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Our Take: Health systems continue to report dismal financial results in Q2, blunted by labor expenses and poor investment performance

Aug 22, 2022

The investment markets, labor costs, and lower year-over-year patient volumes are preventing many of the nation’s largest health systems from bouncing back to their pre-pandemic financial trajectories, and a report from Kaufman Hall offers a bleak outlook for the rest of 2022.

“Although hospitals are seeing improved volumes and reduced expenses month-over-month, they will likely end up with historically low margins for the remainder of the year,” the authors of the National Hospital Flash Report wrote. The report is based on data for the month of June that was collected from more than 900 U.S. hospitals.

The following examples show how several major large health systems are struggling to recover.

Mass General Brigham reported a net loss of $949 million for the quarter ending on June 30, which is the health system’s fiscal third quarter. Much of that — $829 million — was non-operating loss, which the health system attributed to “heightened unfavorable volatility in the financial markets.”

For the same quarter a year ago, the Boston-based health system reported a net gain of $870 million. Staffing shortages resulted in higher labor expenses in the latest quarter, contributing to an operating loss of $120 million.

Meanwhile, Washington-based Providence ended its first two quarters of the year with an operating loss of $934 million; $424 million of that was in the second quarter. By comparison, the health system had an operating loss of $94 million for the first two quarters of 2021. Although Providence’s operating revenue was up 2% on a pro forma basis for the first six months of 2022 compared with the same period a year earlier, its operating expenses were up 8%.

Providence said in its quarterly earnings report that surgical volumes remain below pre-pandemic levels, labor shortages are driving the use of premium labor, which continues to be “significantly higher than previous years,” and length of stay remains “significantly challenged” as the health system continues to care of patients who can’t be discharged to more appropriate care settings because of limited availability.

Specifically, Providence’s year-to-date spending on premium labor increased by $379 million. The health system also reported investment losses of $359 million and $920 million in the first and second quarters of this year, respectively.

Kaiser Permanente also was hit hard by conditions in the investment market during the second quarter. The Oakland, Calif.-based health system reported a net loss of $1.3 billion for the quarter, compared with net income of $3 billion in the same quarter of 2021. Last year, Kaiser Permanente had record net income of $8.1 billion thanks largely to returns on investments.

Sutter Health added another $457 million net loss in the second quarter to the $184 million net loss from the first quarter of this year. The Northern California health system reported operating income of $199 million for 2021 and $95 million for the first quarter of this year, but then it reported an operating loss of $51 million for the most recent quarter.

Operating expenses at Sutter Health grew 4% during the second quarter to $3.55 billion. A considerable portion of that growth stemmed from a $30 million increase in salaries and a $151 million increase in purchased services compared with the second quarter of 2021.

In addition, Sutter Health’s investment income for the first half of this year was substantially lower than in the corresponding period of 2021 ($112 million vs. $401 million). The health system recorded total investment income of $758 million last year.

Mayo Clinic reported its second-quarter results on Friday. Although revenue was up slightly from the second quarter of 2021 ($4.03 billion vs. $3.94 billion), expenses increased 11% from the year-earlier period ($3.88 billion vs. $3.49 billion). Net operating income tumbled 66%, from $451 million in Q2 a year ago to $155 million in the most recent quarter.

The country’s largest for-profit hospital operators — HCA Healthcare, Tenet Healthcare, Community Health Systems (CHS), and Universal Health Services (UHS) — all reported a decrease in net income for the second quarter, compared with the same quarter last year. Total admissions were down at all four operators as well.

HCA’s net income for the quarter was $1.16 billion, compared with $1.45 billion in the same quarter of 2021. Tenet’s net income for the most recent quarter was $38 million, down from $120 million in the previous year’s second quarter. CHS reported a net loss of $326 million in this year’s second quarter and net income of $6 million in the same period last year. UHS’ net income for Q2 of 2022 was about half as much as the company reported for the same quarter a year earlier — $164.1 millions vs. $325 million.

Three of the four operators, HCA, CHS, and UHS, spent more on salaries, wages, and benefits in the second quarter of 2022 than they did in the same period a year earlier. Tenet said it kept those costs in check by managing labor costs and patient volumes simultaneously.

Our Take:  It looks like hospitals are going to have to weather the storm a while longer. Fitch Ratings said last week that it expects “deteriorating conditions” to be present for the not-for-profit hospital sector for the rest of this year and into next year, with labor expenses remaining elevated.

