By Lisa Rapaport, The Sacramento Bee, Calif. Knight Ridder/Tribune Business News
May 1--Sutter Health reported its strongest financial results in more than a decade Friday, outpacing record revenues from the previous fiscal year and shoring up resources for a planned hospital building boom, company executives said.
For the year ended Dec. 30, the Sacramento-based nonprofit health system reported operating income of $389 million on total revenues of $5.7 billion. That's a 6.8 percent operating margin as the nation's top-performing nonprofit hospital chains are typically hitting margins around 2 percent to 3 percent.
That is also the second consecutive year Sutter's margins far outpaced the industry average. In fiscal 2002, Sutter reported operating income of $265 million on revenue of $4.9 billion -- a 5.4 percent margin.
Robert Reed, Sutter's chief financial officer, hailed these operating margins as the essential foundation for capital expansions and technology upgrades that will cost an estimated $6.9 billion over the next 10 years.
'It's pretty straightforward math for us. We calculate our capital requirements and then set our margin targets,' Reed said. 'The hospital systems that have not generated the same margins can't make the same investments.'
Throughout Northern California, Reed said, Sutter is expanding hospitals, building physician offices, upgrading technology and buying new medical equipment.
While Sutter executives draw a straight line between boosting the balance sheets and building facilities, labor leaders long critical of the nonprofit chain's billing practices lambasted its financial results.
'Sutter's margins are so much higher than Kaiser and Catholic Healthcare West and all their competitors, yet those competitors are building just as much, if not more,' said Sal Roselli, president of Local 250 of the Service Employees International Union.
SEIU, the nation's largest health workers union, has in recent months pressed the California Public Employees' Retirement System to drop some of Sutter's hospitals from its health coverage, citing the high cost of care at Sutter. CalPERS is to vote May 18 on a proposal to drop 15 Sutter hospitals from its HMO network.
James Cortez, a nonprofit hospital analyst for the credit rating agency Standard & Poor's said Sutter's margins, while higher than other nonprofits, reflected a management strategy designed to make it cheaper for the health system to borrow the money needed for its building projects.
Sutter, which has an investment grade rating of AA-from S&P, has higher margins but a weaker balance sheet than its competitors, Cortez said. In particular, Sutter lags behind the industry average for its days of cash on hand, essentially a measure of how much rainy-day money is readily available to meet unanticipated expenses. Sutter has 109 days, far below the 178-day average for other chains.
Instead of stashing cash, Sutter is spending it on facilities and market share, Cortez said.
The 26-hospital chain earned nearly one-third of its income last year from five Sacramento-area hospitals: Sutter General Hospital and Sutter Memorial Hospital in Sacramento; Sutter Roseville Medical Center; Sutter Auburn Faith Hospital; and Sutter Davis Hospital. Those five reported operating income of $109 million on revenues of $1.26 billion last year, compared with $95.6 million in income on revenue of $1.1 billion a year earlier.
Growing demand for specialty care helped bolster Sutter's revenues in the region, local executives said.
'If you look back at us in 1999 and 2000, we were really struggling financially here,' said Sarah Krevans, chief executive officer for Sutter's Sacramento region. 'Now, we have seen our organization perform very well in the past two years. And we are seeing an investment in facilities and technology as a direct result of that turnaround.'
Building plans include:
--$385 million at Sutter General Hospital for a new women's and children's medical campus; remodeled units for cardiovascular transplants, pediatric intensive care and oncology.
--$118 million at Sutter Roseville Medical Center for new medical offices in Roseville and Lincoln; an outpatient surgery center; a new, 90-bed acute care hospital tower; and expansions of intensive care, trauma and family birth services.
--$8.8 million at Sutter Auburn Faith Hospital for expansions of the emergency room, cardiac lab, ambulatory surgery and women's imaging units.
--$7 million at Sutter Davis Hospital to expand outpatient surgery, emergency department, labs and operating rooms.
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(c) 2004, The Sacramento Bee, Calif. Distributed by Knight Ridder/Tribune Business News.
