Kaiser Permanente reported lower revenues in the second quarter of this year than in the same period a year earlier, and the Oakland, Calif.-based healthcare giant ended the period with a net loss.
Kaiser, which provides healthcare and health plans, reported operating revenue of $23.47 billion in the second quarter of 2022, down from $23.69 billion in the same quarter of 2021. The organization’s expenses climbed from $23.34 billion in the second quarter of last year to $23.38 billion in the same period this year.
“Much like the entire health care industry, we continue to address deferred care while navigating COVID-19 surges and associated expenses,” Kathy Lancaster, Kaiser executive vice president and CFO, said in an Aug. 5 earnings release. “Kaiser Permanente’s integrated model of providing both care and coverage enables us to meet these challenges as demonstrated by our moderate increase in year-over-year operating expenses for the second quarter.”
Kaiser ended the second quarter of this year with operating income of $89 million, down from $349 million a year earlier.
After factoring in a nonoperating loss of $1.4 billion, Kaiser reported a net loss of $1.3 billion for the second quarter of this year, compared to net income of $2.97 billion in the same period last year. Kaiser said the loss was largely attributable to market conditions.
This is the second quarter in a row that Kaiser has reported a loss. The organization closed out the first quarter of this year with a net loss of $961 million, compared to net income of $2 billion in the same quarter of 2021.
Updated on Aug. 5 with comments from Sutter Health.
A $457 million net loss for the quarter ended June 30 has brought Sutter Health even deeper into the red for 2022, according to new financial filings.
The Sacramento-based nonprofit health system brought in $3.49 billion in total operating revenues from the quarter, down slightly from the prior year’s $3.51 billion.
At the same time, the system’s operating expenses grew from $3.41 billion in the second quarter of 2021 to $3.55 billion in the most recent quarter, driven by $30 million and $151 million year-over-year increases in salaries and purchased services, respectively. The latter includes the increased professional fees being felt by labor-strapped systems across the country.
These led the system to report a $51 million operating loss for the quarter as opposed to the $106 million operating gain from last year’s equivalent quarter.
“Poorly” performing financial markets also took a toll on Sutter’s numbers. The system’s quarterly investment income dipped from $251 million to $56 million from 2021 to 2022. A $495 million downward change in net unrealized gains and losses on its investments was also a stark reversal from the prior year’s $270 million increase.
Despite a 1.5% year-over-year operating revenue increase to $7.05 billion for the opening six months, a 1.7% year-over-year operating revenue bump places the system’s year-to-date income at $44 million (0.6% operating margin), slightly below last year’s $57 million (0.8% operating margin).
However, market struggles through both quarters and a $208 million loss tied to the disaffiliation of Samuel Merritt University now has Sutter sitting at a $641 million net loss for the opening half of 2022. The system was up $825 million at the same time last year.
“Sutter’s finances have stabilized, but our year-to-date numbers show we still have more affordability work ahead as we strive to best position Sutter Health to serve our patients and communities into the future,” the system wrote in an email statement. “We are grateful for our employees and clinicians who have worked diligently over the last several years to help bring our costs down—at the same time managing through the pandemic and continuing to provide high-quality, nationally recognized care.”
Sutter noted in the filing that it is or will be in labor negotiations with much of its unionized workforce, as 43% of its contract agreements have either expired or will be running their course within the year.
The filing also included notice of a handful of legal matters that have yet to be resolved. These include an antitrust verdict in favor of Sutter that is being appealed by the plaintiff, a lawsuit regarding an alleged privacy breach of two anonymous plaintiffs and two separate class-action complaints regarding employee retirement plan funding, among others.
“The organization continues to face financial headwinds like inflation and increased staffing costs, as evidenced by our near breakeven operating margin,” Sutter said in a statement. “Even still, we are encouraged that independent ratings agencies have recently acknowledged our efforts to date. In the second quarter, Moody’s, S&P and Fitch all affirmed the system’s existing ‘A’ category bond ratings.”
Hospitals are forced to absorb inflationary expenses, particularly related to supporting their workforce, AHA says.
The Centers for Medicare and Medicaid Services’ increase in the inpatient payment rate for 2023 is welcome but not enough to offset expenses, according to the American Hospital Association.
CMS set a 4.1% market basket update for 2023 in its final rule released Monday, calling it the highest in the last 25 years. The increase was due to the higher cost in compensation for hospital workers.
The final rule gave inpatient hospitals a 4.3% increase for 2023, as opposed to the 3.2% increase in April’s proposed rule.
WHY THIS MATTERS
CMS used more recent data to calculate the market basket and disproportionate share hospital payments, a move that better reflects inflation and labor and supply cost pressures on hospitals, the AHA said.
“That said, this update still falls short of what hospitals and health systems need to continue to overcome the many challenges that threaten their ability to care for patients and provide essential services for their communities,” said AHA Executive Vice President Stacey Hughes. “This includes the extraordinary inflationary expenses in the cost of caring hospitals are being forced to absorb, particularly related to supporting their workforce while experiencing severe staff shortages.”
