October 2004 Bulletin

From the Treasurer

Fiscal year 2003 was a very good year

Edward R. Toriello, MD
AAOS Treasurer

Every October, the Treasurer is required to deliver a report to the membership on the previous fiscal year. This report covers the period Jan. 1–Dec. 31, 2003. Unlike 2002, which had its ups and downs, 2003 was mainly positive, particularly financially. Not only did total revenue increase by more than $1.9 million over 2002, but total expenses actually declined by $58,000. In addition, the stock market rebounded, resulting in a $5.7 million increase in our investments, compared to a $2.3 million loss in the previous year. Finally, in addition to these positive financials, AAOS introduced a number of program changes in 2003 that made a good year even better.

Programmatic highlights

In March 2003, the Board of Directors established a Medical Liability Reform Campaign under the direction of then-Second Vice President Stuart L. Weinstein, MD. The goal of the campaign was to begin a multi-year effort to achieve meaningful, sustainable liability reform on both the federal and state levels. The AAOS also joined with other medical societies to form a national coalition, Doctors for Medical Liability Reform, to educate the public on the need for real liability reform on the federal level. At the same time, the AAOS began providing grants to state orthopaedic societies to encourage state legislatures to approve liability reform.

In 2003, a total of $184,000 was awarded to the following state organizations:

Texas Orthopaedic Association

$75,000

Mississippi Orthopaedic Society

$38,000

Florida Orthopaedic Society

$32,000

Georgia Orthopaedic Society

$20,000

Pennsylvania Orthopaedic Society

$10,000

New Jersey Orthopaedic Society

$9,000

Assisted by this funding:

Pennsylvania and Georgia have yet to pass any liability reform legislation, but we continue to make headway.

To fund our Medical Liability Reform campaign, the Board approved the use of $1 million from Association cash reserves and authorized the solicitation of donations from Academy members, beginning with a pledge of $1,000 from each Board member. During 2003, a total of $961,390 was raised from members for this effort.

On a related front, in June 2003, the Board of Directors approved establishing Phase I of the AAOS Expert Witness Program. Phase I is an educational and remedial program that includes: monitoring the activities of other national medical associations, developing a series of educational articles on expert witness issues, creating and promulgating an Expert Witness Affirmation Statement, reinvigorating the Expert Witness Clearinghouse Project, encouraging participation in the IDEX Defense Network, developing model state legislation and promoting cooperation and support of state medical societies’ expert witness initiatives. In December 2003, following two surveys of the Fellowship, the Board approved Phase II, an expert witness assessment and disciplinary program, “in concept.” A Project Team under the direction of David A. Halsey, MD, chair of the Council on Health Policy, then developed the professional compliance program particulars, which were approved by the Board at its June 2004 meeting.

Organizationally, and as I noted last year, the executive structure of the Academy has changed to a Chief Executive Officer (CEO) with an executive team consisting of an Executive Director of Medical Affairs, a Chief Operating Officer (COO), a Chief Financial Officer (CFO), and a Chief Education Officer. This new structure integrates educational activities (responsible for about 60 percent of AAOS programs and revenue) with medical resources, health policy activities, and fiscal responsibility and accountability. The search for a new CEO began in October 2002 and culminated in 2003 with the selection of Karen L. Hackett, FACHE, CAE. Searches for a new executive director of medical affairs and a CFO started in late 2003 and ended in 2004 with the selections of Robert H. Haralson, MD, MBA, as executive director of medical affairs and Rich Stewart, CPA, MBA, as CFO. They join COO Larry Rosenthal, PhD, and Mark Wieting, Chief Education Officer, in completing the executive team.

Patient safety remained a key AAOS objective in 2003, with the Sign Your Site Program, fellowship and public education, patient safety checklists and patient safety member alerts as some of the key successes during the year. In addition, the Patient Safety Committee, with David A. Wong, MD, as chair, began implementing 11 major projects, including developing a patient safety curriculum for resident and medical school education and establishing liaisons with the Food and Drug Administration, the Centers for Disease Control and Prevention, the Joint Commission on Accreditation of Healthcare Organizations and the National Quality Forum. A major patient safety Web site section was added to the AAOS home page, and the previously established patient education Web site, Your Orthopaedic Connection (YOC), added pages that addressed specific safety issues for patients to consider when seeking medical care. YOC continued to attract huge numbers of visitors, averaging more than 579,000 page-views per month in 2003.

