Nonprofit health systems’ Q3 earnings: Baylor Scott & White, Sutter Health’s operations stand tall among the pack

https://www.fiercehealthcare.com/providers/q3-2022-nonprofit-health-system-earnings

Motley earnings numbers from more than a dozen major nonprofit health systems show third-quarter operating incomes landing on both sides of zero, though issues such as labor shortages, limited volume recovery and worsening payer mix look to be a constant across much of the sector.

Baylor Scott & White led the pack with a $257 million operating income for the period ended Sept. 30, 2022, though it was closely followed by Sutter Health’s $244 million.

Baylor is among the outlier systems whose financials have been holding strong through the last few years, and the quarter’s 7.7% operating margin represents a slight improvement over the 7.4% of its 2022 fiscal year (ended June 30). It attributed the quarter’s 5.6% year-over-year (YoY) increase in consolidated total operating revenue to a blend of premium revenue increases, higher surgical volumes and favorable service mix that “returned to and/or exceeded pre-COVID levels.”

Sutter’s operations have been back and forth this year with a $91 million Q1 gain and a $51 million Q2 loss before the most recent quarter’s $244 million. Though it’s still well behind its numbers from last year, the organization’s leadership highlighted the quarter’s relatively flat salaries and progress toward long-term financial resiliency.

“Significant challenges remain, including inflationary pressures, supply chain uncertainties, increased labor costs and staffing shortages, and rising drug prices,” a spokesperson said regarding the numbers. “Our priorities include preparing for seismic infrastructure updates, reinvesting in our communities and supporting our clinicians in service to our mission.”

Topping the other end of the spectrum was Bon Secours Mercy Health and Providence’s respective $141 million and $164 million operating losses—though the latter’s could be viewed as an improvement in light of the $934 million it was down during the prior two quarters.

Both of those systems highlighted a continuation of the inflationary and labor trends that had increased their expenses during the year’s earlier quarters.

Providence, for instance, noted an additional $526 million of agency and overtime expenses during the past nine months in comparison to 2021. Bon Secours Mercy said in its filing that the economic pressures offset improvements to patient volumes that had “approached historical pre-pandemic levels.”

Other operating results of note included: UPMC, whose health services division logged a $103 million operating loss but was buoyed by the integrated system’s insurance services division; Intermountain Healthcare, which is fresh off a merger that helped boost its revenue by 28% and its expenses by 35%; and Advocate Aurora Health, which inched closer to its own pending merger with a narrow 0.2% operating margin.

Regardless of how they stuck the landing, virtually every system reported feeling the continued impact of labor shortages. Banner Health was among that list, reporting a 7% Year after Year increase in year-to-date contract labor costs and noting that understaffing in certain locations negatively impacted capacity and patient volumes.

The reports also suggest some heterogeneity across the patient volume metrics of different markets as demand for non-COVID care continued to recover. Several systems noted their surgical or elective volumes have yet to return to pre-pandemic levels, and some highlighted worsened case mixes that limited year-over-year revenue growth.

Similar to earlier quarters, across-the-board non-operating losses weighed heavily on the organizations’ bottom lines. Nearly every system posted a nine-figure investment loss during the quarter, though a nearly $1.7 billion net investment loss at Kaiser Permanente easily took the cake.

The investment losses led to 11 of the 13 nonprofits to notch a negative net income during the three months ended Sept. 30. See below for a breakdown of the numbers (and note that for systems reporting year-to-date results, third quarter numbers represent the difference between nine-month and six-month totals).

 Total Operating RevenuesTotal Operating ExpensesOperating IncomeNet Income
Kaiser Permanente24,25324,328-75-1,550
CommonSpirit Health9,0118,98823-397
Providence6,8667,031-164-612
UPMC6,3766,449114-260
Mayo Clinic4,1173,960157-312
Sutter Health3,9853,741244103
AdventHealth3,9713,91060-305
Intermountain Healthcare3,6853,6850-582
Advocate Aurora Health3,6573,6498-311
Baylor Scott & White3,3353,078257135
Banner Health3,0693,096-26-198
Bon Secours Mercy Health2,7682,909-141-328
SSM Health2,3302,403-73-93
Nonprofit Health Systems’ Q3 Earnings ($ millions)

Providence’s operating loss grows to $1.1B for 2022

Providence, a 51-hospital system headquartered in Renton, Wash., ended the first nine months of 2022 with an operating loss of $1.1 billion, according to financial documents released Nov. 14. 