The AHA would continue to urge Congress to take action to support the hospital field, including by extending the low-volume adjustment and Medicare-dependent hospital programs, Hughes said.
In late July, Senate and House members urged CMS to increase the inpatient hospital payment.
Premier, which works with hospitals, also said the 4.3% payment update falls short of reflecting the rising labor costs that hospitals have experienced since the onset of the pandemic.
“Coupled with record high inflation, this inadequate payment bump will only exacerbate the intense financial pressure on American hospitals,” said Soumi Saha, senior vice president of Government Affairs for Premier.
THE LARGER TREND
Recent studies show hospitals remain financially challenged since the COVID-19 pandemic’s effect on revenue and supply chain and labor expenses. Piled onto that has been inflation that has added to soaring expenses.
Hospital margins were up slightly from May to June, but are still significantly lower than pre-pandemic levels, according to a Flash Report from Kaufman Hall.
The effects of the pandemic on the healthcare industry have been profound, resulting in the creation of new business models, according to a report from McKinsey.
Transformational change is necessary as hospitals have been hit hard by eroding margins due to cost inflation and expenses, Fitch found.
“To say that 2022 has challenged healthcare providers is an understatement,” Erik Swanson, a senior vice president of data and analytics with Kaufman Hall, said in an email report. “It’s unlikely that hospitals and health systems can undo the damage caused by the COVID-19 waves of earlier this year, especially with material and labor costs at record highs this summer.”
The median Kaufman Hall year-to-date operating margin index for hospitals was -0.09% through June, for the sixth month of cumulative negative actual operating margins. However, the median change in operating margin in June was up 30.8% compared to May, but down 49.3% from June 2021.
Hospital revenues for June continued to trend upward, even as volumes evened out, according to the Kauffman Hall data. Organizations saw a 2.1% drop in patient length of stay. Both patient days and emergency department visits each dropped by 2.6% in June when compared to May. Hospital’s gross operating revenue was up 1.2% in June from May.
Expenses have been dragging down hospital margins for months, however, June saw a slight month-over-month improvement as total hospital expenses dropped 1.3%, despite this, year-over-year expenses are still up 7.5% from June 2021. Physician practices saw a drop in provider compensation, according to the Kaufman Hall data, however, this wasn’t enough to offset expenses. The competitive labor market for healthcare support staff resulted in a new high for total direct expense per provider FTE in Q2 2022 of $619,682—up 7% from the second quarter of 2021 and 12% from the second quarter of 2020.
“Given the trends in the data, physician practices need to focus on efficiency in the second half of 2022,” Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall, said in the email report. “Amid historically high expenses, shifting some services away from physicians to advanced practice providers like nurse practitioners or physician assistants could help rein in the costs of treating an increased patient load while taking some of the weight off the shoulders of physicians.”
Fitch Ratings has affirmed the “B-” long-term issuer default ratings of Franklin, Tenn.-based Community Health Systems, and revised the company’s rating outlook to negative from stable.
The credit rating agency said the negative outlook reflects operating performance deterioration in the first half of this year, with significant increases in labor costs. Higher costs, weakness in volumes and acuity mix drove a downturn in the for-profit company’s revenue, resulting in a reduction in its financial guidance for this year, Fitch said.
CHS ended the first six months of this year with a net loss of $327 million on revenues of $6.04 billion. In the first half of 2021, the company posted a net loss of $58 million on revenues of $6.02 billion.
Fitch noted that CHS still benefits from its strengthened liquidity and balance sheet after several debt refinancing and exchange transactions. CHS also benefits from investments in outpatient care and higher-acuity inpatient services, the credit rating agency said.
Like many systems, the for-profit chains seem to have successfully weaned themselves from earlier reliance on expensive temporary nurses, but are facing more structural increases in labor costs as salaries have risen to remain competitive in a very tight labor market.
The Gist: The earnings reports from for-profit companies are a canary in the coal mine for the overall margin performance of the industry. Although investor-owned companies are vastly outnumbered by their not-for-profit peers, they often move more quickly, and with more vigor, to reduce costs in order to meet the earnings expectations of Wall Street investors. They also typically rely more heavily on volume growth—particularly emergency department visits—as a driver of earnings.
If for-profits are now finding it more difficult to pull those levers, we’d expect that the broader universe of nonprofit systems is experiencing even tougher sledding. That’s consistent with what we’re hearing anecdotally from health systems we work with.
Washington State Hospital Association reported a $929 million net loss due to an increase in operating expenses and nonoperating investment losses, The News Tribune reported July 21.
The review reflected January through March 2022 and showed operating revenue increased by 5 percent; however, operating expenses increased by 11 percent.
“This combined with non-operating investment losses, resulted in a total margin of negative 13 percent,” WSHA said in a briefing of the review July 21.
