Category Archives: Operating Revenue

Razor-thin hospital margins become the new normal

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Hospital finances are starting to stabilize as razor-thin margins become the new normal, according to Kaufman Hall’s latest “National Flash Hospital Report,” which is based on data from more than 900 hospitals.

External economic factors including labor shortages, higher material expenses and patients increasingly seeking care outside of inpatient settings are affecting hospital finances, with the high level of fluctuation that margins experienced since 2020 beginning to subside.

Hospitals’ median year-to-date operating margin was -1.1 percent in February, down from -0.8 percent in January, according to the report. Despite the slight dip, February marked the eight month in which the variation in month-to-month margins decreased relative to the last three years. 

“After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses and patient care preferences,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said. “In this new normal of razor thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security.”

High expenses continued to eat into hospitals’ bottom lines, with February signaling a shift from labor to goods and services as the main cost driver behind hospital expenses. Inflationary pressures increased non-labor expenses by 6 percent year over year, but labor expenses appear to be holding steady, suggesting less dependence on contract labor, according to Kaufman Hall. 

“Hospital leaders face an existential crisis as the new reality of financial performance begins to set in,” Mr. Swanson said. “2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul.”

AHA: MedPAC’s 2024 Medicare payment recommendation is ‘out of touch with reality’

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MedPAC’s recommendation that acute care hospitals don’t need a significant increase in 2024 Medicare rates is “totally insufficient and out of touch with reality,” according to the American Hospital Association.

“This view is one-sided, inaccurate and misleading,” Ashley Thompson, AHA’s senior vice president of public policy analysis and development, wrote in a March 23 blog post. “After years of once-in-a-lifetime events in the form of a global pandemic and record inflation, hospitals across the country are struggling to continue to fulfill their mission to care for their patients and communities.”

In its annual March report to Congress, MedPAC recommended an update to hospital payment rates of “current law plus 1 percent,” which the AHA says is not enough for many hospitals to keep their doors open. 

The commission found that most indicators of sufficient Medicare rates for providers were positive or improved in 2021, though it acknowledged that hospitals saw more volatile cost increases in 2022 compared to years prior. Hospital margins were also lower last year than in 2021, according to preliminary data, driven in part by providers facing higher than expected costs and capacity and staffing challenges.

The report also said that its 2024 payment recommendations “may not be sufficient” to sustain some safety-net hospitals with a low number of commercially insured patients, and proposed $2 billion in add-on payments.

Across the U.S., a total of 631 rural hospitals — or about 30 percent of all rural hospitals — are at risk of closing in the immediate or near future.

MedPAC’s recommendations for 2024 differ from how some health economists have recently described hospitals’ finances. In January, hospitals had a median operating margin of -1 percent according to Kaufman Hall, a finding that arrived on the heels of 2022 being named the worst financial year for hospitals since the start of the COVID-19 pandemic.

“It is also important to realize that MedPAC’s report and data has limitations,” Ms. Thompson wrote, referring to a misalignment in the calendar year MedPAC chose to analyze and how hospitals can differ in how they report their individual financial earnings.

MedPAC said its report reflects 2021 data, preliminary data from 2022, and projections for 2023, along with recent inflation rates.

“…cost reports are filed for hospitals’ own specific fiscal years, and because surges, relief payments, and eventual expense increases happened at different times for different hospitals, these calculated margins don’t necessarily provide a fully accurate picture of the financial reality in 2021,” Ms. Thompson wrote.

The AHA stressed that hospitals’ finances in 2023 face much different challenges compared to 2021, when the industry was more supported by strong investment returns and federal pandemic relief. 

“The fact that massive numbers of hospitals are not currently closing due to financial pressures should be seen as positive for patients and communities,” Ms. Thompson said. “Instead, some observers seem to be disappointed that more hospitals are not failing financially.”

A detailed response from the AHA to the MedPAC report is available here.

Sutter Health ends 2022 with $249M loss, but draws solace from $278M operating income

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https://www.fiercehealthcare.com/providers/sutter-health-ends-2022-249m-loss-draws-solace-278m-operating-income

Sacramento, California-based Sutter Health crossed the finish line strong but ultimately wrapped up 2022 with a $249 million net loss, a substantial decline from the $1.1 billion profit of 2021.

