18 health systems with strong finances

Hospital Mergers, Acquisitions, and Affiliations | Case Study – RMS

Here are 18 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

1. Altamonte Springs, Fla.-based AdventHealth has an “Aa2” rating and stable outlook with Moody’s and an “AA” rating and a stable outlook with Fitch. The system has strong profitability, solid liquidity and presence in several high growth markets, Fitch said.

2. St. Louis-based BJC HealthCare has an “AA” rating and stable outlook with S&P and an “Aa2” rating and stable outlook with Moody’s. The health system has a leading market share and a highly regarded reputation, particularly for its flagship hospitals that are affiliated with Washington University School of Medicine in St. Louis, S&P said. The health system has consistently produced stable earnings and cash flow, even during the COVID-19 pandemic, according to the credit rating agency. 

3. Dallas-based Children’s Health System of Texas has an “AA” rating and stable outlook with Fitch. The system has robust operating profitability, good expense management and strong EBITDA margins, according to Fitch. 

4. Cleveland Clinic has an “Aa2” rating and stable outlook with Moody’s. The system’s international brand will allow it to grow revenue outside of the northeast Ohio market and offset the effects of the pandemic on patient volume, Moody’s said. The credit rating agency expects the system to maintain good cash flow margins. 

5. Evansville, Ind.-based Deaconess Health System has an “AA” rating and stable outlook with Fitch. The health system has strong operating performance and an expanding footprint in a stable and economically diverse service area, Fitch said. Investments in core service lines should help support patient volume growth, according to the credit rating agency. 

6. Durham, N.C.-based Duke Health has an “AA” rating and stable outlook with Fitch. The system has a strong clinical reputation and a solid balance sheet with substantial liquidity reserves, Fitch said. 

7. Pinehurst, N.C.-based FirstHealth of the Carolinas has an “AA” rating and stable outlook with Fitch. The health system has a strong financial profile and stable operating performance, despite disruption from the COVID-19 pandemic, Fitch said. The health system’s revenue in the first quarter of fiscal 2021 rebounded to levels close to historical trends, according to the credit rating agency. 

8. Milwaukee-based Froedtert Health has an “AA” rating and stable outlook with Fitch. The system has a solid market position and a robust liquidity position, Fitch said. The credit rating agency expects Froedtert to maintain robust operating cash flow levels. 

9. Indianapolis-based Indiana University Health has an “Aa2” rating and stable outlook with Moody’s and an “AA” rating and positive outlook with Fitch. Cost controls and patient volume will help the system sustain strong margins and liquidity, Moody’s said. 

10. IHC Health Services, the borrowing group of Salt Lake City-based Intermountain Healthcare, has an “Aa1” rating and stable outlook with Moody’s. Intermountain has a leading statewide market position, low debt levels and strong cash levels, Moody’s said. The credit rating agency expects Intermountain will sustain strong margins and cash levels. 

11. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The system has a strong financial profile, and Moody’s expects Inova’s balance sheet to remain exceptionally strong. 

12. Rochester, Minn.-based Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The health system has strong balance sheet measures, an excellent market position and strong patient demand at its three academic campuses in Minnesota, Arizona and Florida, Moody’s said. The credit rating agency expects strong patient demand and steps taken by management to allow Mayo to maintain adequate cash flow and strengthen balance sheet measures. 

13. Traverse City, Mich.-based Munson Healthcare has an “AA” rating and stable outlook with Fitch. The system has strong leverage and liquidity, Fitch said. The credit rating agency expects Munson to maintain solid operating cash flow margins. 

14. Tupelo-based North Mississippi Health Services has an “AA” rating and stable outlook with Fitch. The system has a leading market share in a large 20-county service area and strong adjusted leverage metrics, Fitch said. 

15. Chicago-based Northwestern Memorial HealthCare has an “Aa2” rating and stable outlook with Moody’s and an “AA+” rating and stable outlook with S&P. The health system had strong pre-COVID margins and liquidity, Moody’s said. The credit rating agency expects the system to maintain strong operating cash flow margins. 

16. Columbus-based OhioHealth has an “Aa2” rating and stable outlook with Moody’s and an “AA+” rating and stable outlook with S&P. The system has a leading market position and opportunities for service line expansion, Moody’s said. The credit rating agency expects the system’s strong liquidity to provide ample cushion for volatility in investment returns. 

