On Tuesday, Carolinas HealthCare System officials announced plans to spend $3 billion on capital projects as part of a six-year “reinvestment” plan.
At the system’s quarterly board meeting, Chief Financial Officer Greg Gombar described the goal to spend 10 percent of net operating revenue annually on capital projects – such as buildings, technology and programs – to meet consumer demand.
Although the hospital spends money on such projects every year, the total has dropped in recent years. The new goal is more than twice what the system has spent so far this year.
“We don’t have a margin for margin’s sake,” Gombar said. “We have a margin so we can reinvest in our community. We need to have the funds to reinvest so we can serve the people we need to serve.”
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Gombar didn’t specify future projects. CEO Michael Tarwater said after the meeting that at least one new project will be announced early next year. But others are still to be determined.
As a nonprofit system, Carolinas HealthCare retains its earnings and reinvests them in expansion and improvements.
Since 1984, Carolinas HealthCare has spent, on average, 11 percent of net operating revenue per year on capital projects, Gombar said. That included years in the 1980s and 1990s when the percentage was 20 percent or above.
“There was a lot that needed to be done then,” said Tarwater, who came to Charlotte in 1981, when Carolinas Medical Center was called Charlotte Memorial Hospital and considered a place for charity care.
Starting in 2007, the Great Recession and subsequent passage of the Affordable Care Act led to a more cautious approach on capital projects. Still, in recent years, the system opened Levine Cancer Institute, Levine Children’s Hospital and a psychiatric hospital in Davidson. “We wanted to bring services that the community needs and deserves,” Tarwater said.
So far in 2015, the system has spent only 4.8 percent of net operating revenue, or $176 million, on capital projects. But the board-approved budget for 2016 includes $470 million in capital expenditures, or 8.5 percent of net operating revenue. The goal is to reach 10 percent by 2019.
Revenues better than expected
Carolinas HealthCare officials reported a better-than-expected 11 percent increase in net operating revenue for the first nine months of 2015 compared to the same time last year.
Board Chairman Edward Brown praised Tarwater and his executive team for achieving efficiencies that helped produce a healthy margin. But he warned that it’s not “time for confetti. Happy days are not here again. There is a tremendous amount of uncertainty that exists over the next few years.”
Despite a volatile health care climate that has included cutbacks in reimbursement from private and public insurers, Carolinas HealthCare officials said they’ve seen a countervailing increase in the number of patients using the system’s hospitals and doctors.
Part of the increase can be credited to the region’s growing population. “But we grew more than Charlotte grew,” Tarwater said.
Patient volume spiked at the end of 2014 as consumers flocked to use covered health services after meeting their insurance deductibles, Tarwater said. But the increase continued in 2015, even after flu season ended. “It never really tapered off until August or September,” he said.
For the first nine months of 2015, the system reported net operating revenue of $4 billion for its primary enterprise, which includes 12 hospitals in the Charlotte region. That was an 11 percent increase over $3.6 billion last year at the same time.
After expenses, operating income for the first nine months was $212 million, or 5.3 percent of net operating revenue. That compared to last year’s $145 million, which was 3.9 percent of net operating revenue.
In other business, board member Al McAulay Jr. said the search for a chief executive to replace Tarwater, who has announced he will retire in June, is “on schedule.” Executive search firm Witt/Kieffer has received input from more than 150 people, including board members, and developed “a terrific group of candidates.”
McAulay declined to give more details, citing the need for confidentiality “to ensure the most successful outcome possible – and to respect the rights of candidates who may not want their candidacy known.”