A $628 million dip in investment income, a $578 million decrease in net unrealized gains and losses on investments and the $208 million disaffiliation of Samuel Merritt University all contributed to the nonprofit’s year-over-year decline.

Still, the tally is a $289 million improvement over the $538 million net loss the system had reported at the year’s nine-month mark.

The loss was also blunted by a 12-month operating income of $278 million—a bump over the $199 million operating income of 2021 and a feather in Sutter’s cap at a time when several other major nonprofit systems are reporting hundreds of millions in operating losses.

“Our operating financial performance has put Sutter in a position to reinvest more within the system, which can help support even higher quality, equitable healthcare for patients throughout California,” CEO and President Warner Thomas said in a press release.

Sutter’s total operating revenues rose 3.9% year over year to $14.8 billion in 2022. This was just ahead of the 3.3% increase to $14.5 billion in total operating expenses. The system wrote in a release that “like other healthcare organizations around the country,” it was not immune from inflationary pressures on expenses like wages and benefits or supplies.

However, the strong results of its 2021 financial recovery initiative and patient volumes “returning to near-2019 levels by year’s end” give Sutter “a stable base to invest in the future,” the system said.

Providence suffers 2nd downgrade in a few days

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Renton, Wash.-based Providence had its second downgrade in less than a week amid higher expenses that helped lead to steeper-than-expected losses and an expectation of a multiyear recovery.

The rating downgrade from “A+” to “A” applies to the system’s long-term rating as well as to various bonds it holds, S&P Global said March 21. The outlook is negative.

“The negative outlook reflects our view of the steep operating losses that management must address over the next year to put the organization on a path to better cash flow and break-even margins,” S&P said.

The rating downgrade follows a similar move by Fitch March 17.

Positive fundamentals such as its diversified services and robust strategic plan, as well as its leading market positions in all seven of its regionally centered markets, stands Providence in good stead, S&P added.

Providence, a 51-hospital system, recently reported a fiscal 2022 operating loss of $1.7 billion.

14 health systems with strong finances

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Here are 14 health systems with strong operational metrics and solid financial positions, according to reports from credit rating agencies Fitch Ratings, Moody’s Investors Service and S&P Global.

1. Ascension has an “AA+” rating and stable outlook with Fitch. The St. Louis-based system’s rating is driven by multiple factors, including a strong financial profile assessment, national size and scale with a significant market presence in several key markets, which produce unique credit features not typically seen in the sector, Fitch said. 

2. Berkshire Health has an “AA-” rating and stable outlook with Fitch. The Pittsfield, Mass.-based system has a strong financial profile, solid liquidity and modest leverage, according to Fitch. 

3. ChristianaCare has an “Aa2” rating and stable outlook with Moody’s. The Newark, Del.-based system has a unique position with the state’s largest teaching hospital and extensive clinical depth that affords strong regional and statewide market capture, and it is expected to return to near pre-pandemic level margins over the medium term, Moody’s said.

4. Cone Health has an “AA” rating and stable outlook with Fitch. The rating reflects the expectation that the Greensboro, N.C.-based system will gradually return to stronger results in the medium term, the rating agency said. 

5. Harris Health System has an “AA” rating and stable outlook with Fitch. The Houston-based system has a “very strong” revenue defensibility, primarily based on the district’s significant taxing margin that provides support for operations and debt service, Fitch said. 

6. Johns Hopkins Medicine has an “AA-” rating and stable outlook with Fitch. The Baltimore-based system has a strong financial role as a major provider in the Central Maryland and Washington, D.C., market, supported by its excellent clinical reputation with a regional, national and international reach, Fitch said. 

7. Orlando (Fla.) Health has an “AA-” and stable outlook with Fitch. The system’s upgrade from “A+” reflects the continued strength of the health system’s operating performance, growth in unrestricted liquidity and excellent market position in a demographically favorable market, Fitch said.  

8. Rady Children’s Hospital has an “AA” rating and stable outlook with Fitch. The San Diego-based hospital has a very strong balance sheet position and operating performance and is also a leading provider of pediatric services in the growing city and tri-county service area, Fitch said. 

9. Rush System for Health has an “AA-” and stable outlook with Fitch. The Chicago-based system has a strong financial profile despite ongoing labor issues and inflationary pressures, Fitch said. 

