Not-for-profit hospitals’ investment income covers operating losses

Large not-for-profit health systems are recording investment income windfalls that are offsetting significant operating losses.

St. Louis-based Ascension recorded a $640.1 million operating loss on $19 billion in revenue through the first nine months of its 2022 fiscal year, according to the 142-hospital system’s earnings statement released Friday. Nearly $900 million in non-operating income, $736.4 million of which was attributable to investment income, more than offset those losses. That was down from nearly $4.5 billion in non-operating gains in the same prior-year period.

Ascension and other health systems benefited from favorable stock market returns as interest rates have remained low, while also seeing double-digit wage and salary expense increases.

Rising staffing costs, coupled with lower investment returns and waning COVID-19 funding, puts some financially weaker systems in a precarious position, analysts said.

“Not-for-profit hospitals’ weak operating performance can be excused by strong investment returns. But when that shifts, it becomes a massive problem,” said Jordan Shields, a partner at Juniper Advisory. “When systems have weak operations, coupled with negative investment returns, they can eat through their endowments incredibly quickly.”

Ascension said in a statement that its balance sheet remains strong with 295 days cash on hand. It has implemented an economic improvement and long-term sustainability plan, the company said.

“The financial results show challenges due to a high level of COVID-19 cases in our facilities and related staffing shortages in the third quarter. Results are expected to improve through the end of the fiscal year,” Ascension said.

Better-positioned systems have used the cash from investment gains to fund capital projects. But operating and investment headwinds may increase the borrowing costs of debt-financed not-for-profit health systems. That could dent their capital project spending and potentially their ratings, Shields said.

“Negative returns have an outsized impact on not-for-profit hospitals’ capital structure,” he said.

Providence, the 52-hospital health system based in Renton, Washington, accrued more than $1.2 billion in non-operating income in 2021, covering its $714 million operating loss. That was up from $1 billion of 2020 non-operating income.

Advocate Aurora Health, which has 27 hospitals in Illinois and Wisconsin, posted a $1.33 billion windfall in non-operating income in 2021, up from $395.1 million in 2020. Advocate Aurora had $593.5 million in operating income in 2021.

Rochester, Minnesota-based Mayo Clinic’s cash and investments exceeded $18 billion at the end of 2021, an increase of $3.6 billion from the end of 2020. Kaiser Permanente, a large integrated health system based in Oakland, California, benefited from similarly strong investment gains in 2021.

While Kaiser had a banner year with $8.1 billion in net income on $93.1 billion in revenue, its operating margin was a slim 0.7%.

“The hospital systems that have performed well for a long time have built up their balance sheets to weather the storm. But those on shaky ground that have limped through the pandemic and benefited from COVID-19 funding and investment returns are nervous,” said Rick Kes, senior analyst for RSM. “It could force their hand in some discussions around merger affiliations.”

Potential buyers may be more gun-shy amid the economic instability, inflation and staffing shortages, analysts said.

“The regional buyers have really been propped up with investment returns. But as they face operating headwinds with increasing employee expenses and declining investment returns, it makes them much less acquisitive,” Shields said. “If things go sideways, some systems may be left with little choice of who to join.”

Investment returns rose significantly in 2020 and 2021, national studies show. But those returns will likely drop in 2022, analysts said.

“The combination of inflation and financial market downturn create a challenging time for hospitals, especially those that has been heavily relying on investment income,” said Ge Bai, an accounting and health policy professor at Johns Hopkins University. “Very few entities can escape from the broad negative impact of inflation on the economy. Hospitals are no exception.”

Generally, not-for-profit hospital balance sheets are still strong, said Kevin Holloran, senior director for Fitch Ratings, noting the ebb and flow of patient revenue and expenses during the COVID-19 surges.

Patient volumes and expenses should stabilize in the next year or two, and these operating losses are not expected to last over the long-term, he said.

“There is still some cushion for the (overall healthcare) system to figure it out,” Holloran said. “If this does become the new normal where hospitals lose money month to month, it will eat into their balance sheets and we will see some downgrades. But there is not a widespread belief that this is the new normal.”

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