Leasing a hospital and buying a used car have at least one thing in common: It's tough to get your money back when something goes bad after the deal is done.
Duke University Health System is trying to persuade Durham (N.C.) County commissioners that it deserves financial relief from its 20-year lease of 185-bed Durham Regional Hospital because of accounting errors discovered after the lease was signed, which led to a major financial shortfall at the hospital last year. But so far, the health system's pleas have fallen on unsympathetic ears.
"I don't think the commissioners are favorable to amending the lease," said Becky Heron, one of the county commissioners who appoint the board of trustees for Durham Regional's not-for-profit corporate parent. "It was an agreement that was made, and a deal's a deal," she said.
Duke's request for a lease adjustment based on revised financials is a variation on the theme of troubled hospital system mergers that have come to light in recent months (May 29, p. 24). In many instances, the realities of merged systems have fallen short of expectations because of incomplete or flawed information provided during merger talks.
In June 1998, Durham-based Duke signed the lease for Durham Regional. Also that year it acquired 168-bed Raleigh (N.C.) Community Hospital. Including its 878-bed Duke University Medical Center, the system controls the entire acute-care market in Durham.
In the fall of 1999, however, Duke's auditors discovered that Durham Regional for several years had been using an incorrect accounting practice that overstated Durham Regional's accounts receivable, failing to make adjustments for bad debt and contractual discounts provided to insurers.
The resulting $8.8 million unfavorable adjustment contributed to the hospital's $12.8 million operating deficit in fiscal 1999. It also led to the resignations of the hospital's chief financial officer and its controller, as well as the announcement that Richard Myers, Durham Regional's chief executive officer, would step down from that role at the end of this month and retire in November (See editorial, p. 20).
Duke's original $7.1 million lease commitment includes a $3.5 million annual lease payment, a $1.5 million annual supplement for the county's ambulance service and a $2.1 million subsidy for Lincoln Community Health Center, an inner-city clinic.
Duke officials have requested a meeting with commissioners "regarding some financial relief that will hopefully enable us to meet DRH's financial objectives," a letter from Myers to Durham's board of trustees said.
William Donelan, executive vice president of Duke University Health System, did not return calls for a comment.
In its letter, however, Myers noted that Duke transferred rehabilitation services to Durham Regional this year and that the patient census has jumped 10% since the lease was signed. The hospital is expected to generate a 1% operating profit in the current fiscal year.
Relying on the audited financial statements the hospital provided to Duke, system officials thought they could meet projected financial targets of a 1.5% profit in the first year of the lease, 2.5% in the second year and 3.5% in the third.
"However, knowing what we know today, there is no possible way for us to meet DRH's targets as well as the obligations of the original lease," the letter said.
Duke recently closed one of three intensive-care units at Durham Regional because of a nursing shortage.
Heron, however, said it was the system's responsibility to do proper due diligence before signing an agreement. "If I were going into a proposed merger, I'd certainly try to do my due diligence," said William Bell, another county commissioner. "It's a money issue; that's what it's always been from when we started. That's why Durham Regional was in a position to be considered for a merger."