Taxpayers shouldn't foot the bill for health systems' massive 2022 investment losses, health economists say

Any potential financial relief for nonprofit hospitals and health systems reporting major net losses in 2022 must take into account the outsized role negative investment returns had on their bottom lines, health economics experts wrote in a Health Affairs Forefront article published Friday.

“Wall Street losses should not impact private payers’ and taxpayers’ payments to hospitals,” the trio of researchers hailing from the RAND Corporation, Manhattan College and Johns Hopkins University wrote. “Asking these constituents to foot the bill for hospitals’ investment losses not only lacks justification but will insulate hospitals from the consequences of their investment decisions, motivating less fiscally responsible behavior in the future.”

To better characterize the oft-publicized financial losses of hospitals and health systems, the group reviewed 10 large nonprofit hospital systems’ second-quarter financial statements (the most recent available at the time of article submission).

All 10 of the hospital systems reported negative overall profit margins during the quarter, averaging a decline from 9% in 2021 to -6% in 2022, the researchers found. 

The systems saw a collective -184.6% year-over-year decline across their investment return-to-total revenue ratios, whereas patient care revenue obtained by providing hospital services rose by just under one percent, the researchers wrote. The organizations’ investment losses accounted for approximately 85% of their overall financial losses during the period, they wrote.

“Investment losses are highlighted by Ascension’s $4.7 billion loss [17%] and CommonSpirit’s $3.7 billion loss [21.2%]” on a year-to-year basis during the analyzed quarter, researchers wrote in the article. “Other sources attribute hospital financial losses to increased labor costs, particularly for nurses and health professionals, and increased supply costs. Our analysis suggests that investment losses are actually the primary driver of these nonprofit health systems’ overall losses.”

The 10-system sample—which was financially supported by the philanthropic fund Arnold Ventures and price transparency nonprofit—isn’t statistically representative of the industry as a whole, but it does “provide insight into the financial profiles of the nation’s largest systems and the most important factors behind those profiles,” the researchers wrote. The financial performances of smaller hospitals and systems “may have been different,” they wrote.

More recent financial statements from these and other health systems also reflect some recovery among health systems’ investment returns, in line with the broader stock market’s gradual return from early 2022 lows.

Still, the researchers said their numbers highlight the financial strength with which sector leaders entered 2022 as well as the risk-reward many health systems knowingly take on in a bid to diversify their revenue sources.

“If losses were driven by persistent labor and supply cost increases, then it might be reasonable to ask patients, employers and insurers to consider these underlying cost drivers in their payments to hospitals,” they wrote. “However, when losses are driven by risky financial investments, which generated positive returns in many previous years and will do so in many future periods, it is not clear whether patients, employers, insurers and taxpayers should be responsible for paying higher prices to offset the impact of overall market declines.”

Ge Bai, Ph.D., one of the authors and a professor of accounting and health policy at Johns Hopkins, told Fierce Healthcare that her and her colleagues’ findings are in line with MedPAC's recent report to Congress. The independent committee advised a modest 2024 reimbursement bump to hospitals citing prior pandemic relief funding and strong investment returns that blunted 2022 losses.

“Also, from the perspective of the financial markets, historically there were many more good years than bad years,” she said. “The chance for hospital systems to experience similar investment losses in 2023 as in 2022 is low.”

In the meantime, Bai said federal policymakers should be wary of authorizing any further subsidy packages that are allocated to hospitals based on metrics impacted by investment returns, such as net income. Doing so would be a disservice to constituents, who the researchers noted have been shouldering “the same investment losses and the same wage and supply costs” as their local hospitals.

“Taxpayers’ money should not be used to subsidize investment loss,” Bai said. “Investment is a risky business. Hospitals have been reaping all the gains in good years. Why should taxpayers subside the losses in bad years? Why should taxpayers own the loss in bad years?”