Health care CEOs made $2.6 billion in 2018

https://www.axios.com/newsletters/axios-vitals-3dafd3d8-dd1c-47ed-a1f0-287e7f37fc6f.html?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

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The CEOs of 177 health care companies collectively made $2.6 billion in 2018 — roughly $700 million more than what the National Institutes of Health spent researching Alzheimer’s disease last year, according to a new Axios analysis of financial filings.

Why it matters: The pay packages reveal the health care system’s real incentives: finding ways to boost revenue and stock value by raising prices, filling more hospital beds, and selling more drugs and devices, Axios’ Bob Herman reports.

By the numbers: The median pay of a health care CEO in 2018 was $7.7 million. Fourteen CEOs made more than $46 million each.

  • The figures were calculated by using actual realized gains of stock options and awards, which are in the annual proxy disclosures companies file with the Securities and Exchange Commission.

The highest-paid health care CEO last year was Regeneron Pharmaceuticals CEO Leonard Schleifer, who made $118 million. A spokesperson said Schleifer “has built Regeneron from a start-up into a leading innovative biopharmaceutical company” and that he “generally holds his option awards until nearly the end of the full 10-year option term.”

  • Pharmaceutical CEOs represented 11 of the 25 highest compensation amounts last year.
  • Executives of medical device and equipment companies that don’t attract as much attention — such as Intuitive Surgical, Masimo, Hill-Rom and Exact Sciences — also were sitting at the top.

Between the lines: A vast majority of CEO pay comes from exercised and vested shares of stock. Salaries are almost an afterthought.

  • But health care executives routinely earned millions of dollars in cash bonuses, based on factors like revenue goals and financial metrics that experts say can be manipulated.
  • Quality of care is either not a factor at all in CEOs’ bonuses at all, or a marginal one.

Details: McKesson CEO John Hammergren received a $4 million bonus for hitting financial targets last year, just as the company was facing a slew of lawsuits over its role in the opioid crisis. McKesson did not immediately respond to questions.

  • Community Health Systems CEO Wayne Smith recorded a $3.3 million bonus even though his hospital chain continued to hemorrhage money. His bonus was heavily weighted by an adjusted metric that made CHS look profitable, and none of his bonus was tied to patient outcomes. CHS did not respond.

Worth noting: The analysis does not include compensation from not-for-profit hospital systems, because their 2018 tax filings have not been released yet.

 

 

 

Financial updates from Banner, Kaiser, Mayo + 3 other health systems

https://www.beckershospitalreview.com/finance/financial-updates-from-banner-kaiser-mayo-3-other-health-systems.html?origin=cfoe&utm_source=cfoe

The following six health systems recently released their financial statements for the nine-month period ended Sept. 30:

1. Phoenix-based Banner Health’s revenue climbed 7.2 percent year over year to $6.3 billion in the first nine months of 2018. The system ended the first nine months of this year with operating income of $122.1 million, down 37 percent from $192.9 million in the same period a year earlier.

2. Oakland, Calif.-based Kaiser Permanente’s revenue climbed to $59.7 billion in the first nine months of 2018, up 9.6 percent from revenue of $54.5 billion in the same period of 2017. Kaiser ended the first nine months of this year with operating income of $2.03 billion, compared to $2.33 billion in the same period of 2017.

3. Rochester, Minn.-based Mayo Clinic ended the first nine months of 2018 with revenue of $9.5 billion, compared to $8.8 billion in the same period of 2017. The system reported operating income of $601 million in the nine months ended Sept. 30, up 32 percent from the same period of 2017.

4. Bronx, N.Y.-based Montefiore Health System recorded revenue of $4.4 billion in the nine months ended Sept. 30, up from $4.1 billion in the same period a year earlier. The system ended the first nine months of this year with operating income of $59.6 million, up from $37.7 million in the same period of the year prior.

5. Arlington-based Texas Health Resources recorded revenue of $3.5 billion in the first nine months of 2018, up from $3.4 billion in the same period a year earlier. The system ended the first nine months of this year with operating income of $168.7 million, down from $174.5 million in the same period of 2017.

