BAR HARBOR – The only hospital serving Mount Desert Island ended its fiscal year in April with an operating loss of nearly $1.9 million, due in part to rising labor costs, less volume than forecast and shortfalls in reimbursements.

Art Blank, president of Mount Desert Island Hospital, said Wednesday he thinks the hospital’s financial health will rebound now that significant changes have been made.

Those changes during the past year include getting physicians qualified for higher Medicare and Medicaid reimbursements and streamlining hospital operations, Blank said.

“It’s been a disappointing year financially for us,” Blank said, “but not in other ways.”

MDI Hospital has recorded operational losses for the past several years, topping out at $1.7 million in fiscal year 1999, according to Jeff Nichols, hospital spokesman. The operational loss in 2000 was $1 million; in 2001 it was $706,000, Nichols said.

The hospital was bailed out of its financial problems this year by an infusion of $3.8 million in equity from the now-defunct Mount Desert Island Health Care Foundation, resulting in a net gain to the hospital of $2.35 million, according to the financial report released this week during the hospital’s annual meeting.

Hospital trustees last year voted to merge the foundation and the hospital to save on administrative and other costs, Blank said. The foundation was created by the hospital as a separate entity in 1983 to manage the hospital’s endowment.

The equity windfall to MDI Hospital will not be repeated, Blank said, but the hospital will receive an annual payment based on the earnings of the endowment. For example, the endowment generated $490,000 in revenue for the hospital in 2001, according to Nichols.

Another merger that’s expected to bring significant financial gains to the hospital is combining MDI Hospital physician practices with the hospital. By doing so, services provided in physician offices now will qualify for higher Medicare and Medicaid reimbursements, Blank said.

The hospital qualifies for higher government payments because it was designated as a “critical access” hospital in recognition of its rural location and distance from other hospitals, Blank said.

The “critical access” designation means MDI Hospital – and now its affiliated physician practices – will be paid 94 cents on the dollar for services rather than 65 cents on the dollar, Blank said. The hospital’s health care clinics around the island also will now qualify for the higher reimbursement, he said.

“These are major ways we are working on reducing this deficit,” Blank said.

Blank said the hospital has confronted rising health care costs and lower reimbursements from insurance companies and the government, while at the same time holding down cost increases to patients.

MDI Hospital has increased prices by 11.2 percent over the past five years, compared with annual health care inflation of 25 percent, the president said.

He said community support through outright gifts, which totaled almost $500,000 last year, along with foundation contributions has kept the hospital strong through the transitions of the past year.

Blank said hospital officials did not budget enough money in 2002 to cover rising salary and benefit costs necessary to compete during a nationwide shortage of health care professionals. The special difficulties of living on MDI, particularly the cost of housing, also contribute to higher salaries, Blank said.

“We have always made sure we pay what we need to pay to be sure we get quality people,” Blank said.

Other factors that led to the operational deficit included lower-than-projected use of services and steeper discounts for physician services, he said.