17. Stanford (Calif.) Health Care has an “AA” rating and stable outlook with Fitch. The system has broad reach and is a clinical destination for high acuity services, Fitch said. The credit rating agency expects the system to sustain strong EBITDA margins. 

18. Iowa City-based University of Iowa Hospitals & Clinics has an “Aa2” rating and stable outlook with Moody’s. The credit rating agency expects the system to maintain strong operating performance and cash flow. The system benefits as the only academic medical center in Iowa, according to Moody’s. 

10 health systems with strong finances

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

1. Altamonte Springs, Fla.-based AdventHealth has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the system benefits from strong operating cash flow margins, low operating leverage and a large scale with presence in multiple states.  

2. Children’s Hospital of Philadelphia has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the rating is reflective of Children’s Hospital of Philadelphia’s strong market position and brand equity as a top U.S. children’s hospital with advanced clinical research. The pediatric hospital network also has strong liquidity.

3. Cleveland Clinic has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the health system benefits from its reputation as an international brand, which will allow it to grow revenue outside of the Ohio market. Moody’s said it maintains good cash flow margins and therefore very strong liquidity.

4. Cottage Health in Santa Barbara, Calif., has an “AA-” rating and stable outlook from Fitch. The credit rating agency said Cottage benefits from consistently strong profitability, a strong balance sheet and leading market position. Fitch also said the health system has broad reach in a service area that has high demand for acute care services. 

5. Froedtert Health in Wauwatosa, Wis., has an “AA” rating and stable outlook from Fitch. The credit rating agency said the rating reflects the health system’s solid market position and robust liquidity position, as well as its strong utilization trends and operational metrics in recent years. 

6. Indiana University Health in Indianapolis has an “AA” rating and positive outlook from Fitch. The credit rating agency said the health system has a long track record of strong operating margins and a “remarkably solid” balance sheet. The system also benefits as the largest healthcare system and academic medical center in Indiana, according to Fitch.

7. Vineland, N.J.-based Inspira Health has an “AA-” rating and stable outlook from Fitch. The credit rating agency said the rating is supported by Inspira’s stable financial profile, leading market position, large medical staff and expansive outpatient network. Fitch also said Inspira saw a strong operating performance through the construction and transition of its new campus, an IT implementation and through the peak of the pandemic.

8. Sanford Health in Sioux Falls, S.D., has an “AA-” rating and stable outlook from Fitch. The credit rating agency said the “AA-” rating reflects Sanford’s leading inpatient market share in multiple states and strong financial profile. Fitch also said Sanford’s growing health plan and plan for continued improvement and balance sheet growth are credit positives. 

9. Spectrum Health in Grand Rapids, Mich., has an “Aa3” rating and stable outlook with Moody’s. The credit rating agency said the health system has a stable operating performance and strong balance sheet metrics. In particular, the system generated positive margins even without federal aid in fiscal year 2020. Moody’s said the health system will continue to benefit from a strong market share for patient care in western Michigan. 

10. Texas Children’s Hospital in Houston has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the children’s hospital network benefits from favorable leverage metrics and strong liquidity. Moody’s also said Texas Children’s has very strong patient demand and high acuity services as the academic medical center for Baylor College of Medicine’s pediatric department in Houston.

Hospitals saw gains in volume, revenue and margin in April, finds Kaufman Hall

https://www.healthcarefinancenews.com/news/hospitals-saw-gains-volume-revenue-and-margin-april-finds-kaufman-hall

Hospitals saw gains in volume, revenue and margin in April, finds Kaufman  Hall | Healthcare Finance News

The signs of progress are encouraging, but the metrics are still down slightly when compared to last month.

Slowly, the financial health of the nation’s healthcare institutions are improving. Hospitals and health systems continued to see performance improvements in April compared to the devastating losses experienced in the early months of the COVID-19 pandemic.

Hospital margins, volumes, and revenues were up across most performance metrics, both year-to-date and year-over-year, but were down compared to March, according to the latest issue of Kaufman Hall’s National Hospital Flash Report. There was no explicit reason given for the dip, but any number of factors small and large could play into the results. It’s possible that clearer trend lines will develop over time.

WHAT’S THE IMPACT?

While any signs of progress are encouraging, the April results draw a clear contrast to the severity of record-low performance seen during the first two months of the pandemic in 2020, rather than strong overall performance so far this year.

