Majority of Colorado hospital systems lost money in 2022

Colorado hospitals as a whole remained financially healthy through the first two years of the pandemic, but their profit margins were slashed in half in 2022 as costs swelled, pushing the majority of the state’s hospital systems into the red by the fall.

Breaking even or losing money for a year or two might not spell disaster for hospitals, particularly for systems that built up reserves before COVID-19 hit. But an inability to turn at least a small profit over the longer term could lead to layoffs, reduced health services or even hospitals closing.

St. Vincent Hospital in Leadville came close to shutting down last year, before an infusion of state and local funds pulled it from the brink. Health systems such as Banner Health and CommonSpirit Health — which owns the Catholic hospitals under the Centura partnership, including St. Anthony in Lakewood — lost money treating patients in the first nine months of 2022.

And Denver Health’s loss of $34 million last year, and the fact it had less than 90 days’ cash on hand, led state legislators to approve what was considered an “extraordinary” emergency appropriation of $5 million last month to stabilize the city’s safety-net hospital.

“It’s staggering. It feels like a punch in the gut,” Julie Lonborg, spokeswoman for the Colorado Hospital Association, said of the financial hit the state’s hospitals took in 2022.

State officials see last year as an anomaly after a long stretch of profitability, while hospital leaders argue it was one more blow to a sector battered by the pandemic and employee burnout. They don’t necessarily disagree on the numbers so much as what those numbers mean — and what “rainy day” funds are meant to do.

Revenue from treating patients for all Colorado hospitals combined increased by about $898 million from 2021 to 2022, but care expenses grew by $1.7 billion, according to newly released data from the Colorado Hospital Association.

About half of the increase in expenses was for salaries as hospitals hit by high turnover were forced to spend more — including on costlier travel nurses — to fill jobs, and faced rising costs associated with supplies, employee benefits, charity care and bad debt.

As a group, the state’s hospitals remained profitable in 2022, with about a 4.7% margin on patient care, compared to 10.6% in 2019. But that narrowed to about 1.5% when investment losses from last year’s market downturn are included.

The difficult year followed several good ones.

After including pandemic aid, Colorado hospitals had about an 8.6% profit on patient care in 2020 and a 9.6% margin in 2021. With investments included, the profit margin was close to 14% in both years — though even then, some facilities fared far better than others, with some small and rural hospitals struggling to break even.

The Colorado Department of Health Care Policy and Financing estimated hospitals in the state had an average profit of $1,181 per patient in 2021, even after accounting for charity care and lower rates paid by Medicare and Medicaid. That was comparable to 2019 levels.

Tom Rennell, senior vice president of financial policy and data analytics at the Colorado Hospital Association, said 47% of hospitals in the state had negative margins on patient care in 2021, up from 41% in 2019. The organization considers a 4% margin sustainable, and only about 44% of hospitals had that in 2021. And that’s before a spike in costs last year, he said.

Patients are staying longer, which increases costs, but some insurance plans pay a bundled rate regardless of the length of stay, Rennell said. The hospital association reported operating expenses in 2022 were about 21% higher than in 2019, because of increased costs for wages and supplies. Revenue was up about 12%.

“Revenues certainly aren’t increasing that much,” he said.

Kim Bimestefer, executive director of the Department of Health Care Policy and Financing, acknowledged costs were up last year, but said more-profitable hospitals can bridge the gap by dipping into reserves, especially since the cost to bring in extra staff is coming down.

“That’s what rainy day funds are for,” she said. “Families and employers aren’t sitting on billions of dollars.”

Of the seven hospital systems whose reserves the department estimated, only one had less than $1 billion in the first nine months of 2022: Denver Health, which had about $223 million in cash on hand. While that may sound like a large amount, it equates to about 87 days’ worth of expenditures, a level where hospital leaders and state officials both start to get nervous.

Days’ cash on hand represents how long a hospital could operate if no new revenue came in. While that’s not a realistic scenario, it provides a sense of how much cushion a hospital has if payments are late or expenses rise. Most systems had fewer days of cash on hand than they did in 2019, even if their reserves increased, because costs also rose.

Colorado lawmakers appear to be skeptical of the claim hospitals are treading water financially.