Still, it’s not all doom and gloom. On Thursday, Becker’s Hospital Review published a list of eight health systems that have “strong operational metrics and solid financial positions,” based on reports from Fitch and Moody’s Investor Service.

The eight on the list were Advocate Aurora Health, Banner Health, Bryan Health, Gundersen Health System, Hackensack Meridian Health, Inova Health System, Intermountain Healthcare, and UnityPoint Health.

Becker’s noted that the list is not exhaustive.

What else you need to know
The FDA approved a new gene therapy that will cost $2.8 million for a one-time dose. Bluebird bio’s Zynteglo (betibeglogene autotemcel) is approved for the treatment of adults and children with beta-thalassemia who require regular red blood cell transfusions. Beta-thalassemia is an inherited blood disorder that causes a reduction of normal hemoglobin and red blood cells in the blood, which leads to insufficient oxygen delivery throughout the body. People with the most severe form experience severe anemia and require red blood cell transfusions every two to five weeks for life, bluebird bio stated in a press release. The company estimates there are approximately 1,300 to 1,500 people with this severe form of the disease in the U.S. and said the lifetime cost of medical care for one of these patients can be as high as $6.4 million. Zynteglois a customized treatment made by genetically modifying the patient’s own bone marrow stem cells to produce functional beta-globin.

The Centers for Disease Control and Prevention plans to restructure to address the findings of an external review of the agency’s handling of the COVID-19 pandemic. Director Rochelle Walensky, who requested the review in April, said the CDC’s performance “did not reliably meet expectations.” The proposed changes are outlined on the agency’s website. Among them, new internal systems, processes, and policies will be implemented to improve the CDC’s accountability, collaboration, communication, and timeliness. The agency will also work to improve how it delivers its science, guidance, and programs to the public. A specific objective within that initiative is to share scientific findings and data faster. “We will modernize CDC to better prepare us for future public health challenges,” the website states. Some of the planned actions will require authorization by Congress.

Almost 2,000 mental health clinicians at Kaiser Permanente went on strike last Monday in Northern California, causing the health system to cancel approximately 1,600 appointments by midweek, Healthcare Dive reported. The clinicians say they can’t keep up with the caseload and patients are waiting up to two months to get an appointment, The Associated Press reported. They want the health system to hire additional staff. Kaiser Permanente said it has hired hundreds of new mental health workers, including 200 since January 2021, according to the AP. This is the latest in a series of major strikes by health care workers in the last couple of years. Most involve demands for higher wages, better working conditions, including staffing increases, and improvements in safety — all issues brought to the forefront and exacerbated by the pandemic.

Mount Sinai Health System is partnering with Regeneron Pharmaceuticals on a five-year research project called the Mount Sinai Million Health Discoveries Program. The goal is to build a database of sequenced DNA samples — obtained from 1 million of the health system’s patients, with their permission — paired with deidentified patient records. The data will be used to develop genetics-based precision medicine treatments and potential new therapies, the health system said in a press release. A team from the Icahn School of Medicine at Mount Sinai, headed by Drs. Alexander Charney and Girish Nadkarni, will lead the project in collaboration with researchers at the Regeneron Genetics Center.

Executive moves
Jason Hollar will become Cardinal Health’s next CEO on September 1, succeeding Mike Kaufmann, who has been with the company for more than 30 years and has been CEO for the last five, according to the announcement. Hollar has been Cardinal Health’s chief financial officer since May 2020.

Chuck Hall is retiring as HCA Healthcare’s National Group president at the end of this year. He has been with the Nashville, Tenn.-based company for nearly 36 years. In his current role, Hall is responsible for overseeing operations at 96 hospitals in 13 states. The organization said in a news release that a search for Hall’s replacement is underway.

Lydia Jumonville will serve as Intermountain Healthcare’s interim CEO, effective Aug. 22, the health system announced Friday. She was president and CEO of Colorado-based SCL Health from 2017 until April of this year, when SCL Health merged with Intermountain Healthcare. Dr. Marc Harrison, who served as president and CEO of Intermountain Healthcare since 2016, is leaving to run a new health care business for General Catalyst.

What we’re reading
What else we’re reading
Will You Please Be Quiet, Please?: Stories, by Raymond Carver. Still on the beach, this is a re-reading of a favorite collection by one of the finest storytellers of the twentieth century.
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