As the importance of leadership was a constant theme in 2002, ‘volunteerism’ was the watchword of 2003. The Academy couldn’t do what it does without the generous donations of time and effort provided by members. However, the Board recognized that sometimes there is a disconnect in communication between the Board and the members at large. In 2003, under President James H. Herndon, MD, the Board began a concerted effort to improve communication, an effort that continues today under the leadership of President Robert W. Bucholz, MD.

Education is the cornerstone of the Academy and in 2003 we continued to build upon it. One of the major issues undertaken in 2003 is the concept of lifelong learning. Included here is the effort to develop a curriculum for Maintenance of Certification. The Board charged a new committee, chaired by David G. Lewallen, MD, to begin developing ways for members to meet the requirements for Maintenance of Certification as outlined by the American Board of Medical Specialties.

The Academy’s series of public service announcements (PSAs) continued to win awards. In 2003, the “Sedentary” television PSA, which had been developed as part of the 2002 campaign, won a Freddy and was a finalist for an Emmy. At the 2003 Annual Meeting in New Orleans, “Legacy of Heroes,” a program honoring orthopaedic surgeons who served in World War II, premiered. After the Annual Meeting, this program began traveling around the country and has been in 14 different states with more to come.

Combined Balance Sheet

Total assets of $66.1 million at year end 2003 represented an increase of approximately $7.1 million from the 2002 year-end balances. The increase is due to both operational revenue and investment gains. Operationally, the gain is due to an increase in membership dues and Annual Meeting revenue (mainly from exhibitors), offset in part by a decline in product and course revenue. At the same time, the investment portfolio increased by $5.7 million over the 2002 portfolio balance. Continuing the good news, liabilities also decreased by almost $800,000 from 2002 to 2003.

Net assets increased $7.9 million due to a $1.3 million operating gain, a $5.7 million long-term investment gain and the receipt of almost $800,000 more in contributions over 2002 figures.

Investments

For the first time in four years, there were gains in long-term investments. Almost $800,000 in dividends and interest income, net of fees, was generated. In addition, the increase in market value at December 31 resulted in $5 million of unrealized gains. Combined, the Academy experienced a 15.8 percent return on the portfolio.

Combined Statement of Activities

Combined revenues of the Academy and Association were $41 million, an increase of $2 million over 2002. The increase, as noted previously, resulted from increases in membership dues and Annual Meeting revenue, offset in part by less revenue generated in products and courses. Combined expenses of $39.7 million were $58,000 lower than in 2002.

2004 Budget

Recent forecasts have estimated a slight operating loss for 2004, totally as a result of using $1 million from cash reserves to partially fund the Medical Liability Reform initiative. Without this unique situation, we would expect 2004 to be almost as strong as 2003 for operations. Your Board, however, believed the liability crisis warrants this expenditure on behalf of the fellowship, even if it generates a net operating loss for the year. As of this writing, investments show positive gains as well, but not to the extent witnessed in 2003.

Summary

Education continues to be the Academy’s predominate activity under our Strategic Plan priorities. New products and programs are continually being developed, in both traditional and new technology formats. The Academy will be increasingly active in Washington, D.C., particularly with medical liability reform and the Medicare physician payment schedule, because the last fix merely stole from the future to pay the present. As I said last year and would like to re-emphasize this year, the need for member volunteers continues to increase. When opportunities arise, I urge you to apply through the Knowledge, Experience, Interest (KEI) database. Your involvement will ensure a robust Academy for years to come.

In summary, the total financial picture for the Academy/Association continues to be strong. An emphasis on controlling expenses and developing new sources of revenues continues. In 2003, I began to track the financial performance of various activities to identify trends and we are using this information to identify areas that need our attention as we move forward.

