Carilion Roanoke Memorial Hospital. Photo by Matt Busse.

Carilion Clinic anticipates reporting a negative operating margin at the end of this fiscal year, which would mark the second year in a row the Roanoke-based health system has operated in the red.

Nonetheless, executives say that even though the nonprofit health care provider is seeing the impacts of a competitive labor market and higher costs, its balance sheet is strong and it remains on track to complete major capital projects on schedule.

Carilion says it generally aims for an annual operating margin of 3% to 5%, which it then reinvests in its facilities, technologies and communities. In fiscal years 2020 and 2021, federal COVID-19 relief helped turn Carilion’s otherwise negative margins into positive ones. 

[Disclosure: Carilion is one of our donors but donors have no say in news decisions; see our policy.]

In fiscal year 2022 — which ended Sept. 30, 2022 — even $53.5 million in COVID relief that Carilion received on top of its $2.24 billion in operating revenue was only enough to turn a -4.93% margin into a -2.49% margin — better, but still not in the black, according to financial figures that Carilion officials provided this week.

“We were fortunate to receive support through federal COVID relief, but that program ended in 2023. We’re trending in the right direction this year but still anticipate a negative operating margin for FY23,” Carilion CEO Nancy Agee said in a statement, referring to the fiscal year that ends Sept. 30 of this year.

In an interview Wednesday, Agee and Carilion Chief Financial Officer Don Halliwill said that they anticipate a fiscal year 2023 operating margin of about -2.5%.

While that would be similar to the margin from last fiscal year, achieving it without the help of the federal COVID money would mark a “major improvement,” Agee said.

Furthermore, Agee said she anticipates that Carilion will return to a positive operating margin in fiscal year 2024.

Although federal COVID-19 relief money is drying up, the pandemic continues to make itself felt. Coronavirus cases are on the rise again, and Agee said Wednesday that “dozens and dozens” of Carilion staffers are calling out sick each day.

“It’s very much a prevalent virus,” she said.

The Carilion Clinic health system consists of seven hospitals and more than 250 clinics with just over 14,000 employees serving approximately 1 million patients each year in western Virginia. 

Carilion’s financial management has allowed it to weather the pandemic while moving forward on expansion projects, Agee said.

It plans to open a new 12-story, $400 million Crystal Spring Tower at Roanoke Memorial Hospital in 2025 and is moving Carilion Mental Health outpatient services to a new, larger space at Tanglewood Mall in an $11 million project.

But Carilion, like other health systems nationwide, is working to recover from pandemic-related losses while grappling with persistent staffing shortages

Expenses are rising — most notably, suppliers’ costs have risen and employees are earning higher wages.

Agee said that salaries have increased about 27% since before the pandemic, with a focus on clinical roles.

“Carilion’s focus on clinical care, innovation, research and academic partnerships has built a culture that attracts world-class talent. We’ve also leaned into the lessons from the pandemic, continuing flexible staffing and remote work models when able, giving staff the chance to determine schedules and roles that work best for them,” Agee said.

Executive compensation has risen as well, according to the health system’s 990s — tax forms that certain nonprofits provide annually to the IRS — filed last month.

Agee said that while executive compensation rose from fiscal year 2021 to fiscal year 2022, it dropped from fiscal year 2020 to 2021, and increases seen in fiscal year 2022 were “a reflection of full pay being restored following decreases during the pandemic.”

The five highest compensated executives at Carilion Clinic for the latest fiscal year were as follows: Agee, with $2.66 million in total compensation; President and Chief Operating Officer Steven Arner, with $1.38 million; Chief Medical Officer Dr. Patrice Weiss, $1.31 million; Halliwill, $1.29 million; and Chief Administrative Officer Jeanne Armentrout, $1.16 million.

Some individual Carilion physicians’ compensation would place them among those top five. 

Agee said the board works with a third-party consultant to determine executive compensation at market rates.

“Pay for our executives is competitive with peers in similar size nonprofit health systems,” she said in her statement.

While expenses have been rising, revenues haven’t been keeping pace.

Neither Medicare payments to hospitals nor contractually negotiated payments from commercial insurers are matching inflation, Agee said.

Some Medicaid patients are losing eligibility due to the federal government’s “unwinding” process of requiring annual re-enrollments following a three-year pandemic-induced grace period.

“Unlike other businesses, we cannot simply raise prices to make up the difference. … The majority of our patients are Medicaid and Medicare patients; that’s simply a reflection of the payor mix in southwest Virginia,” Agee said in her statement. “We operate by set rates with government payers that cannot be negotiated and, as mentioned, do not keep pace with inflation.”

To bring down costs, Carilion is executing several strategies.

It’s negotiating with commercial insurers such as Anthem, with some multi-year contracts having last been signed before the pandemic and before recent inflationary trends.

It’s prioritizing staff retention, which has led to a nearly 25% decrease in more expensive clinical contract labor, such as travel nurses, since last spring.

And it’s using technology to optimize services through efforts such as hiring “virtualists” — physicians who focus exclusively on telehealth care, Agee said.

“While we’re feeling financial pressures, we know that our communities and patients are as well. We continue to work with patients to find ways to lift their financial burden,” she said.

Agee noted that Carilion offers financial and community assistance in a variety of ways that aren’t reflected in tax filings. For example, under the health system’s policies, patients qualify for fully or partially discounted care if their assets and family income meet certain criteria. 

Carilion isn’t alone in its financial challenges: “It’s a problem across the country,” Agee said Wednesday.

Ultimately, Agee said in her statement, “we’re starting to heal following the turbulence of the last few years, but it will be a long process.”

“We’re always working to improve and deliver the care that our communities deserve. We’re proud of what has been accomplished, the projects that we’re able to continue despite disruptions like the pandemic, and we ask that the community continue to be engaged in their health.”

Matt Busse is the business reporter for Cardinal News. Matt spent nearly 19 years at The News & Advance,...