The system said in a Nov. 11 news release that its third quarter financial results showed the “ongoing impact of inflation, the national healthcare labor shortage, delayed reimbursement from payers, global supply chain disruptions and financial market weakness.”

For the nine months ended Sept. 30, Providence’s operating revenues were $19.6 billion on a pro forma basis, up from $18.8 billion during the same period last year, according to the report. The pro forma results exclude the operations of Newport Beach, Calif.-based Hoag Hospital. Providence and Hoag ended their affiliation in January. 

Operating expenses over the first nine months of the year were $20.7 billion, a 7 percent increase over the same period in 2021 on a pro forma basis. This includes a 9 percent increase in salary and benefits due to the cost of agency staff, overtime and wage increases, according to the release. It also includes a 6 percent increase in supply costs, driven by an 8 percent increase in pharmaceutical spending. 

Providence said financial market weakness and volatility drove investment losses of $1.4 billion for the first nine months of 2022, bringing the system’s unrestricted cash and investments to $9.1 billion. 

“Healthcare delivery systems across the country face unprecedented challenges, and Providence has not been immune,” Providence President and CEO Rod Hochman, MD, said in the release. “However, just as we have for more than 165 years, we will continue to be here to meet the health care needs of our communities. While we still have a journey ahead of us, we are moving in the right direction and are beginning to see signs of renewal this quarter. My deepest gratitude to the caregivers of Providence for continuing to focus on the Mission and serving those in need, especially those who are most vulnerable, with excellence and compassion.”

10 health systems with strong finances

Here are 10 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings and Moody’s Investors Service.

1. Advocate Aurora Health has an “AA” rating and a stable outlook with Fitch. The health system, dually headquartered in Milwaukee and Downers Grove, Ill., has a strong financial profile and a leading market position over a broad service area in Illinois and Wisconsin, Fitch said. The health system’s fundamental operating platform is strong, the credit rating agency said. 

2. Allina Health System has an “AA-” rating and a stable outlook with Fitch. The Minneapolis-based system is the inpatient market share leader in a highly competitive market and has a strong relation with payers in the market, Fitch said. Alliana’s financial profile is strong, the ratings agency said. 

3. Banner Health has an “AA-” rating and stable outlook with Fitch. The Phoenix-based health system’s core hospital delivery system and growth of its insurance division combine to make it a successful, highly integrated delivery system, Fitch said. The credit rating agency said it expects Banner to maintain operating EBITDA margins of about 8 percent on an annual basis, reflecting the growing revenues from the system’s insurance division and large employed physician base.

4. Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based health system has a broad geographic footprint as one of the five largest Catholic health systems in the U.S., a good payer mix and a leading or near-leading market share in eight of its eleven markets in the U.S., Fitch said.

5. Bryan Health has an “AA-” rating and stable outlook with Fitch. The Lincoln, Neb.-based health system has a leading and growing market position, very strong cash flow and a strong financial position, Fitch said. The credit rating agency said Bryan Health has been resilient through the COVID-19 pandemic and is well-positioned to accommodate additional strategic investments. 

6. Deaconess Health System has an “AA” rating and stable outlook with Fitch. The Evansville, Ind.-based system has a leading market position in its primary service area and a favorable payer mix, Fitch said. The ratings agency said it expects Deaconess’ operating EBITDA margins to improve and stabilize around 10 percent by 2023, reflecting strong volumes and focus on operating efficiencies.

7. Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The La Crosse, Wis.-based health system has strong balance sheet metrics, a leading market position and an expanding operating platform in its service area, Fitch said. The credit rating agency expects the health system to return to strong operating performance as it emerges from disruption related to the COVID-19 pandemic. 

8. Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based health system has shown consistent year-over-year increases in market share and has a solid liquidity position, Fitch said. 

9. Intermountain Healthcare has an “Aa1” rating and stable outlook with Moody’s. The Salt Lake City-based health system has exceptional credit quality, which will continue to benefit from its leading market position in Utah, Moody’s said. The credit rating agency said the health system’s merger with Broomfield, Colo.-based SCL Health will also give Intermountain greater geographic reach.

10. Yale New Haven (Conn.) Health has an “AA-” rating and stable outlook with Fitch. The health system’s turnaround efforts, brand recognition and market presence will help it return to strong operating results, Fitch said. 

