308 Willow Avenue, Hoboken, New Jersey 07030 • 201-418-1000. www.HobokenU!V1C.com

January 28, 2009

George W. CrimminsExecutive DirectorHoboken Municipal Hospital Authority308 Willow AvenueHoboken, New Jersey 07030

Dear Mr. ./". Qrlll1mins: ~.'. .".,.,. . v. Responding to your Iette 00anuary 26ili, Iam enclosing information requested

about the finances of Hoboken University Medical Center, the overall economic outlookfor the industry, and long-term projections for the fiscal health of the hospital.

As you suggested, this material may be distributed at today's meeting of theAuthority.

Very truly yours,

~J ..IV·~~'-·

Harvey ~ZbergChief Executive Officer

General Economic Outlook

On January 27th, 2009, the Conference Board (a New York based business index

research group) said its Consumer Confidence Index fell to the lowest point it has everbeen since the survey began in 1967. "It doesn't feel good," the report says, "and as aresult consumers are spending less and they are worried about the outlook for the U.S.economy and their own personal situation."

Despite general hopes that an economic stimulus initiative out of Washington willsustain current jobs and generate new ones in the New JerseylNew York region,consumer behavior is cautious, if not downright tight-fisted. Nationwide, physiciansreport fewer patients seeking care and more patients postponing tests and treatments.Eventually some of these patients may require care but at that point the treatment may bemore costly and fewer of these patients will have adequate insurance.

Financial experts differ on the time the current recession will last and how rapidthe recovery might be. But prudent management of resources requires that action betaken now to prevent further financial losses, to compensate for losses already occurred,and to adapt to rapidly changing circumstances.

Hoboken University Medical Center Outlook

Despite gloomy predictions from healthcare experts noting that inpatient andoutpatient activity began dropping in the last quarter of2008 and that investment incomewill shrink as refinancing opportunities dry up, the outlook for Hoboken UniversityMedical Center is good.

The FAST (Fiscal Analysis & Statistical Trends) report issued by the New JerseyHospital Association, lists 52 acute care and 3 specialty hospitals. The most recent oneshows Hoboken UMC in the middle ofthe pack for all the indices that assess a hospital'sfinancial health except that it has the second highest percentage of charity care patients(Jersey City Medical Center is first.)

Informal communications from peers in the local hospital industry indicate that allother area hospitals are experiencing financial problems, including lessened cash flow,fewer admissions, and declining investment income. Others have already laid offemployees, closed or curtailed services, temporarily shuttered nursing units, and takenother steps to reduce operating costs.

The budget proposed for calendar year 2008 projected the continuation of then-current levels of charity care funding. Instead, the state budget cut funding for charitycare reimbursement of all hospitals, as well as Graduate Medical Education funding. Inaddition, interest received from bonds declined more than $1 million.

Despite those cuts, Hoboken UMC remained fiscally stable through three quartersof 2008. Efficiencies in providing service, reducing overtime from 5 to 1%, and

renegotiation of some contracts achieved savings that balanced the loss. However, in thelast quarter of 2008, the number of patients in the hospital began to drop. The averagedaily census went from an annual figure of 144.8 to 140.5. A percentage of thatdifference resulted from an improvement in the average length-of-stay for patients, butfinancial savings from that improvement can result only when staffing is adjusted.

However, at the start of2009, census began to rise again. For the first 27 days ofJanuary, the daily census averaged 152.5.

It is important to note that payment for services rendered usually arrives 45 to 50days after the submission of a bill. So payments received from insurers in January willreflect care given to fewer patients in late 2008 while reimbursements for care given tomore patients in early 2009 will not arrive until March. Therefore, although actions tocut costs begin almost immediately and patient activity has already begun to improve, thechanges will not affect revenues until spring.

2008 Loss

Although the first nine months of2008 showed break-even revenues andexpenses, in the final three months, losses began to accumulate. The year-end losstotaled $4,314,174. Although $4,562,795 depreciation is not funded, this is not an actualcash loss, but only a bookkeeping transaction.

2009 Budget

In order to provide a break-even budget for 2009, compensating for previouslosses, it was determined that $8,450,000 needed to be cut from the $150 million annualoperating budget.

• The reduction in overtime from 5 to 1% will result in $1,050,000 savings• Technology contractual changes will result in $1 million savings• Other contractual changes will result in $1 million savings• Changes to ER physician stipends will result in $400,000 savings• Reduction in physician payments will result in $800,000 savings• Reductions in expenses in ancillary departments will result in $1,000,000• Lowered insurance premiums will result in $150,000 savings• Staff adjustments based on lower average length-of-stay will result in

$900,000 savings

The remaining savings needed ($2,150,000) will be achieved through acombination of employee voluntary separations, union concessions, and layoffs, as wellas receipt of a gift from the Hoboken UMC Foundation from unrestricted funds. The goalis to reduce payroll from 3 to 5 percent.

Long-Term Projection

Although health care is no longer considered recession-proof, most financialexperts predict essential hospitals will be able to weather the current economic storm.Hoboken UMC, with its loyal physician base, skilled employees, and densely populatedreferral area, is well positioned to do so.

Although financial problems unrelated to Hoboken UMC caused the imposition ofa State Fiscal Monitor on the City of Hoboken and hampered the Hoboken MunicipalHospital Authority's ability to refinance as planned in early 2008, it is anticipated thatsufficient funds will be available from operating and investment revenues to remainstable.

When the new Emergency Department opens in early summer 2009, hospitaladministrators expect an increase of 15% in the number of patients seeking care there. Inaddition, the new facility is expected to attract a larger proportion of patients with healthinsurance. These increases will eventually improve the fiscal health of the hospital.

No assurances have been given that New Jersey and/or the federal governmentwill not impose further cuts to reimbursement. On the other hand, there is widespreadhope that the federal economic stimulus package will include relief for hospitals.

With that or without that, however, the overall outlook for Hoboken UniversityMedical Center for 2009 and beyond is upbeat!