6. Pittsburgh-based UPMC reported revenue of $13.9 billion in the first nine months of this year, up from $11.4 billion in the same period of 2017. The system ended the first nine months of 2018 with operating income of $190 million, down from $196 million in the same period of 2017.

 

Partners HealthCare’s annual operating income soars 489%

https://www.beckershospitalreview.com/finance/partners-healthcare-s-annual-operating-income-soars-489.html?origin=rcme&utm_source=rcme

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Boston-based Partners HealthCare saw its operating income rise in fiscal year 2018 despite a decline in revenues, according to financial documents released Dec. 7.

Partners saw operating revenues dip 0.5 percent year over year to $13.31 billion in fiscal year 2018, which ended Sept. 30. The health system’s significant growth in provider revenues was partially offset by a decline in insurance revenue. Partners said the decrease in insurance revenue was attributable to the transition of members from Medicaid managed care programs into the new MassHealth ACO program in March.

After accounting for a 2.4 percent decrease in expenses, Partners ended fiscal 2018 with operating income of $309.9 million. That’s up 489 percent from a year earlier, when the health system posted operating income of $52.57 million.

Partners reported a 2.3 percent operating margin for fiscal 2018, up from a 0.4 percent operating margin in the year prior.

“While a 2-3 percent margin is slim compared to our peers across the nation, it enables us to reinvest in patient care and provide for the future capital needs of our hospitals and facilities,” said Peter K. Markell, treasurer and CFO of Partners.

After factoring in nonoperating income, Partners ended fiscal 2018 with net income of $826.6 million, up from $659.1 million in fiscal 2017.

 

 

Hospital Operating Income Falls for Two-Thirds of Health Systems

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Hospital operating income and health systems

Hospital expenses are rising faster than revenue growth for health systems, resulting in declining operating income.

Health system operating income is deteriorating as hospital expenses continue to grow, according to a recent Navigant analysis.

In the three-year analysis of the financial disclosures for 104 prominent health systems that operate almost one-half of US hospitals, the healthcare consulting firm found that two-thirds of the organization saw operating income fall from FY 2015 to FY 2017. Twenty-two of these health systems had three-year operating income reductions of over $100 million each.

Furthermore, 27 percent of the health systems analyzes lost revenue on operations in at least one of the three years analyzed and 11 percent reported negative margins all three years.

In total, health systems facing operating earnings reductions lost $6.8 billion during the period, representing a 44 percent reduction.

Rapidly growing hospital expenses as the primary driver of declining operating margins, Navigant reported. Hospital expenses increased three percentage points faster hospital revenue from 2015 to 2017. Top-line operating revenue growth decreased from seven percent in 2015 to 5.5 percent by 2017.

Hospital revenue growth slowed during the period because demand went down for key hospital services, like surgery and inpatient admissions, Navigant explained.

Many of the revenue-generating services hospitals rely on are under the microscope. Policymakers and healthcare leaders are particularly looking to decrease the number of hospital admissions and safely shift inpatient surgeries to less expensive outpatient settings.

In exchange, Medicare and other leading payers are reimbursing hospitals for decreasing admissions or readmissions and their performance on other value-based metrics.

The shift to value-based reimbursement, however, is slow and steady, with just over one-third of healthcare payments currently linked to an alternative payment model. Hospitals and health systems are still learning to navigate the new payment landscape while keeping their revenue growing.

Value-based contracts also failed to deliver sufficient patient volume to counteract the discounts given to payers, Navigant added.

According to the firm, other factors contributing to a slowdown in hospital revenue growth included a decline in collection rates for private accounts and reductions in Medicare reimbursement updates because of the Affordable Care Act and the 2012 federal budget sequester.

“Because of reductions in Medicare updates from ACA and the sequester, hospital losses in treating Medicare patients rose from $20.1 billion in 2010 to $48.8 billion in 2016, according to American Hospital Association analyses,” the report stated. “The sharp $7.2 billion deterioration in Medicare margins that occurred from 2015 to 2016 surely contributed to the reduction in hospital operating margins in the same year of this analysis.”