Bills introduced this spring would limit how much medical providers can charge above estimates and cap interest rates on medical debt; require hospitals to report more financial information, including transfers to headquarters out-of-state and executive compensation, with fines for those who don’t comply; and ban “facility fees” for outpatient care in hospital-owned practices.

Colorado isn’t the only state whose lawmakers are talking about targeting hospitals. In Indiana, the legislature is considering a similar bill banning some facility fees, and a proposal that would go even further by penalizing nonprofit hospitals if their prices for commercial insurance plans exceed 260% of what Medicare would pay.

In 2022, 38% of Americans polled by Gallup said they had put off some type of medical care because of concerns about cost, and about one-fourth of those who did said it was for a condition they deemed “serious.” About 28% of Americans who owed medical debts were solely indebted to a hospital, while another 45% owed both a hospital and another type of provider, according to a poll from the Robert Wood Johnson Foundation.

Hospitals account for about 40% of health care costs, so it’s not possible to lower the burden on patients without addressing them, Bimestefer said. The rate of cost growth has dropped from 5% to 6% each year to under 3%, which is progress, she said.

“This business isn’t for the faint of heart,” she said. “If you want to lower health care costs, you’re going to have to disrupt someone’s revenue stream.”

Systems took a hit in 2022

Six of the state’s eight hospital systems had negative profit margins in the first nine months of 2022. Five were profitable when only looking at patient care, however.

Complete hospital-level data for 2022 won’t be available until early 2024.

One rural facility, St. Vincent Health in Leadville, was on the brink of closing in December after posting a nearly $2.3 million loss, but was rescued at the last minute by $1.5 million in advances from the state and Lake County. The hospital had taken on costs to expand services that turned out to be unsustainable and had problems with its accounting software, which interfered with billing, according to Kaiser Health News.

Denver Health also reported a particularly difficult year, with a $39.9 million operating loss in the first nine months of 2022, meaning it spent more on patient care than it received in payments for that care. With investment losses, the drop came to about $73.8 million.

By year’s end, though, Denver Health’s operating loss had improved to $34 million. A year-end total including investment losses was not available.

In a summary for investors in October, Denver Health attributed the 2022 shortfall to lower-than-expected numbers of patients with commercial insurance, which pays the highest rates; higher-than-expected amounts of charity care; lower patient volumes overall, because some beds were closed; and continued extra expenses to hire travel nurses, who command higher wages than permanent staff.

“Part of our mission is to serve our community and provide care regardless of their ability to pay,” Denver Health CEO Donna Lynne said. “There’s a confluence of factors in 2022.”

Children’s Hospital Colorado also lost money in the first nine months of 2022, but that was entirely from a $180 million drop in the value of investments. Profits from patient care actually rose to about $70.3 million in the first three quarters of the year, compared to $57.4 million in the same period in 2021, as revenue growth outpaced rising expenses.

UCHealth also took a significant hit on investment income, according to disclosures to investors. The system came out ahead on patient care by about $327 million in the fiscal year ending in June 2022, though expenses grew faster than income. That became a nearly $314 million loss when investment fluctuations were added in, though.

Dan Weaver, spokesman for UCHealth, estimated that compensation costs were up 21% in four years, while Medicare reimbursements rose only 9% and Medicaid payments went up about 4.5%.

The two systems that make up Centura Health, CommonSpirit Health and AdventHealth, both lost money in the first nine months of 2022. The Adventist hospitals made a narrow profit of 0.1% on patient care, while CommonSpirit’s Catholic hospitals lost about 4.8% on patient care.

The only two systems that made money overall in the first nine months of 2022 were HealthOne, which posted a 9.4% total profit margin, and SCL Health, which had a 15.1% margin. SCL, which was purchased by Utah-based Intermountain Healthcare last year, had higher profits than in 2021, while HealthOne’s were down.

Marilyn Bartlett, senior policy fellow at the Center for Health System Costs, said that hospitals likely saw an improvement in the final quarter of the year, as labor costs started to decrease and the stock market recovered.

“We have seen a turnaround,” she said. “2023 looks better.”

Questions about investments, “rainy day funds”

State officials and the Colorado Hospital Association differed on whether facilities’ investment portfolios should be used to judge hospitals’ finances.

Rennell said the hospital association focuses on operating income — the revenue from taking care of patients — because investments can be volatile.

“As soon as the stock market goes negative, those numbers go negative,” he said.

