Takeaways from health systems' first-quarter earnings results

Takeaways from health systems' first-quarter earnings results Caroline Hudson

Many health systems returned to profitability in the first quarter, following a tumultuous 2022 that brought multibillion-dollar losses.

Systems are shoring up their operating margins, making cuts where necessary in headcount, supplies and facilities, while investing in new types of care delivery and high-growth markets.

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“Organizations have taken a really hard stance at how they’re going to improve margin, and they’ve gone through and looked at every opportunity,” said Rick Kes, healthcare partner at professional services firm RSM. “Now it’s like… we have to make these decisions, and there’s no other choice. I think everyone in the ecosystem understands that.”

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

Investment returns boosted slim margins

Investment-related losses took a big toll on health systems’ earnings in 2022. It's early in the year but that trend has so far been largely reversed, providing an extra boost to operating margins.

Ohio-based Cleveland Clinic, for example, reported $335.5 million in first-quarer net, including a more than $526 million increase in investment returns, which the system attributed to improved market conditions.

Mass General Brigham reported $379 million in investment gains during its second quarter, ended March 31. Those gains helped propel the Boston-based system to $361.4 million in net income.

Despite favorable market conditions, Kes noted health systems don’t manage their business based on unrealized gains or losses.

Optimism is growing for how 2023 will shake out

Improved financial results led some systems to raise their outlook for the year.

For-profit HCA Healthcare in Nashville, Tennessee, raised its guidance, projecting annual net income to fall between $4.75 billion and $5.16 billion, compared with a previous estimate in the range of $4.525 billion and $4.895 billion. The raised guidance comes after HCA delivered a first quarter that beat expectations.

Tenet Healthcare, a Dallas-based for-profit system, raised its 2023 financial outlook for adjusted earnings before interest, taxes, depreciation and amortization by $50 million. The system continues to invest heavily into ambulatory care. Its first-quarter net income rose by about 2% from a year ago.

Labor expenses are still taking their toll

Staffing challenges plaguing the industry for the past three years are easing but are nowhere near resolved, analysts say.

Health systems are building stronger talent pipelines, especially through partnerships with nursing schools, and continue to offer hefty sign-on incentives to attract permanent employees. Oakland, California-based Kaiser Permanente, for example, said earlier this month it grew clinical hiring by 15% year-over-year in the first quarter.

Providers also continue to reduce their reliance on contract workers. At HCA, contract labor accounted for just over 7% of salaries, wages and benefits in the first quarter, compared with 9.5% the prior year, Chief Financial Officer Bill Rutherford told investors on an April earnings call. He said the goal is to bring that percentage down to between 6.5% and 7% by the end of the year.

Significant staffing shortages remain, particularly in clinical roles, and systems still need contract workers to fill in the gaps. Contract wage rates are beginning to normalize, pushing some clinicians back to permanent roles, but compensation for contract and permanent positions remains elevated due to a competitive hiring market.

Mayo Clinic in Rochester, Minnesota, reported a 7.7% jump in compensation-related expenses in the first quarter. At Renton, Washington-based Providence, those expenses were up 5.3%.

Health systems aren’t expecting staffing costs to return to pre-COVID levels anytime soon, said Daniel Steingart, vice president at Moody’s Investors Service. To mitigate the impact, they are reassessing care models and implementing more technology, such as artificial intelligence and remote patient monitoring, he added.

Kes noted it’s unlikely individual wages or salaries will ever return to 2019 levels, but there is a chance overall staffing costs can continue to decrease with the use of technology.

“Hospitals are deploying all kinds of strategies to make sure that they’re using folks at the top of their licenses to gain efficiencies from other parts of running the hospital, so they free up cash flow effectively,” Steingart said.

Other systems are eliminating non-clinical administrative roles, from back-office to executive level, to reduce costs in future quarters. Chicago-based CommonSpirit Health said this month it cut leadership and administrative roles at the divisional and national levels, but it did not say how many positions were affected.

Patient volumes are rebounding in many markets

Patient volumes are starting to rebound as more people return for care.

Universal Health Services, based in King of Prussia, Pennsylvania, reported more patient volume in acute care and behavioral health in the first quarter. Same-facility admissions for behavioral health grew 7.5% from a year ago, and acute care admissions increased 7.2%.

At Pittsburgh-based UPMC, first-quarter inpatient volume, which includes medical-surgical admissions and observation visits, grew 5.5% compared with last year’s first quarter.

“There’s not that many hospitals that I talk to that aren’t at full capacity,” Kes said. “A lot of our clients that are seeing inpatient volumes either stagnate or … [are] not seeing a lot of growth, a lot of it is because they don’t have enough staff to staff the beds to allow for inpatient volume to grow.”

Outpatient volumes are seeing a boost as providers perform more procedures outside of the hospital to save costs on both sides. Payers are also pushing for less costly care. Quarterly outpatient activity at UPMC, measured by average revenue per workday, increased 9.3% over the past year. Mayo Clinic’s outpatient visits grew about 6%.

However, any improvements are still largely dependent on the geographic market.

Kes said patient volumes are generally decreasing in areas like the Midwest due to population migration, while fast-growing Southern cities are seeing a better recovery.