A rough year so far for health system finances

https://mailchi.mp/b1e0aa55afe5/the-weekly-gist-october-7-2022?e=d1e747d2d8

As everyone in our industry knows, sluggish volumes amid persistently rising costs, especially for labor, have sent health system margins into a downward spiral across 2022. Using the latest data from consultancy Kaufman Hall, the graphic above shows that by the end of this year, employed labor expenses will have increased more than all non-labor costs combined. 

While contract labor usage, namely travel nursing, is declining, the constant battle for nursing talent means travel nurses are still a significant expense at many hospitals. Through the first six months of this year, over half of hospitals reported a negative operating margin, and the median hospital operating margin has dropped over 100 percent from 2019. 

Larger health systems are not faring better: all five of the large, multi-regional, not-for-profit systems we’ve highlighted below saw their operating margins tumble this year, with drops ranging from three points (Kaiser Permanente) to nearly seven points (CommonSpirit Health and Providence). 

While these unfavorable cost trends have been building throughout COVID, health systems now have neither federal relief nor returns from a thriving stock market to help stabilize their deteriorating financial outlooks. 

Health system boards will tolerate negative margins in the short-term (especially given that many have months’ worth of days cash on hand), but if this situation persists into 2023, pressure for service cuts, layoffs, and restructuring will mount quickly. 

Ascension reports $1.8B annual loss

St. Louis-based Ascension reported higher expenses in the 12 months ended June 30 and closed out the year with a loss, according to recently released financial documents

The 144-hospital system reported operating revenue of $27.98 billion in the year ended June 30, up from $27.24 billion a year earlier. 

Ascension’s operating expenses climbed to $28.77 billion in the 12 months ended June 30, up from $26.69 billion last year. The increase was attributed to several factors, including higher salaries, wages and benefits due to staffing challenges and increased use of contract and premium labor. 

Ascension ended the most recent fiscal year with an operating loss of $879.2 million, compared to an operating income of $676.3 million a year earlier. 

After factoring in nonoperating items, Ascension reported a net loss of $1.8 billion for the 12 months ended June 30. A year earlier, the health system posted net income of $5.7 billion. 

Ascension is facing many of the same financial pressures as other health systems across the U.S. More than half of hospitals — 53 percent — are projected to have negative margins for the rest of the year.

14 health systems with strong finances

Here are 14 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings and Moody’s Investors Service.

1. Advocate Aurora Health has an “AA” rating and stable outlook with Fitch. The health system, dually headquartered in Milwaukee and Downers Grove, Ill., has a strong financial profile and a leading market position over a broad service area in Illinois and Wisconsin, Fitch said. The health system’s fundamental operating platform is strong, the credit rating agency said. 

2. AnMed Health has an “AA-” rating and stable outlook with Fitch. The Anderson, S.C.-based system has a leading market share in most service lines, strong operating performance and very solid EBITDA margins, Fitch said. 

3. Banner Health has an “AA-” rating and stable outlook with Fitch. The Phoenix-based health system’s core hospital delivery system and growth of its insurance division combine to make it a successful highly integrated delivery system, Fitch said. The credit rating agency said it expects Banner to maintain operating EBITDA margins of about 8 percent on an annual basis, reflecting the growing revenues from the system’s insurance division and large employed physician base. 

4. Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based health system has a broad geographic footprint as one of the five largest Catholic health systems in the U.S., a good payer mix and a leading or near leading market share in eight of its eleven markets in the U.S., Fitch said. 

5. Lincoln, Neb.-based Bryan Health has an “AA-” rating and stable outlook with Fitch. The health system has a leading and growing market position, very strong cash flow and a strong financial position, Fitch said. The credit rating agency said Bryan Health has been resilient through the COVID-19 pandemic and is well-positioned to accommodate additional strategic investments. 

6. Franciscan Alliance has an “AA” rating and stable outlook with Fitch. The Mishawaka, Ind.-based health system has a very strong cash position and maintains leading market shares in seven of its nine defined primary service areas, Fitch said. The health system benefits from a good payer mix, the credit rating agency said. 

7. Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The La Crosse, Wis.-based health system has strong balance sheet metrics and a leading market position and expanding operating platform in its service area, Fitch said. The credit rating agency expects the health system to return to strong operating performance as it emerges from disruption related to the COVID-19 pandemic. 

8. Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based health system has shown consistent year-over-year increases in market share and has a solid liquidity position, Fitch said. 

9. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The health system has a consistently strong operating cash flow margin and ample balance sheet resources, Moody’s said. Inova’s financial excellence will remain undergirded by its favorable regulatory and economic environment, the credit rating agency said. 

10. Salt Lake City-based Intermountain Healthcare has an “Aa1” rating and stable outlook with Moody’s. The health system has exceptional credit quality, which will continue to benefit from its leading market position in Utah, Moody’s said. The credit rating agency said the health system’s merger with Broomfield, Colo.-based SCL Health will give Intermountain greater geographic reach.

11. Omaha-based Nebraska Medicine has an “AA-” rating and stable outlook with Fitch. The health system has a strong market position and is the only public academic provider in Nebraska with high acuity services, Fitch said. The health system continues to generate positive operating cash flow levels, and it has modest flexibility to absorb additional debt, according to the credit rating agency. 

12. Fort Wayne, Ind.-based Parkview Health has an “Aa3” rating and stable outlook with Moody’s. The health system has a leading market position with expansive tertiary and quaternary clinical services in northeastern Indiana and northwestern Ohio, Moody’s said. The credit rating agency said the stable outlook reflects management’s ability to generate strong operating performance during the pandement and with less favorable reimbursement rates. 

13. UnityPoint Health has an “AA-” rating and stable outlook with Fitch. The Des Moines, Iowa-based health system has strong leverage metrics and cash position, Fitch said. The credit rating agency expects the health system’s balance sheet and debt service coverage metrics to remain robust. 

14. Yale New Haven (Conn.) Health has an “AA-” rating and stable outlook with Fitch. The health system’s turnaround efforts, brand recognition and market presence will help it return to strong operating results, Fitch said. 

MultiCare hit with credit downgrade

Moody’s Investors Service has downgraded MultiCare Health System’s revenue bonds to “A1” from “Aa3,” and revised the health system’s rating outlook to negative from stable. 

Moody’s said the downgrade and the revision of the outlook to negative reflect several pressures that weaken the health system’s credit profile, including an unexpected 24 percent increase in debt, a decline in liquidity and significant operating losses through the first six months of fiscal 2022. 

“Operations are expected to improve through the second half of fiscal 2022, but nevertheless full year results will remain weak, providing at best thin headroom to MultiCare’s debt service coverage covenant,” Moody’s said. 

Moody’s noted that MultiCare, an 11-hospital system based in Tacoma, Wash., will continue to benefit from several strengths, including a large and growing revenue base and strong clinical offerings.

Hospitals experiencing some of the worst margins since beginning of pandemic: Kaufman Hall

https://www.fiercehealthcare.com/providers/julys-hospital-margins-were-among-worst-pandemic-kaufman-hall-says

Despite a a seventh straight month of industrywide negative margins, “hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience,” Kaufman Hall’s Erik Swanson said.

Months of inching performance gains were upended in July as the nation’s hospitals logged “some of the worst margins since the beginning of the COVID-19 pandemic,” Kaufman Hall wrote in its latest industry report.

Decreasing outpatient revenues paired with pricier inpatient stays were chief among the culprits and outpaced minor improvements in expenses, the group wrote in its monthly sector update for July.

What’s more, seven straight months of negative margins “reversed any gains hospitals saw this year” and has the advisory group forecasting a brutal year for the industry.

“July was a disappointing month for hospitals and put 2022 on pace to be the worst financial year hospitals have experienced in a long time,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said in a statement. “Over the past few years, hospitals and health systems have been able to offset some financial hardship with federal support, but those funding sources have dried up, and hospitals’ bottom lines remain in the red.”

Kaufman Hall placed its median year-to-date operating margin index at -0.98% through July, compared to the -0.09% from January to June the group had reported during last month’s report. Hospitals’ median percent change in operating margin from June to July was -63.9%, according to the report, and -73.6% from July 2021.

The month’s volume trends hinted at the larger shift toward scheduling procedures for ambulatory settings, Kaufman Hall wrote. For instance, operating room minutes declined 10.3% from June to July and 7.7% year over year, according to the report.

Patients who did come into the hospital tended to be sicker, the firm continued. Average length of stay increased 2% from last month and 3.4% year over year. Patient days increased 2.8% from the previous month but were down 2.6% from the prior year, while adjusted discharges dipped 2.8% from June and 4.2% from July 2021.  

