Northern Arizona Healthcare CEO David Cheney started in the role on June 12. Cheney answered questions in an in-depth interview in December.
Verde Valley Health Care Series
This is the second story in a series from an in-depth interview with new Northern Arizona Healthcare CEO David Cheney.
A letter has been circulating since late November claiming that there are significant issues with the Northern Arizona Healthcare board and administration. The letter was penned by Dr. Douglas Mapel, head of Flagstaff-based Northern Arizona Pulmonary Associates, an organization with which NAH terminated its contract in March.
The letter claims that “what used to be a consistently profitable health care system is now losing money at the rate of $56,000,000 per year.”
Mapel provided no documentation to support this claim, nor many of the other claims in his letter.
■ Can you speak about NAH’s financial status and alleged losses?
Cheney: “Last year we lost $44 million and locally, people go, ‘Oh, they’re really losing a lot of money.’ At the exact same time period, CommonSpirit Health, aka Dignity Health, lost $1.2 billion. Sutter [Medical Center], where I came from, lost money. Banner [Health], I don’t know what their numbers are, but they are having trouble.”
Phoenix-based Banner Health reported a loss of $113 million in 2022.
Cheney: “So that was a time period at the end of COVID when we were all losing money. Today, we’re in way better shape. We’re still negative, but instead of looking at fiscal year a year ago, when we were $41 million behind, as we sit here today, we’re about $10 [million] or [so] behind, so way better, but we’re not going to enjoy it until we’re in the black. We have to have some sort of margin because we don’t have shareholders — but this is how we reinvest in the community, right? We have a huge investment coming up for our Verde Valley hospital — huge investment that we have to pay for.
“We have a whole plan of what has to happen to that facility. It’s the most unsexy thing you can imagine, which is the central plant — where all the electricity, water, HVAC, everything comes from. That thing is out of date and needs to be replaced.
“So we had an outside contractor come and say, this is where it should be located, this is what it needs to bring it to modern-day. They asked, ‘Any questions?’ and I said, ‘Yeah, how much?’ $220 million just for the central plant; nothing that you will see visible from the street.
“But we are going to keep that hospital, which means we have to invest some big dollars in that facility. From where? I’m not sure yet, but I’ve got to find it. It’s not an option.”
■ We looked at the IRS’ Return of Organization Exempt From Income Tax Form 990s going to back to 2014 and 2015. From the 990s alone, it appears NAH is losing between $40 million and $61 million every year. It’s not possible to lose $40 million for 15 years. Somewhere, that has to be paid off somehow. There’s additional income and other financials to balance that perceived loss, right?
Cheney: “We look at EBITDA [earnings before interest, taxes, depreciation, and amortization, a measure of core corporate profitability]. That number is different from the net income piece of the thing.
“If you even look at just operations, or you can look at the whole organization, because every hospital system takes a big chunk of money and puts it into the market. You can either lose $100 million in a year or you can make $200 million. So it becomes very challenging to give an accurate number that the community can understand.
“There was a time when many systems were making 6%, 7%, 8% margins for a year.
“Our goal for this year, which is very typical to any hospital in the U.S., we’re shooting for a 1% margin. Up in northern California, they’re shooting for 1.5% margin. So things have changed dramatically, but it’s still going to be a challenge.”
Northern Arizona Healthcare Audit
NAH’s Form 990 only includes the corporate office and the medical group, which will always show a loss. The numbers from the NAH Form 990 must be combined with the FMC and VVMC Form 990s to come up with the total numbers for the organization as a whole. The FMC 990 also includes Guardian Medical and Guardian Air Transports, NAH stated in a follow-up email. The audited financial statements report both income from operations, and their non-operating income, which includes changes in the value of NAH’s investment portfolio.
According to the Consolidated Statement of Activities in the 40-page Consolidated Financial Statements and Supplementary Information audit prepared by the Phoenix office of Ernst & Young LLC, NAH had total assets of $1,332,561,000 in fiscal year 2023, and total liabilities of $317,923,000.
NAH had total revenue of $735.7 million in 2023 compared to $774.2 million in 2022; expenses of $791.7 million in 2023 compared to $765.3 million in 2022; an investment gain of $56.4 million in 2023 compared to an investment loss of $96.4 million in 2022; and additional revenue of $15,108,000 in 2023 compared to a deficiency of $869,000 in 2022.
Flagstaff Medical Center had a gross profit of $487,014,000 and a net profit of $64,099,000.
The Verde Valley Medical Center had a gross profit of $176,025,000 and a net profit of $26,853,000.
Net excess revenues over expenses showed a profit of $15,502,000 in 2023 compared to a net deficiency of $88,424,000 in 2022.
