Kaiser, Mass General Brigham operating losses driven in large part by labor expenses

Photo: Courtesy Mass General Brigham

Two of the nation's largest integrated health systems have reported financial losses, driven by labor shortages and increases in expenses and capacity.

Kaiser Permanente reported an operating loss of $1.3 billion for 2022 compared to operating income of $611 million in 2021. The financial results reflect an increase in healthcare expenses driven by inflation, high COVID-19 costs, ongoing labor shortages and a rise in care volume, Kaiser said.

In 2022, Kaiser had an increase of 4.5% in operating expenses, while revenue increased by a modest 2.4% for the year.

Factors that drove higher annual operating expenses included increased care volume -- in part due to care deferred over the three years of the pandemic, higher costs of goods and services, additional outside care costs in contracted hospitals, an increase in labor costs due to a highly competitive labor market, and increased COVID-19 care and testing.

In addition to health system challenges, headwinds in the financial markets drove Kaiser's loss in total other income and expense of $3.2 billion in 2022, compared to a gain of $7.5 billion in 2021. For 2022, there was a net loss of $4.5 billion compared to net income of $8.1 billion in 2021.

Mass General Brigham reported a loss from operations of $1 million for the first quarter of Fiscal Year 2023, which ended on December 31, 2022. This includes $52 million in healthcare provider revenue related to prior year activity, of which the largest component was a $22 million permanent grant from the American Rescue Plan Act of 2021.

Excluding the revenue attributable to prior year activity, the system reported an operating loss of $53 million (-1.2% operating margin).

Mass General Brigham said its financial performance continues to be impacted by external pressures, including a severe capacity crisis, elevated cost inflation and significant workforce vacancies. For the three months ended December 31, 2022, the system absorbed $574 million in Medicare, Medicaid and Health Safety Net shortfalls due to certain government reimbursements that do not cover the full cost of providing care.

WHY THIS MATTERS

Despite the losses and continued financial challenges, both health systems said they are continuing with their strategic plans. 

Mass General Brigham said it remains focused on advancing integration initiatives. It is evolving the organization and management structure of its community hospitals and physicians to be unified under a new leadership structure. 

Ongoing efforts to coordinate capacity management resulted in a modest increase in system-wide discharges (1%) despite the average acute care length of stay remaining above six days through the first quarter of FY2023.

Mass General Brigham continues to expand its Home Hospital program for patients with chronic illness, which has shown to lower complication rates and reduce emergency department utilization. Mass General Brigham delivered nearly 5,000 Home Hospital patient days in 2022.

Other initiatives include introducing a Medicare Advantage product into the market, receiving approval from the state to support the Mass General Brigham Accountable Care Organization and launching a mental health solution with Lyra Health. 

Kaiser's capital spending totaled $3.5 billion, consistent with the $3.5 billion spent the prior year. During 2022, Kaiser Permanente opened four new medical offices. 

In 2022, Kaiser Permanente continued its long-standing commitment to improving the health of its members and the communities it serves by investing $2.8 billion in community health programs compared to $2.6 billion in 2021. The Kaiser Permanente Medical Financial Assistance program provided nearly 320,000 low-income and uninsured patients more than $433 million in assistance to cover part or all of their medical expenses.

THE LARGER TREND

Last year was the worst financial year for hospitals and health systems since the start of the COVID-19 pandemic, with operating margins taking a particular hit, according to Kaufman Hall's latest Flash Report.

December was the only month in which hospitals realized positive margins. Despite the end-of-year upswing, about half of U.S. hospitals finished 2022 with a negative margin as growth in expenses outpaced revenue increases.

A Commonwealth Fund report found that the U.S. spends far more on healthcare than do other countries, yet it doesn't have the results to show for it. Despite the higher spending, life expectancy and other health metrics fare worse in the U.S. than in other locations across the world.

ON THE RECORD

"Clinical staff shortages, COVID-19 care and testing, higher costs of goods and services, and deferred care drove Kaiser Permanente's expenses beyond revenue," said chair and CEO Greg A. Adams. "Rather than pull back amid financial pressures, we made the decision to continue our long-term and strategic investments in care and service improvements while carefully managing resources." 

"Kaiser Permanente's mission and integrated model of care and coverage remain resilient despite an uncertain and challenging post-pandemic economic environment," said executive vice president and CFO Kathy Lancaster. "In response to strong economic headwinds we effectively executed mitigation strategies to ensure operational soundness while remaining steadfast in focusing on the quality of care, enhancing the consumer experience, delivering operational efficiencies, and investing in our technology and facilities to better serve our members."

"We continue to navigate the ongoing challenges that have been exacerbated by the COVID-19 pandemic, including the capacity and staffing crises," said Dr. Anne Klibanski, president and CEO of Mass General Brigham. "Despite these unrelenting pressures, Mass General Brigham remains on course in its multi-year journey to build the integrated academic health system of the future, leading change to improve patient access and experience, and ensuring that we can continue to deliver the highest-quality patient care, invest in research and teaching, and serve our community."

"We are continuing to staff as many beds as possible to help meet patient need, which does require the ongoing use of contract labor," said Niyum Gandhi, CFO and treasurer at Mass General Brigham. "The associated costs may temper operating margins over the short term but, over time, we anticipate reaping benefits from clinical integration and resource stewardship initiatives. Through provider-payer integration with Mass General Brigham Health Plan, we are also advancing key initiatives to improve health equity, outcomes, and affordability, including through Medicare Advantage and the state's approval of an integrated Mass General Brigham Accountable Care Organization to support our Medicaid population."

Twitter: @SusanJMorse
Email the writer: SMorse@himss.org