Operating margin, for example, rose 101.9% (or 8.6 percentage points) compared to January-April 2020, not including federal Coronavirus Aid, Relief, and Economic Security Act funding. With the funding, operating margin was up 90.6% year-to-date, or 6.9 percentage points. 

Operating margin was up 113.1% (39.3%) without CARES and 109.5% (21.4%) with CARES, compared to the first full month of the pandemic in April 2020, when nationwide shutdowns and broad restrictions on outpatient procedures caused operating margins to plummet 282% year-over-year.

April 2021 hospital margins, however, remained relatively thin. The median Kaufman Hall hospital operating margin index was 2.4% for the month, not including CARES. Even with the funding, it was 3.3%.

When it came to volumes, hospitals saw them increase across most metrics compared to 2020 levels, but decrease slightly compared to March. Adjusted discharges were up 5.9% year-to-date and jumped 66.4% year-over-year, while adjusted patient days rose 10% year-to-date and 64.8% year-over-year. Both metrics fell 1% month-over-month.

Emergency department visits were mixed, falling 7% compared to the first four months of 2020, but rising 57.2% year-over-year and 5.3% month-over-month. Operating room minutes were down 3.6% from March, but increased 26.1% year-to-date, and shot up 189.2% compared to April 2020, when COVID-19 abruptly halted most outpatient procedures.

Revenues followed a similar pattern, with gross operating revenue (not including CARES) up 16.7% year-to-date and 71.8% year-over-year, but down 2.5% compared to the prior month. Inpatient revenue rose 10.6% year-to-date and 37.1% year-over-year, but was down 1.9% month-over-month. Outpatient revenue rose 20.3% year-to-date, jumped 114.8% compared to April 2020, but fell 2% from March.

Total expenses continued to increase both year-to-date and year-over-year, but saw moderate decreases month-over-month. Total expense was up 6.6% year to date and 13.1% year over year. Total labor expense increased 6.1% year-to-date and 9.4% year-over-year, and total nonlabor expense rose 7% year-to-date and 16.3% year-over-year. 

Compared to March, though, all three metrics were down about 3%. Expense results were mixed when adjusted for the month’s volumes. Total expense per adjusted discharge, for example, increased 2% compared to January-April 2020, but fell 32.3% from April 2020 and 2% from March. 

THE LARGER TREND

Despite the ongoing pandemic, the 2021 financial outlook for the global healthcare sector is mostly positive, as strong demand for products and services – including those related to COVID-19 – will more than offset lingering pressures from the public health emergency, Moody’s Investors Service found in December.

The demand will remain strong, largely due to aging populations, the improvement in access and the introduction of new and innovative products. There is one caveat: steadily rising healthcare expenditures, which will cause payers to continue to restrict utilization and lower prices.

In October, Moody’s found that owning a public hospital during the COVID-19 pandemic carried operational risk, which will compound the fiscal and credit difficulties facing many large urban counties across the U.S.

Whether recovery from the coronavirus this year is relatively rapid or relatively slow, America’s hospitals will face another year of struggle to regain their financial health.
 

10 health systems with strong finances

How to assess the financial strength of an insurance company | III

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

1. St. Louis-based BJC HealthCare has an “AA” rating and stable outlook with S&P. The health system has a leading market share and highly regarded reputation, particularly for its flagship hospitals that are affiliated with Washington University School of Medicine in St. Louis, S&P said. The health system consistently has produced stable earnings and cash flow, even during the COVID-19 pandemic, according to the credit rating agency. 

2. Cleveland Clinic has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the health system benefits from its reputation as an international brand, which will allow it to grow revenue outside of the Ohio market. Moody’s said it maintains good cash flow margins and therefore very strong liquidity.

3. Fountain Valley, Calif.-based MemorialCare has an “AA-” rating and stable outlook with Fitch. The health system has a strong financial profile and maintains high liquidity, Fitch said. The credit rating agency expects the system to generate cash flows of approximately 7 percent in the years after fiscal 2021. 

4. Winston-Salem, N.C.-based Novant Health has an “AA-” rating and stable outlook with Fitch. The health system has a solid market position in four regions and strong financial metrics that support the rating. The credit rating agency said Novant Health’s acquisition of New Hanover Regional Medical Center in Wilmington, N.C., will benefit the system financially and strategically in the long term.