10. Salem (Ore.) Health has an “AA-” rating and stable outlook with Fitch. The system has a “very strong” financial profile and a leading market share position, Fitch said. 

11. TriHealth has an “AA-” rating and stable outlook with Fitch. The rating reflects the Cincinnati-based system’s strong financial and operating profiles, as well as its broad reach, high-acuity services and stable market position in a highly fragmented and competitive market, Fitch said. 

12. UCHealth has an “AA” rating and stable outlook with Fitch. The Aurora, Colo.-based system’s margins are expected to remain robust, and the operating risk assessment remains strong, Fitch said.   

13. University of Kansas Health System has an “AA-” rating and stable outlook with S&P Global. The Kansas City-based system has a solid market presence, good financial profile and solid management team, though some balance sheet figures remain relatively weak to peers, the rating agency said. 

14. Willis-Knighton Health System has an “AA-” rating and stable outlook with Fitch. The Shreveport, La.-based system has a “dominant inpatient market position” and is well positioned to manage operating pressures, Fitch said. 

4 health systems hit with rating downgrades

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Here is a summary of recent credit rating downgrades, going back to the last Becker’s roundup on Jan. 17.

Operating concerns and a bleak financial outlook for some resulted in the following changes:

Geisinger Health System (Danville, Pa.): Moody’s Investors Service downgraded Geisinger Health System’s outstanding bonds from “A1” to “A2” Feb. 13 amid expectations of continued cash flow weakness. 

The outlook for the system, which has about $1.3 billion in debt, is stable. 

Marshfield (Wis.) Clinic Health System:  The system suffered a credit downgrade because of recent operating losses and amid expectations of no immediate financial improvement.

The S&P Global move Feb. 7 to downgrade the system to “BBB+” from “A-” follows a similar move from Fitch Jan. 18.

Marshfield signed a memorandum of understanding with Duluth, Minn.-based Essentia Health to discuss a potential merger Oct. 12 that would include 25 hospitals.

Tower Health (West Reading, Pa.): Troubled Tower Health, which is currently undergoing a strategic review and selling off several assets, suffered a rating downgrade on its bonds, S&P Global reported Feb. 6, adding that the outlook is negative.

“The downgrade reflects Tower Health’s significant ongoing operating losses that are expected to continue in fiscal 2023, and a steep decline in unrestricted reserves to a level that we view as highly vulnerable,” said S&P Global Ratings credit analyst Anne Cosgrove.

Fairview Health (Minneapolis): Moody’s Investors Service downgraded the revenue bond ratings of Fairview Health from “A3” to “Baa1.” 

The downgrade reflects Moody’s projection that weak operating performance will be challenging to overcome due to increased labor costs and lower inpatient volume. Inflation and annual transfers to the University of Minnesota in Minneapolis will also hamper margins, Moody’s said.

Adventist Health reorganizes; executive job cuts coming

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Roseville, Calif.-based Adventist Health plans to go from seven networks of care to five systemwide to reduce costs and strengthen operations, according to a Feb. 15 news release shared with Becker’s.

Under the reorganization, Adventist Health will have separate networks for Northern California, Central California, Southern California, Oregon and Hawaii.

“Reducing the number of care networks strengthens our operational structure and broadens the meaning and purpose of our network model as well as the geographical span of one Adventist Health,” Todd Hofheins, COO of Adventist Health, said in the release. “This also reduces overhead and administrative costs.”

The reorganization will result in job cuts, including reducing administration by more than $100 million.

“Our commitment to rural and urban healthcare remains steadfast, and we are expanding to other locations to invest and transform the integrated delivery of care,” Kerry Heinrich, president and CEO of Adventist Health, said in the release.

Specifically, the health system has a recently approved affiliation agreement for Mid-Columbia Medical Center in The Dalles, Ore., to join Adventist Health, the health system said. The agreement is pending final regulatory and state approvals.

Meanwhile, Adventist Health filed a Worker Adjustment and Retraining Notification Act notice with California officials Feb. 15. 

Adventist Health will eliminate job functions and positions for employees at its corporate office campus along with some remote roles, the notice states.    

Layoffs from Adventist Health began Feb. 1 and will continue into April, according to the notice. 