These trends came together as a brake check on 2022’s to-date revenue gains. Gross operating revenue fell 3.6% from June but remains up 5.5% year to date. Outpatient revenue was down 4.8% from June and maintains a 7.1% year-to-date increase. Inpatient revenue declined 0.7% from June but is still up 3.6% year to date.

The silver lining in Kaufman Hall’s report were total expenses that, although up 7.6% from July 2021, saw a modest 0.4% decline since June. Those savings came squarely among supply and drug expenses as total labor costs and labor expense per adjusted discharge still grew 0.8% and 3.5%, respectively, since June. Increases in full-time employees per adjusted occupied bed “possibly” suggest increased hiring, the group wrote in the report.

Kaufman Hall acknowledged the “urgency of day-to-day pressures” driving the month’s sudden performance dips but urged hospital leaders to prioritize long-term operational improvements as they work to keep the organization afloat.

“2022 has been, and will likely continue to be, a challenging year for hospitals and health systems, but it would not be prudent to focus on short-term solutions at the expense of long-term planning,” Swanson said. “Hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience.”

Kaufman Hall’s monthly reports are based on a sample of more than 900 nationally representative hospitals.

The group isn’t alone in its doom-and-gloom warnings for providers. Fitch Ratings recently wrote that high expenses, jilted volume gains and other challenges are unlikely to resolve before the end of the year. As such, the agency downgraded its outlook for the nonprofit hospital industry from “neutral” to “deteriorating.”

Read the full report here

Cleveland Clinic reports $1B loss in first half of this year

Cleveland Clinic’s revenue was down year over year in the second quarter of this year, and the health system ended the period with a loss, according to financial documents released Aug. 29. 

The health system’s revenue totaled $3.1 billion in the three-month period ended June 30, down from $3.2 billion in the same quarter last year. 

Cleveland Clinic reported expenses of $3.1 billion in the second quarter of this year, up from $2.7 billion in the same period last year. The system saw expenses rise across all categories, including supplies and salaries, wages and benefits. 

“Nationwide labor shortages have created staffing challenges that have resulted in increased overtime costs and premium pay for employed caregivers as well as an increase in the utilization of agency nurses and other temporary personnel to meet the demand of patient activity,” Cleveland Clinic said in an earnings release. “Supplies, pharmaceuticals and other nonlabor expenses have also increased due to recent inflationary trends and supply chain challenges.” 

The health system ended the second quarter with an operating loss of $183.5 million, compared to operating income of $339.5 million in the second quarter of 2021. 

After factoring in nonoperating losses, Cleveland Clinic posted a net loss of $786.9 million in the second quarter of this year, compared to net income of $904.4 million in the same quarter a year earlier. 

Looking at the first six months of this year, Cleveland Clinic reported a net loss of $1.1 billion on revenue of $6.2 billion. In the same period a year earlier, the health system reported net income of $1.3 billion on revenue of $6 billion, according to the financial documents. 

Nonoperating losses for Cleveland Clinic were $781.4 million in the first six months of this year, compared to nonoperating gains of $853.5 million in the same period last year. The decrease was primarily due to lower investment returns in the first half of 2022.

UPMC’s operating income sinks 86% in first half of year

UPMC reported higher revenue in the first half of this year than in the same period of 2021, but the Pittsburgh-based health system’s operating income declined year over year, according to financial documents released Aug. 23. 

UPMC reported revenue of $12.5 billion in the first six months of this year, up from $12.2 billion in the same period of 2021. 

Expenses also increased year over year. UPMC reported operating expenses of $12.4 billion in the first half of this year, up from $11.6 billion a year earlier. Expenses increased across all categories, including supplies and salaries and benefits. 

“Throughout 2022, the continued effect of COVID-19, along with conditions in the labor and supply markets have resulted in cost growth in employment, staffing and other operating expenses in excess of revenue growth,” UPMC management wrote in the financial filing

The health system ended the first half of this year with operating income of $81.9 million, down 86 percent from $604.6 million in the same period last year. UPMC’s operating margin was 0.7 percent for the first half of this year, compared with 5 percent in the same period last year. 

UPMC reported a net loss of $844.1 million in the first half of this year, compared to net income of $1.1 billion in the same period of 2021. The system’s loss from investing and financing activities totaled $865.9 million in the first two quarters of 2022, compared to a gain of $531.1 million in the same period a year earlier.