5. OhioHealth has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the health system has a leading market position with several growth opportunities in an attractive market and a favorable payer market that contributes to stability. Moody’s also said OhioHealth’s ongoing cost reductions and management discipline will continue to support strong margins and liquidity levels. 

6. Rady Children’s Hospital and Health Center in San Diego has an “Aa3” rating and stable outlook with Moody’s. The credit rating agency said that Rady Children’s has an extremely high market share in San Diego County and benefits from its status as a regional referral center for tertiary and quaternary pediatric services. The health system also has very strong liquidity, Moody’s said. 

7. Stanford (Calif.) Health has an “AA” rating and stable outlook with Fitch. The credit rating agency said the hospital has a broad reach and benefits, as it is a clinical destination for high-acuity services, a largely favorable service area and a close relationship with Stanford University. Fitch said it expects the health system’s post-2021 EBITDA margin to be closer to its historical 11 percent operating margin. 

8. Spectrum Health in Grand Rapids, Mich., has an “Aa3” rating and stable outlook with Moody’s. The credit rating agency said the health system has a stable operating performance and strong balance sheet metrics. In particular, the system generated positive margins even without federal relief aid in fiscal year 2020. Moody’s added that the health system will continue to benefit from a strong market share for patient care in western Michigan. 

9. SSM Health in St. Louis has an “AA-” rating and stable outlook with Fitch. The credit rating agency said it has a strong financial profile and a solid market presence in multiple states with no dependence on any one location. Fitch also said its expanding health plan is a credit positive. 

10. Birmingham, Ala.-based UAB Medicine has an “Aa3” rating and stable outlook with Moody’s. The credit rating agency said the health system has high patient demand, strong margins and a leading market share in Birmingham. The credit rating agency expects UAB Medicine to generate strong cash flow in fiscal year 2021.

Private equity acquisitions targeted large, high-margin hospitals over 15-year period

Private-Equity Cash Piles Up as Takeover Targets Get Pricier - WSJ

From 2003 to 2017, private equity firms focused their acquisition crosshairs on larger hospitals with higher operating margins and greater patient charge-to-cost ratios, according to a new review of healthcare investments published in Health Affairs.

These private equity (PE)-owned hospitals also saw greater increases to their operating margins and charge-to-cost ratios over the course of the 15-year study period than their non-PE-owned counterparts.

Combined with a decrease in all-personnel staffing ratios, the study’s researchers said these data make a case for further investigation into how PE investment may be influencing operational decisions to boost profits and secure favorable exits.

“[Short-term acute care] hospitals’ large size, stable cashflow environment and prevalence of valuable fixed assets (that is, properties) make them highly desirable targets for acquisition, researchers wrote in Health Affairs. “Broadly speaking, PE acquisition of hospitals invites questions about the alignment of the financial incentives necessary to achieve high-quality clinical outcomes.”

To inform that discussion, the researchers reviewed PE deal data collected by Pitchbook, CB Insights and Zephyr. They also collected information on hospital characteristics and financials from the Centers for Medicare and Medicaid Services’ (CMS) Healthcare Provider Cost Reporting Information System database and the American Hospital Association’s Annual Survey.

Their efforts yielded 42 PE acquisitions involving 282 different hospitals during the 15-year time period. These deals were most frequent among hospitals in Mid-Atlantic and Southern states.

Of note, 161 of the acquired hospitals were tied to a single deal: Bain Capital, Kohlberg Kravis & Roberts and Merrill Lynch Global Private Equity’s roughly $33 billion (more than $21 billion cash, $11.7 billion debt) acquisition of HCA Healthcare in 2007.

The study outlined differences between the PE-acquired hospitals and others that were not acquired before any of the deals (in 2003) and after (in 2017).

Nearly three-quarters of hospitals acquired by PE were for-profit in 2003, versus about a quarter of those that were not acquired, the researchers wrote. By 2017, those respective proportions had increased to 92.3% and 25.3%.

Acquired hospitals were significantly larger in terms of beds and total discharges both in 2003 and in 2017. In fact, while acquired hospitals increased in size during the 15-year window, other hospitals decreased in beds and discharges by 2017.

Nurse staffing ratios were similar on both ends of the study period for both categories of hospitals. However, all-staff ratios were lower among the soon-to-be-acquired hospitals in 2003 and saw a slight decrease over the years, whereas hospitals that had not been acquired instead recorded an increase over time.

