — but compared to the $1.1 million that we’re trying to come up with now, it is an extremely doable number.”
“One thing is that if we can get this one-cent sales tax through, 2019 is when those bonds come due. We have a 7-percent interest rate right now, which is way too high,” said City Commissioner Jay Warren.
“We are hoping by that time that the hospital will be starting to turn around and be able to either take over some of that debt or (move it) around somehow locally into some banks to reduce this interest rate. It’s what we are trying to do.
“We are not trying to increase any more taxes at this point in time. If we can get that interest rate to drop back to where it should be, to three and a half or 4 percent … three-percent savings on $22 million is huge per year. That puts them in almost profit right there, just the interest off of that.”