4 takeaways from health systems’ 2022 earnings reports

4 takeaways from health systems’ 2022 earnings reports unknown

Labor shortages, rising expenses and poor performance in the financial markets led to a money-losing year many in the industry would like to forget.

“When you look back at 2022, for a sizable portion for the sector, it’s going to go down again as really one of, if not the worst, operating income years ever,” said Kevin Holloran, senior director at Fitch Ratings. “Some people got better as the year went on … but not everybody.”

Healthcare executives are hoping to see improvement this year, especially as the industry moves out of the COVID-19 pandemic and economic leaders work to slow rampant inflation.

Here are four key takeaways from the latest round of earnings reports.

Labor worries aren't easing

High labor costs remain a top concern. Birmingham, Alabama-based Encompass Health saw its profits plummet nearly 30% in 2022, driven in part by a 12.5% jump in salaries and wages. The for-profit system did manage a 31% year-over-year decrease in contract labor costs in the fourth quarter.

Contract labor costs began to normalize after peaking earlier in 2022, but for some systems, they picked up again in the fourth quarter due to the “triple-demic” – RSV, flu and COVID-19. Use of traveling providers and their pay rates remained higher than pre-pandemic levels, requiring more work to ease those costs.

Tenet Healthcare Chief Financial Officer Daniel Cancelmi told investors last month the Dallas-based system’s labor expenses peaked in September, and he expects them to continue declining. He said the for-profit system is focused on replacing contract employees “to the greatest extent possible."

Health systems are seeing more traveling providers return to permanent job options, including with employers they left during the pandemic for higher-paying roles.  

But substantial improvement is needed. Labor shortages can create a cascading effect, Holloran noted, where already-strained hospitals cannot discharge patients because of shortages in lower-acuity settings, which creates further financial burden on facilities. Although moving in the right direction, contract labor costs in 2023 are not expected to reset to pre-COVID rates, he said.

Better patient volumes aren't enough

Patient volumes rebounded, but it often wasn’t enough to cover rising expenses. Altamonte Springs, Florida-based AdventHealth reported an 11% jump in operating expenses for 2022. Mayo Clinic in Rochester, Minnesota, reported a $1.2 billion, or 8.1%, increase in annual expenses.

To cut costs, health systems looked to automation for administrative functions, cutting some jobs as a result, and will likely continue to do so. They also took a harder look at borrowing practices and capital expansion projects, said Rick Kes, healthcare partner at professional services firm RSM.

“I think all of our clients are looking at their expense structure and considering what are they capable of changing,” Kes said.

Other systems chose to consolidate operational structures and remove layers of leadership. Renton, Washington-based Providence, which will release earnings later this month, shrunk its executive team in 2022 and reorganized its seven regional divisions into three.

Kaiser Permanente in Oakland, California, is relocating 10% of the workforce at its regional headquarters in 2024 as part of a larger office consolidation plan to cut costs.

Investments added to the pain

Performance in the financial markets was generally poor and did more than dent the bottom line. The S&P 500 dropped by more than 15% in 2022–causing problems for organizations invested in stocks and bonds.

Health systems typically saw higher losses if they invested heavily in equities, a riskier investment option, Holloran said. He said he views the recent losses as more of a market reset after the unusually high gains in 2021.

Kaiser Permanente suffered a $3.2 billion loss on investments, a big contributor to the overall $4.5 billion net loss it posted in 2022. Mayo Clinic saw a $747 million decrease in cash and investments for 2022, most of which stemmed from the investment side.

Some health systems saw improvement in investment performance in the last three months of 2022, which bodes well for this year. During the year's final quarter, more than $400 million in investment-related gains bolstered Boston-based Mass General Brigham’s net income while Chicago-based CommonSpirit Health said it got a $719 million boost.

Assets are being re-evaluated

Hospitals and health systems were forced to re-evaluate where their money goes, directing it to services that produce the most revenue and divesting the assets that don't.

“No one wants to say that COVID is behind us, but we’re certainly in a much different situation today than we were a year, and certainly two years ago,” said Doug Anning, a shareholder at law firm Polsinelli.

One example is Tenet's ongoing investments into ambulatory surgery centers through subsidiary United Surgical Partners International. CEO Dr. Saum Sutaria said on a February investor call that the company plans to invest $250 million in the space each year, referring to it as a "sustained and far-reaching tailwind."

Sam Hazen, CEO of Nashville, Tennessee-based HCA Healthcare, told investors in January the system is seeing few opportunities in the hospital space, as it continues to shave off those facilities. In October, LCMC Health agreed to buy three of HCA's Louisiana hospitals for $150 million.

Community Health Systems in Franklin, Tennessee, said this week it is selling off two North Carolina hospitals to Novant Health, one of that state’s largest providers, in a $320 million deal.

Anning said mergers and acquisitions deals among his client base have not slowed as hospitals seek new ways to bring in revenue. He said the transactions are typically strategic ones based on a client’s need, not a deal to grow for growth’s sake.