Also, the Leadership Review Group critically looks at each program that spends more than $75,000 to ensure that it is within budget and that the program accomplishes what it is designed to do: create value for the fellowship.

Please contact Dr. Bucholz, AAOS president, or me with any comments or concerns.

Edward R. Toriello, MD

Treasurer

Combined statements of Assets, Liabilities and Net Assets

As of December 31

2003

2002

Assets

Cash and temporary cash investments

$9,309,289

$7,812,731

Accounts receivable (net of an allowance for doubtful accounts of $27,000 and $37,000, respectively)

2,682,789

2,404,861

Publication and electronic media inventories (net of reserve of $50,000 in 2003 and 2002)

653,006

605,251

Investments-at market

Permanent Fund

20,523,000

20,000,000

Project Fund

13,566,788

5,089,149

Operating Fund

128,489

3,388,517

Total investments

34,218,277

28,477,666

Prepaid annual meeting, course and other expenses

2,442,735

2,435,944

Deferred product costs

876,767

822,174

Land, building, furniture and equipment, at cost:

Land and land improvements

1,169,300

1,169,300

Building and building improvements

18,969,659

18,649,585

Furniture and equipment

7,966,286

9,714,967

Total cost

28,105,245

29,533,852

Accumulated depreciation

12,211,218

13,146,897

Property and equipment net

15,894,027

16,386,955

Total assets

$66,076,890

$58,945,582

Liabilities and

Liabilities:

Net Assets

Accounts payable and accrued liabilities

$4,577,639

$4,687,772

Future course fees

385,815

290,105

Deferred dues

3,941,344

4,023,373

Deferred annual meeting revenue

6,758,659

7,344,575

Deferred product revenue

296,416

369,607

Total liabilities

15,959,873

16,715,432

Net assets:

Unrestricted

48,216,652

41,175,633

Temporarily restricted

1,900,365

1,054,517

Total net assets

50,117,017

42,230,150

Total liabilities and net assets

$66,076,890

$58,945,582

 Combined statements of activities

For 12 months ended December 31

2003

2002

Program revenues

Membership

$14,398,488

$11,599,951

Annual meeting

10,294,119

9,028,857

Products

8,288,586

10,082,065

Continuing education

3,150,344

3,548,712

Specialty society management

1,857,386

1,927,668

Public education and communication

501,470

1,071,045

Facility management revenues

885,117

918,441

Health policy

635,571

498,850

Medical liability reform

675,588

-

Other revenues

277,639

336,736

Total revenues

40,964,308

39,012,325

Program expenses

Education

18,239,480

19,082,497

Membership

2,529,159

2,407,718

Specialty society management

2,011,116

2,008,394

Public education and communications

2,728,589

3,266,264

Health policy

2,216,632

2,155,428

Research and scientific affairs

1,454,866

1,463,776

Academic affairs

777,475

857,864

Board of Councilors

865,323

980,538

Council on Musculoskeletal Specialty Societies (COMSS)

208,847

214,963

Medical liability reform

799,489

-

Total program expenses

31,830,976

32,437,442

Supporting services

Administration

3,106,878

2,931,344

Facilities management

1,924,884

1,838,278

Board of Directors

1,891,739

1,922,747

Other governance

911,136

593,660

Total supporting services expenses

7,834,637

7,286,029

Increase (decrease) in unrestricted net assets before investment activities

1,298,695

(711,146)

Investment activities

Dividend and interest income on investment funds

762,256

245,056

Gain (loss) on investment funds

4,980,066

(2,546,549)

Total investment activities

5,742,322

(2,301,493)

Increase (decrease) in unrestricted net assets

7,041,017

(3,012,639)

Change in temporarily restricted net assets

Contributions

2,766,532

1,893,453

Recognition of temporarily restricted funds

(1,920,684)

(2,481,190)

Increase (decrease) in temporarily restricted net assets

845,848

(587,737)

Combined increase (decrease) in net assets

7,886,865

(3,600,376)

Net assets at beginning of year

42,230,150

45,830,526

Net assets at end of year

$50,117,015

$42,230,150


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