Adventist Health said it has provided all affected employees 60 days’ written notice of the layoff. The health system expects about 59 employees to be separated from employment with Adventist Health. 

Employees affected by the layoffs include administrative directors, directors, managers and project managers, among others.

“We recognize that these changes impact people’s lives and want to respect each affected individual,” Joyce Newmyer, chief people officer for Adventist Health, said in the health system’s release. “We will make every effort to identify other opportunities for team members impacted.”

CommonSpirit records $451M operating loss in 2nd half of 2022

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Chicago-based CommonSpirit Health, one of the largest healthcare systems in the country operating 138 hospitals in 21 states, has reported $451 million in operating losses for the six-month period ending Dec. 31.

Those figures compared with operating losses of $47 million for the same period in the prior year. Overall income for the second half of 2022 totaled a $213 million loss, but there was a gain of $200 million in the final quarter as stronger investment returns kicked in.

Staffing expenses continue to be a “major challenge,” CommonSpirit said. While salaries and benefits decreased $80 million in the final quarter, there was an overall increase of $140 million, or 1.7 percent, in such expenses over the second half of the year.

“We are meeting our challenges head on by scaling programs that drive growth, create a better experience for patients, and support our employees,” CFO Dan Morissette said in a statement. “At the same time we are working hard to reduce our costs so we can sustain these essential services in the long term.”

CommonSpirit estimated costs from its October cybersecurity event at approximately $150 million. The health system held $14.6 billion in debt as of Dec. 31.

4 health systems with recent credit rating upgrades

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Here are four health systems that recently had their credit rating upgraded by Fitch Ratings, Moody’s Investors Service or S&P Global Ratings:

1. Cooper University Health Care received upgrades from both S&P and Moody’s. S&P upgraded the Camden, N.J.-based system from “BBB+” to “A-,” praising Cooper for its focus on cost containment, revenue improvement, expanding market share and developing key services to gain more tertiary referrals and limit outpatient migration to Philadelphia academic medical centers. 

Moody’s raised the system’s bond ratings from “Baa1” to “A3” and said it expects Cooper’s operating margins will be maintained through execution of its performance improvement plan and strong growth in key service lines. 

2. Loma Linda (Calif.) University Medical Center’s rating was raised to “BB+” from “BB” by Fitch. “The upgrade … incorporates LLUMC’s major new hospital, which is now open, and the system has been operating in their new environment for more than one year, removing a considerable risk factor,” Fitch said in a report. 

3. Mercy Health’s credit rating was upgraded from “A-” to “A” by Fitch. The rating agency said the Rockford, Ill.-based system’s operating profile is expected to remain strong in the longer term. 

4. Orlando (Fla.) Health’s rating was upgraded to “AA-” from “A+” by Fitch. The ratings agency said in a report the bump “reflects the continued strength of OHI’s operating performance, growth in unrestricted liquidity and excellent market position in a demographically favorable market.”

CHS’ net income drops 51% in 2022

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Franklin, Tenn.-based Community Health Systems, one of the largest for-profit health systems in the country, reported $179 million net income in 2022, a 51.4 percent drop from the $368 million net income reported the prior year. 

The drop was driven by a decline in net operating revenues, fewer inpatient admissions and what CHS termed “unfavorable changes” in payer mix.

Total operating costs and expenses for the year ended Dec. 31 were $11.4 billion, up from $11 billion in 2021. Net operating revenues were $12.2 billion in 2022, down slightly from $12.4 billion the prior year. 

Net income in the final three months of the year totaled $446 million compared with $223 million in the same period in 2021.

“We were pleased with our progress during the final quarter of the year, including solid volume growth in admissions, adjusted admissions and surgeries,” CEO Tim Hingtgen said in a statement. “We also significantly reduced contract labor from its peak in early 2022 while improving overall employee recruitment and retention levels.”

CHS, which owns or leases 79 affiliated hospitals with approximately 13,000 beds and operates more than 1,000 sites of care, also released guidance for 2023, predicting annual revenues of between $12.2 billion and $12.6 billion. Such figures compare with $12.2 billion in 2022.

The system, which is also predicting a net loss in 2023 between 0.05 and 0.65 a share, recorded long-term debt of $11.6 billion as of Dec. 31 compared with $12.1 billion at the same time in 2021.