While hospital revenue growth slowed, hospital expenses sharply rose as healthcare organizations invested in new technologies. Value-based reimbursement, federal requirements, and other components of the Affordable Care Act prompted hospitals to make strategic investments in EHRs, physicians, and population health management, causing expenses to increase, Navigant stated.

Key strategic investments made by hospitals and health systems included:

  • Compliance with the 2009 Health Information Technology for Economic and Clinical Health (HITECH) Act, which requires certified EHR implementation in hospitals and affiliated physician practices
  • Compliance with Medicare payment reform initiatives, such as accountable care organizations (ACOs) or pay-for-performance programs
  • Participation in new value-based contracts with payers
  • Establishment of employed physician groups or clinically integrated networks to develop the capabilities needed for compliance with performance- or value-based initiatives

“In addition to these strategic investments, other factors drove up routine patient care expenses, including a nursing shortage that increased nursing wages and agency expenses; specialty drug costs, particularly for chemotherapeutic agents; and, for some systems, recalibration of retirement fund costs,” the report stated.

The shift to value-based reimbursement and all of its accompanying policies will be the “new normal,” and hospitals should expect the low rate of revenue growth to persist, Navigant stated.

But hospitals and health systems can withstand the economic downturn by achieving strategic discipline and operational excellence, the firm advised.

“Systems must be disciplined to invest their growth capital in areas of actual reachable demand; that is, matched to the growth potential in the specific local markets the system serves,” the report stated. For example, creating a Kaiser-like closed panel capitated health offering in markets where there is no employer or health plan interest in buying such a product is a waste of scarce capital and management bandwidth.”

In line with strategic discipline, organizations will need to “prune” their owned assets portfolio by improving the utilization of their clinical capacity and growing patient throughput. Health systems can achieve this by focusing on scheduling and staffing, ensuring adherence to clinical pathways, streamlining discharges and care transitions, and adjusting physical capacity to actual demand.

The tools used to succeed in value-based contracts should also be applied to Medicare lines of business to reduce Medicare operating losses.

Additionally, vertical alignment will be key to weathering falling operating earnings, Navigant explained.

“Revenue growth is more likely to occur around the edges of the hospital’s core services — inpatient care, surgery, and imaging — rather than from those services themselves,” the report stated. “Creatively repackaging services like care management that is presently imbedded in every aspect of clinical operations, and finding retail demand for services presently bundled as part of the hospital’s traditional service offerings, represent such edge opportunities.”

Reducing patient leakage in multi-specialty groups and systems through improved referral patterns, scheduling, or care coordination will help to grow revenue and keep it within the system.

“To achieve better performance, health system management and boards must take a fresh look at their strategy considering local market realities. They need to look closely at the markets they serve, and size and target their offerings to actual market demand,” the report concluded. “They must re-examine and rationalize their portfolio of assets and demand marked improvements in efficiency and effectiveness, and measurable value creation for those who pay for care, particularly their patients. Since much of this should have been done five years ago, time is of the essence.”

Kaiser’s net income dips 23% in first 9 months of 2018

https://www.beckershospitalreview.com/finance/kaiser-s-net-income-dips-23-in-first-9-months-of-2018.html

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Oakland, Calif.-based Kaiser Permanente reported higher revenue for its nonprofit hospital and health plan units in the first nine months of this year, but the system ended the period with lower net income.

Here are four things to know:

1. Kaiser’s operating revenue climbed to $59.7 billion in the first nine months of 2018, according to recently released bondholder documents. That’s up 9.6 percent from revenue of $54.5 billion in the same period of 2017.

2. Kaiser’s health plan membership increased from 11.8 million members in December 2017 to 12.2 million members as of Sept. 30, 2018.

3. During the first nine months of this year, Kaiser’s operating expenses totaled $57.7 billion. That’s up from $52.2 billion in the first nine months of 2017. In the third quarter of 2018 alone, Kaiser’s expenditures included capital spending of $760 million, which includes investments in upgrading and opening new facilities, as well as in technology.

4. Kaiser ended the first nine months of 2018 with net income of $2.9 billion, down 23 percent from net income of $3.8 billion in the same period of 2017.