In terms of financials, the researchers reviewed measures including net patient revenue per discharge, total operating expenses per discharge and the percentage of discharges paid out by Medicaid. Differences among these three areas were not significant with the exception of a larger 15-year increase in total operating expenses per discharge among non-PE hospitals.

The primary financial differences between the PE and non-PE hospitals were instead found among the organizations’ percent operating margins and charge-to-cost ratio, the researcher wrote.

In 2003, both measures were higher among the soon-to-be acquired hospitals. By 2017, the percent operating margin and charge-to-cost ratio increased 66.5% and 105% among the PE-acquired hospitals, respectively, versus changes of -3.8% and 54.2% for the non-PE hospitals.

These and the study’s other findings outline the playbook an investor could follow to identify a profitable hospital and increase its margins, the researchers wrote.

“Post-acquisition, these hospitals appeared to continue to boost profits by restraining growth in cost per patient, in part by limiting staffing growth,” they wrote.

The trends affirm findings published in a 2020 JAMA Internal Medicine study, which similarly tied PE acquisition to moderate income and charge-to-cost ratio increases over the same time period, the researchers wrote.

The data also contrast “the prevailing narrative” that PE investors target distressed businesses to extract value for a quick turnaround sale, they wrote. Outside of a few outlier acquisitions, the researchers said that PE’s goal for short-term acute care hospitals appears to be the opposite—operations refinement and further profit improvements among potential top performers.

Still, the differing structure of PE investments warrants questions as to whether these groups are promoting high-quality outcomes alongside their high margins, Anaeze Offodile II, M.D., an assistant professor at the University of Texas MD Anderson Cancer Center and the study’s lead author, said during an accompanying Health Affairs podcast.

In contrast to the public market, PE investments often lean on leveraged buyouts that are higher risk and higher reward, he said. Partners are targeting a three-to-seven-year exit window for their investments and often need to hit 20% to 30% annualized returns.

More investigation is needed to determine whether these economic incentives come in tandem with better care or are instead hindering patient outcomes, he said.

“The question becomes ‘Are there unintended consequences or tradeoffs invited due to pursuit of profitability?’” Offodile said during the podcast. “I think someone could make the same argument that if there is a value enhancement strategy by PE firms, then it behooves them to actually raise the level of care delivery up because that enhances the value and engineers a better sale.

“In seeing that sort of exploratory result and how it challenged the prevailing narrative, we’re glad that we took this sort of [setting the] stage approach, and I look [forward] to seeing what we find—which we’re doing now—with respect to quality, spending, access domains,” he said.

Margins remain narrow for US hospitals

Facing a financial squeeze, hospitals nationwide are cutting jobs

Not including federal relief aid, hospital operating margins remained narrow in March at just 1.4 percent, according to a recent report from healthcare consulting firm Kaufman Hall. Including federal relief aid, the median hospital operating margin was 2 percent. 

Although margins remained narrow in March, hospitals saw year-over-year margins starkly increase. In particular, operating margin increased 14.5 percentage points year-over-year in March, without federal relief aid. 

The sharp increase was attributed to measuring March 2021 performance against the same period last year, when hospitals faced losses amid national shutdowns of elective procedures. 

Kaufman Hall noted that the median operating earnings before interest, taxes, depreciation and amortization margin also rose 13.3 percentage points in March, compared to March of 2020. 

“We expect to see additional margin gains in the months ahead, especially in comparison to record-poor performance in the early months of the pandemic,” said Jim Blake, managing director at Kaufman Hall. Over the course of 2021, however, we project hospital margins could be down as much as 80 percent, and revenues down as much as $122 billion compared to pre-pandemic levels, as hospitals continue to feel the dire repercussions of COVID-19.”

Hospitals also saw their adjusted discharges, emergency room visits, adjusted patient days and average length of stay increase year over year in March, Kaufman Hall noted. 