The losses were mainly seen in urban Washington hospitals, though rural hospitals were also affected.
“All 52 urban hospitals/health systems reported negative margins and account for 86 percent of the losses statewide,” WSHA said. “Of the independent rural hospitals responding, 18 out of 32 had negative margins.”
WSHA said lower Medicaid reimbursements were part of the problem. In the first quarter, Medicaid reimbursements covered 42 percent of the cost of care delivery.
Pandemic pressures also had a negative effect, according to WSHA. It said federal COVID-19 relief funds have been depleted.
Additionally, WSHA said labor costs have continued to rise because of a need to retain staff and a reliance on travel nurses with high wages.
HCA Healthcare and Tenet Healthcare, two of the largest for-profit hospital operators in the U.S., reported lower net income in the second quarter of this year than in the same period of 2021.
1. Nashville, Tenn.-based HCA Healthcare, a 182-hospital system, reported revenues of $14.82 billion in the second quarter of this year, up from $14.44 billion in the same period last year.
2. HCA’s net income totaled $1.16 billion in the second quarter of 2022, down from $1.45 billion in the same period a year ago. The second quarter of this year included $32 million in losses on the sales of facilities and and losses on retirement of debt of $78 million.
3. HCA said same-facility admissions declined 1.2 percent year over year in the second quarter of this year. Emergency room visits were up 7.3 percent year over year.
4. “Many aspects of our business were positive considering the challenges we faced with the labor market and other inflationary pressures on costs,” Sam Hazen, CEO of HCA, said in a July 22 earnings release. “Our teams executed well as they have in the past through other difficult environments. Again, I want to thank them for their dedication and excellent work.”
5. For the six months ended June 30, HCA reported net income of $2.43 billion on revenues of $29.77 billion. In the same period a year earlier, the company posted net income of $2.87 billion on revenues of $28.41 billion.
1. Dallas-based Tenet Healthcare reported revenues of $4.64 billion in the second quarter of this year, down from $4.95 billion in the same period a year earlier. The decrease was primarily attributed to the sale of the company’s Miami-area hospitals in the third quarter of 2021 and the impact of a cybersecurity incident.
2. The 60-hospital system ended the second quarter of this year with net income of $38 million, down from $119 million in the same quarter last year.
3. Same-hospital admissions adjusted for outpatient activity were down 5.3 percent year over year in the second quarter of this year. Tenet said a cybersecurity incident in April that temporarily disrupted some acute care operations contributed to the decline.
4. “We demonstrated resilience in the face of a disruptive cyber attack and discipline through challenging market conditions,” Saum Sutaria, MD, CEO of Tenet, said in a July 21 earnings release. “The ongoing diversification of Tenet driven by our capital efficient ambulatory expansion is a key differentiator that presents compelling opportunities for growth in earnings and free cash flows.”
5. Looking at the six months ended June 30, Tenet reported net income of $178 million on revenues of $9.38 billion. In the same period of 2021, the company reported net income of $216 million on revenues of $9.74 billion.
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. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
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
Nonprofit hospitals are reporting thinner margins this year, stretched by rising labor, supply and capital costs, and will be pressed to make big changes to their business models or risk negative rating actions, Fitch Ratings said in a report out Tuesday.
Warning that it could take years for provider margins to recover to pre-pandemic levels, Fitch outlined a series of steps necessary to manage the inflationary pressures. Those moves include steeper rate increases in the short term and “relentless, ongoing cost-cutting and productivity improvements” over the medium term, the ratings agency said.
Further out on the horizon, “improvement in operating margins from reduced levels will require hospitals to make transformational changes to the business model,” Fitch cautioned.
It has been a rough year so far for U.S. hospitals, which are navigating labor shortages, rising operating costs and a rebound in healthcare utilization that has followed the suppressed demand of the early pandemic.
Fitch said the majority of the hospitals it follows have strong balance sheets that will provide a cushion for a period of time. But with cost inflation at levels not seen since the late 1970s and early 1980s, and the potential for additional coronavirus surges this fall and winter, more substantial changes to hospitals’ business models could be necessary to avoid negative rating actions, the agency said.
Providers will look to secure much higher rate increases from commercial payers. However, insurers are under similar pressures as hospitals and will push back, using leverage gained through the sector’s consolidation, the report said.
As a result, commercial insurers’ rate increases are likely to exceed those of recent years, but remain below the rate of inflation in the short term, Fitch said. Further, federal budget deficits make Medicare or Medicaid rate adjustments to offset inflation unlikely.
Inflation is pushing more providers to consider mergers and acquisitions to create economies of scale, Fitch said. But regulators are scrutinizing deals more strenuously due to concerns that consolidation will push prices even higher. With increased capital costs, rising interest rates and ongoing supply chain disruptions, hospitals’ plans for expansion or renovations will cost more or may be postponed, the report said.