 

Nonprofit hospitals ‘on an unsustainable path,’ Moody’s says

https://www.healthcaredive.com/news/nonprofit-hospitals-on-an-unsustainable-path-moodys-says/531245/

Dive Brief:

  • Not-for-profit and public hospitals spent more than they gained in revenues for the second consecutive year in fiscal 2017, according to Moody’s Investors Service.
  • Moody’s said the widening gap leaves facilities “on an unsustainable path” and will remain the largest strain on nonprofits through next year.
  • Median annual expense growth decreased to 5.7% in 2017 from 7.1%. That’s compared to annual revenue growth, which declined to 4.6% from 6.1%, according to Moody’s analyst Rita Sverdlik.

Dive Insight:

Hospitals, especially nonprofit facilities, are facing difficult times. Morgan Stanley recently reported that about 18% of more than 6,000 hospitals studied were at a risk of closure or are performing weakly. About 8% of studied hospitals were at risk of closing and 10% were called “weak,” according to that report. 

For perspective, just 2.5% of hospitals closed over the past five years.

What’s in store for hospitals in the near term depends on the specific outlook. Moody’s this year revised its outlook for the sector from stable to negative. That move followed nonprofit hospitals seeing more credit downgrades in 2017.  

On the other hand, Fitch Ratings recently called off its “Rating Watch” for U.S. nonprofit hospitals and health systems after the organizations showed improved or stable results this year.

So, there are signs of improvement in the sector, but challenges with revenues, sagging reimbursements and lower admissions will continue to plague hospitals.

The reasons Moody’s gave for lower revenue growth came from lower reimbursements, the shift to outpatient care, increased M&A activity and additional ambulatory competition. It said the move away from inpatient to outpatient moved into its fifth year.

Reversing sluggish volume trends and growing profitable service lines will be critical to improving the sector’s financial trajectory over the near-term as most hospitals continue to operate in a fee-for-service environment,” Sverdlik said.

Moody’s added that more hospitals reported operating deficits in 2017. That coincided with lower absolute operating cash flow. It said 28.4% of nonprofit hospital experienced operating losses, an increase from 16.5% in 2016. Also, 59% of providers reported lower absolute operating cash flow, which was more than double the 24% noted in 2015. The 2017 figure was the highest percentage in five years.

Don’t expect times to get better any time soon. Moody’s said nonprofit hospital margins will continue to remain thin through this year. Margins have fallen to an all-time low of 1.6% operating and 8.1% of operating cash flow.

“Margin pressures led to softened debt coverage ratios, though the median growth rate of total debt has been negative over the last five years,” Sverdlik said. “Ongoing operating pressures will constrain the ability to reverse these trends, especially if providers turn to debt to fund capital needs.”

However, it’s not all bad news. Moody’s said the medians have shown positive signs. For instance, median unrestricted cash and investments growth rate improved to 8.9% thanks to strong market returns and steady capital spending. Also, absolute cash growth exceeded expenses growth, which caused improved median cash on hand. That trend isn’t expected to continue if hospitals spend more cash flow on capital or if equity markets fall.

 

 

Allina’s operating income sinks 45% in Q2

https://www.beckershospitalreview.com/finance/allina-s-operating-income-sinks-45-in-q2.html

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Allina Health’s revenues increased in the second quarter of 2018, but the Minneapolis-based system’s operating income plummeted due to growth in expenses.

Allina reported revenues of $1.07 billion in the second quarter of this year, up from $1.01 billion in the same period of 2017, according to recently released bondholder documents. The boost was attributable to higher net patient service revenue, which climbed 6.4 percent year over year.

The system’s operating expenses totaled $1.06 billion in the second quarter of 2018, up from $990.4 million in the same period a year earlier.

Allina ended the second quarter of this year with operating income of $13.1 million. That’s down 45 percent from the first quarter of 2017, when the system reported operating income of $23.9 million.

Allina reported an investment return of $33.8 million in the second quarter of 2017, but that number dropped to $6.3 million in the second quarter of this year.

After factoring in the drop in investment income, Allina’s net income tumbled 56 percent year over year to $19.1 million in the second quarter of 2018.