Non-operating income helps Providence claw back into black for 2020

https://www.healthcaredive.com/news/non-operating-income-helps-providence-claw-back-into-black-for-2020/596370/

Dive Brief:

  • Though the COVID-19 pandemic hampered Providence’s operational performance in 2020, the regional nonprofit powerhouse still ended the year in the black with net income of $1 billion, down about 9% from 2019.
  • Providence ended 2020 with an operating loss of $306 million, compared to an operating income of $214 million in 2019. However, healthy non-operating income recouped operating losses and offset reimbursement shortfalls from Medicaid and Medicare coverage, Providence said in full-year financial results released Monday.
  • The system, which operates 51 hospitals spanning seven states, posted drastic net losses in the first half of 2020 due to the pandemic, but seems to have closed out the year on more stable financial footing though volumes remain down.

Dive Insight:

Like other major systems, the pandemic railroaded Providence’s operational performance in 2020, as state and local lockdowns and orders to pause non-emergency procedures contributed to an unprecedented drop in patient volumes starting in March. As a result, the West Coast system reported a significant dip in patient revenue, along with skyrocketing expenses for personal protective equipment, pharmaceuticals and labor.

Volumes as measured by adjusted admissions were down 9% for the fiscal year ended Dec. 31, Providence said. Despite the lower volume, operating revenues were actually up 3% year over year to $25.7 billion, driven by growth in capitation, premium and diversified revenue streams — and supported by the recognition of $957 million in federal COVID-19 grants to providers from the Coronavirus Aid, Relief, and Economic Security Act passed a year ago.

However, operating expenses climbed 5% year over year to $26 billion, resulting in ​operating earnings before interest, depreciation and amortization of $1.1 billion, compared with $1.6 billion in 2019.

Overall, Providence’s financial results suggest the system was able to sidestep the worst of the pandemic’s financial effects, and mirrors 2020 reports from other major nonprofits.

Kaiser Permanente, which reported in early February, was also able to stay in the black despite COVID-19 deflating operating and net income, which fell about 19% and 15% respectively from 2019. Similarly, nonprofit Mayo Clinic reported a shrinking bottom line, with net income down almost 24% from 2019 though it remained profitable.

California-based nonprofit Sutter Health also squeaked to overall profitability in 2020 despite a operational loss of $321 million. The system, which said it expected to take several years to fully recover from COVID-19, launched a systemwide operational and financial review as a result of its weak operational performance.

For-profit operators weathered similar headwinds and were able to turn a profit in 2020, including Universal Health ServicesHCA HealthcareTenet and Community Health Systems.

A number of hospital executives have called out CARES grants and other federal aid as a key help in turning their finances around in 2020. However, despite the pandemic’s financial pressures, numerous major operators, including Kaiser Permanante, Mayo Clinic and HCA said they would return all or a portion of congressional aid, even as powerful hospital lobbies call on Washington for additional funds.

A recent Kaufman Hall report suggests providers could be overwhelmed by ongoing COVID-19 expenses following a surge in cases over the winter. Researchers estimate hospitals could lose anywhere from $53 billion to $122 billion in revenue in 2021 if pandemic pressures don’t abate, despite the glimmer of hope brought by ongoing vaccination efforts.

Despite increasing distribution of coronavirus vaccines, Moody’s Investors Service has placed a negative outlook on nonprofit hospitals in 2021.

Providence came together in 2016 with the merger of Washington-based Providence Health & Services and California-based St. Joseph Health to create the nation’s fourth-biggest Catholic hospital chain. Its full-year earnings come a week after California Attorney General and Biden nominee for HHS Secretary Xavier Becerra disclosed his office is investigating whether Providence violated legal commitments in applying religious restrictions to medical care at a hospital in Orange County.​

Sutter launches ‘sweeping review’ of finances after $321M operating loss

https://www.healthcaredive.com/news/sutter-launches-sweeping-review-of-finances-after-321m-operating-loss/596221/

Digital assistant uses AI to ease medical documentation at Sutter | Health  Data Management

Dive Brief:

  • Sutter Health is launching a “sweeping review” of its finances and operations due to the pandemic’s squeeze on the system in 2020, which led to a $321 million operational loss, the system said Thursday. 
  • The giant hospital provider in Northern California said it will take “several years to fully recover,” adding that it plans to restructure and even close some programs and services that attract fewer patients, and will reassign those employees to busier parts of its network. 
  • Sutter, which spent $431 million to modernize its facilities last year, is also reassessing its future capital investments due to its current financial situation. 

Dive Insight:

The pandemic “exacerbated” existing challenges for the provider, including labor costs, Sutter said. 

Expenses again outpaced revenue in 2020 and Sutter fears the trajectory is “unsustainable.” 