The Department of Health Care Policy and Financing defended including the investment numbers in its calculations.

“For some systems like Denver Health, non-operating profits can be the difference between profits and losses. For many big systems, non-operating profits increase or even double their profits,” the department said in a statement.

It’s true that calculations can be “tricky” because investment income fluctuates, said Allan Baumgarten, an analyst who has studied Colorado’s health care market. Still, it’s real money that should be accounted for as part of the bigger picture, he said.

“You have to look at the results not just one year at a time, but the last five to seven years,” he said.

Rennell said investment income and reserves will let hospitals to add capacity and workers at some point, while allowing them to get better interest rates when they need to borrow money now. He doesn’t see those goals as being in tension with controlling care costs.

“Like you and me, they’re saving for the future,” he said. “Our hospitals are doing a lot to try to manage costs and maintain services for Coloradans.”

Nancy Dolson, the Department of Health Care Policy and Financing’s special financing division director, said there’s no set standard for how much cash hospitals should have in reserves, but nine months’ to one year’s worth is generally seen as reasonable. Denver Health’s decline in cash on hand is concerning, and UCHealth had a significant drop, though that was mostly due to investment losses and repaying loans from Medicare, she said.

“We see the rainy day funds were not used as much as might be expected with the pandemic,” she said.

The real importance of reserves is to show potential bond buyers that a hospital has plenty of cash on hand and is a good bet, which allows it to get better bond ratings when it wants to expand, Baumgarten said. Whether that aligns with patients’ interests depends on if there’s need additional services in any given area, or if hospitals are just trying to get a bigger share of the market by offering more amenities, he said.

“The major goal of these organizations is to continue growing,” he said. “But somebody has to pay the bills.”

Tom Gronow, president and CEO of University of Colorado Hospital, pushed back on the idea that patients don’t benefit from systems’ expanding their reach. Having a presence throughout the state reduces the need to bring people to the Aurora campus, which has the highest costs because of the complexity of care offered, he said.

“People say it’s growth for growth’s sake,” he said. “It’s actually growth so we can impact the cost of care.”

Hospitals have brought their costs down, so that Colorado was no longer one of the top 10 states in terms of how expensive it is to deliver care as of 2021, Dolson said. Still, the state had the sixth-highest prices charged in the country, and the fourth-highest total profits and profits per patient, she said.

“We see improvement in cost of care, but without a reduction in price,” she said.

Profitable pandemic years for some (but not all)

Colorado hospitals as a group were profitable in 2020 and 2021, partially due to one-time funds to offset the effects of the pandemic. Even with stimulus dollars, however, there was significant variation. Denver Health eked out a narrow 1.2% profit margin in 2021, while UCHealth had a 16.5% margin, according to the department.

In general, independent hospitals were less profitable than systems, and rural hospitals were less profitable than urban ones, which is consistent with the pattern nationwide. The top five hospitals that made the largest profits on patient care in Colorado were part of systems, and four of them were in the Denver area. The exception was Centura St. Anthony Summit Hospital in Frisco.

Three of the five with the biggest losses on patient care were independent rural facilities, but two were in the metro area. And when investment income is counted in, UCHealth had three of the most-profitable hospitals, but also four of the least profitable. Weaver said the system’s newer hospitals have offered lower prices, leading to lower profits.

Rural independent hospitals had a median of 215 days’ cash on hand — meaning half had more and half had less — while urban hospitals and those in systems had a median of 245 days’ worth in 2021. It ranged from a low of 71 days at Delta Health to 527 days at Vail Valley Medical Center.

Rural hospitals suffered more when states shut down elective care in the early days of the pandemic, because nonemergency surgeries and outpatient procedures account for a larger share of their revenue, Baumgarten said. They already faced multiple headwinds, including fewer patients covered by commercial insurance and limited ability to negotiate higher rates, which were then compounded by inflation and shifts in how people got care.

“That was a much bigger hit to their finances than some of the larger hospitals,” he said.

Kevin Stansbury, CEO of Lincoln Health in Hugo, said the federal COVID-19 stimulus funding got rural hospitals through the worst of the pandemic, but didn’t change the underlying problems they face. Because they serve small populations, it’s difficult to cover the overhead costs of staying open around the clock, let alone save up money to replace aging facilities, he said.

“We need to figure out a way to have a sustainable margin,” he said.

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