Acuity, payer mix declines drag CommonSpirit Health to $1.1B operating loss over 9 months

Returning patients and hundreds of millions in net investment income weren’t enough for CommonSpirit Health to outpace a -8% operating margin for the three months ended March 31, according to quarterly financial numbers released Monday.

Though the Catholic nonprofit said it saw “strong volume growth” across the quarter, revenue per adjusted admission fell due to “a slight decline in patient acuity and reimbursement that has not kept pace with inflation,” CommonSpirit wrote in an accompanying press release.

“CommonSpirit is delivering high quality services all along the care continuum to communities across the country. These results show that patients and consumers are continuing to seek care through a broad range of access points,” CommonSpirit Chief Financial Officer Dan Morissette said in the release. “Now we’re taking decisive steps to boost revenue and address our costs to ensure we’re operating in a sustainable way for years to come.”

Other complications contributing to CommonSpirit’s tough bottom line included continued labor shortages, last fall’s high-profile cybersecurity incident and “the lingering effects of the pandemic,” according to the filing.

The 143-hospital system reported a $658 million operating loss for the most recent quarter—the third in its fiscal year—and a bottom-line loss of $244 million.

The former number is a year-over-year decline from the $591 million operating loss (-7.2% operating margin) of fiscal 2022’s third quarter.

The latter is a year-over-year improvement over the $592 million deficit of revenues over expenses attributable to the organization during fiscal 2022’s third quarter, which had been dragged down by investment losses.

Still, the most recent quarter continues the downward trajectory for CommonSpirit’s fiscal 2023. Across the nine months ended March 31, CommonSpirit has now reported $1.1 billion in operating losses and a $465 million deficit of revenues over expenses attributable to the system—both down from the $638 million operating loss and $205 million net deficit it had notched nine months into fiscal year 2022.

Total operating revenue for the quarter inched up just $15 million to $8.28 billion whereas its expenses rose by $82 million, according to the filing.

Total salaries and benefits expenses for the quarter represented a 2.3% decline over the fiscal third quarter of 2022, a 0.9% increase on a same-store basis and a 7.4% decrease on a same-store, per adjusted admission basis “primarily due to lower contract labor as the labor supply shortage softens and retention and hiring efforts are realized,” the system wrote. Costs for supplies and purchases services were both up from last year.

Though the quarter’s adjusted admissions rose 5.5% year over year, adjusted patient days and acute average length of stay were down by 0.7% and 6.1%, respectively, thanks to lower COVID-19 activity. This, along with an unfavorable payer and service mix, led CommonSpirit to report a 4.3% year-over-year decline in same-store net patient and premium revenue per adjusted admission for the quarter (after normalizing for funds to be received under the California Provider Fee Program expected to be approved in the fall).

Of note, CommonSpirit also increased the estimated negative financial impact of the fall cybersecurity incident from the $150 million reported last quarter to $160 million.

Across nonoperating items, CommonSpirit reported a $427 million net income for fiscal 2023’s third quarter on the back of $443 million in net investment income. These were a stark turnaround from the $17 million nonoperating net loss and $183 million net investment loss of the prior year.

Across the nine-month period, the organization has picked up $664 million in total nonoperating income thanks to $645 million of net investment income, compared to the preceding year’s nine-month $469 million total net nonoperating income and $219 million net investment income.

Chicago-based CommonSpirit Health had reported a nearly $1.3 billion operating loss (-3.8% operating margin) and a $1.85 billion net loss during the full fiscal year ended June 30, 2022.  It currently operates about 2,200 care sites and facilities in 22 states and employs more than 150,000 people.

Looking ahead, CommonSpirit said it will continue to focus on growing its volumes and improving its revenue cycle to better secure revenues. The organization pointed to its recently closed acquisition of Steward Health Care’s Utah care sites as evidence of its investments into opportune markets.

“We have identified opportunities to further scale the market by improving access, quality, payor partnerships, competitiveness, and delivering on profitable organic growth,” the system wrote in its filings. “The acquisition provides development opportunities along the I-70 corridor (Denver to Salt Lake City) and the I-15 corridor (Las Vegas to Salt Lake City).”

Its release also noted expense reduction efforts around labor costs. The system highlighted investments toward expanding its nursing residency and virtual nursing programs and alluded to job eliminations that have “impacted a number of leadership, administrative and other roles at the division and national level that do not affect patient care.” Virginia Mason Franciscan Health, an affiliate of CommonSpirit, laid off somewhere between 300 and 400 employees earlier this year.