In 2020, Sutter generated revenue of $13.2 billion which was eclipsed by $13.5 billion in expenses, which was actually lower than its total expenses reported in 2019. 

Last year, the system invested heavily to prepare for the pandemic, buying up personal protective equipment and other supplies all while volumes declined. Sutter estimates it spent at least $121 million on COVID-19 supplies, which does not include outside staffing costs. 

Sutter said labor costs represented 60% of its total operating expenses, blaming high hospital wage indexes in Northern California, which it said are among the priciest in the country.

Still, Sutter was able to post net income of $134 million thanks in part to investment income, which was also deflated compared to the year prior. 

Volume has not rebounded to pre-pandemic levels, the system said. 

Admissions, emergency room visits and outpatient revenues all fell year over year, according to figures in Sutter’s audited financial statements. 

Other major health systems were pinched by the pandemic but were able to post a profit, including Kaiser Permanente.  

How hospital operators fared financially in 2020

“For the most part providers were dependent on that CARES funding. I think they would have been in the red or break even without it,” Suzie Desai, a senior director at S&P Global Ratings, said.

The pandemic weighed heavily on the financial performance of not-for-profit hospitals in 2020, but some of the larger health systems remained profitable despite the upheaval — in large part thanks to substantial federal funding earmarked to prop up providers during the global health crisis. 

Industry observers have been closely watching to see how health systems ultimately fared in 2020. Now, with the fiscal-year ended and accounted for, analysts say the $175 billion in federal funds was crucial for providers’ bottom lines.

Without the stimulus funding, it is very likely we would have seen more issuers [hospitals/health] systems experience either lower profitable margins, or outright losses from operations,” Kevin Holloran, senior director of U.S. public finance for Fitch Ratings, said.  

Still, the pandemic put a squeeze on nonprofit hospital margins last year, according to a recent Moody’s report that showed the median operating margin was 0.5% in 2020 compared to 2.4% in 2019.

The first half of the year hit providers especially hard as volumes fell drastically, seemingly overnight. Revenue plummeted alongside the volume declines as the nation paused lucrative elective procedures to preserve medical resources.

One estimate showed hospitals lost more than $20 billion as they halted surgeries in the early months of the outbreak in the U.S. 

But as the year wore on, the outlook improved as some volumes returned closer to pre-pandemic levels. At the same time, health systems worked to cut expenses to mitigate the financial strain.

Still, some health systems did post operational losses even with the federal funds meant to help them. Moody’s found that 42% of 130 hospitals surveyed posted an operating loss, an increase from 23% the year prior. Yet, the 2019 survey included more hospitals, a total of 282.

Sutter Health, the Northern California giant, reported an operating loss for 2020 and said it was launching a “sweeping review” of its finances as the pandemic exacerbated existing challenges for the provider. Washington-based Providence also reported an operating loss for 2020. However, both Sutter and Providence were able to post positive net income thanks in large part to investment gains.    

Investment income can aid nonprofit operators even when core operations are stunted like during 2020. Though, initially, the pandemic put stress on the stock market as uncertainty around the virus and its duration ballooned. The stock market took a dive and it was reflected in some six-month financials as both operations and investments took a hit. 

“COVID and the stimulus is (hopefully) a once in a lifetime disruption of operations,” Holloran said, who noted analysts have been trying to assess whether the top line losses can be placed squarely on COVID-19. If that’s the case, analysts are typically more apt to keep the provider’s existing rating. 

“For the most part providers were dependent on that CARES funding. I think they would have been in the red or break even without it,” Suzie Desai, a senior director at S&P Global Ratings, said.

For example, Arizona’s Banner Health would have posted an operating loss without federal relief, according to their financial reports. Banner Health was able to work its way back to black after it reported a loss through the first six months of the year. The same was true for Midwest behemoth Advocate Aurora. 

The providers that were able to weather the storm of the pandemic tended to be integrated systems that had a health plan under their umbrella. 

Kaiser Permanente ended the year with both positive operating and net income and returned relief funds it received.   

“The integrated providers, yeah, were one group that just had a natural hedge with the insurance premiums still coming in,” Desai said.  

Still, the hospital lobby is hoping to secure more funding for its members as the threat of the virus is still present even amid large scale efforts to vaccinate a majority of Americans to reach a blanket of protection from the novel coronavirus and its variants.