Most Philly-area health systems lost money over the summer as financial woes persist

Main Line Health predicted it would lose $60 million in the year that started July 1.

That’s a poor result for a health system that serves some of the wealthiest communities in the Philadelphia region — and a sign of how troubled the industry is.

But it’s turning out even worse than predicted. Through October, Main Line already had lost $62 million and is now anticipating its second consecutive $100 million annual loss, chief executive Jack Lynch said.

“We are in a crisis,” Lynch said, speaking not just of Main Line, which has deep financial reserves to absorb losses and remains financially strong, but of the entire hospital sector.

Seismic shifts in the labor market have forced hospitals to pay more to attract and keep nurses and other hospital staff. And soaring costs for drugs and other supplies, and increasing numbers of sicker patients with longer but less profitable hospital stays — coupled with insurance payments that haven’t nearly kept up with recent inflation — have led to widespread hospital operating losses. It’s a turnabout for an industry that is widely viewed as inefficient and for decades was a major contributor to inflation in the broader economy.

In Southeastern Pennsylvania, the only nonprofit health systems to report operating gains in July, August, and September were the University of Pennsylvania Health System and Children’s Hospital of Philadelphia. The biggest percentage losses were at small suburban providers: Doylestown, Grand View, and Redeemer. Results for Trinity Health Mid-Atlantic were not available.

Lynch, other executives, and credit rating agencies said hospitals’ financial woes are likely to continue for years. The persistent financial pressure is expected to lead to more hospital closures, reduced duplication of services at hospitals, and an even greater push to provide more care in patients’ homes.

“This is all about access to care,” Lynch warned. “When health systems in this country have financial struggles, access to care becomes impacted. Look at what happened at Hahnemann. Look at what happened with the Tower closures. You could look at what’s going on with the Crozer closures.”

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The math for hospitals, illustrated by Main Line’s experience in the quarter ended Sept. 30, is brutal. Lynch said Main Line’s costs per patient were up 26% in the three months that ended Sept. 30, with labor being the biggest factor, compared with the same period last year, but its corresponding revenue rose only 6%.

Executives said a major reason for the mismatch is the federal government’s habit of providing only paltry, if any, increases in rates for Medicare, which accounts for half the business at some area health systems.

For many years, hospitals were able to secure higher payments from commercial insurers to make up for the government’s low rates — which meant that employers were subsidizing Medicare — but that’s no longer happening, Lynch said.

That doesn’t mean Medicare has changed its ways.

Medicare rates for hospital stays increased just 2.3% on Oct. 1, despite significantly higher costs, and rates for doctors went down, according to Moody’s Investors Service. On Jan. 1, a 4% reduction in Medicare rates is scheduled, unless Congress blocks it.

» READ MORE: Hospitals have spent unprecedented amounts of money on contract nurses during the pandemic.

If the Jan. 1 cut happens, it will reduce Penn Medicine’s revenue by $100 million, the system’s chief executive Kevin Mahoney said. Already, a shift in Penn’s business toward Medicare and Medicaid, away from commercial insurance since early 2020 has shaved Penn’s annual operating profit by $105 million, he said.

Another potential blow to hospitals’ revenue is the anticipated end next year of the COVID-19 public health emergency, which has increased the federal contribution to states’ Medicaid expenditures and has allowed millions of people to keep Medicaid insurance who may no longer qualify. In Pennsylvania, as many as 500,000 people could lose Medicaid coverage.

At Doylestown Health, which has seen a sharp decline in its cash reserves, CEO Jim Brexler is focused not just on Medicare, but also on rates his hospital gets from commercial insurers like Independence Blue Cross.

“All of our contracts with commercial insurers were negotiated pre-pandemic, so I’m in the middle of multiyear contracts with Blue Cross and Aetna and Humana and others,” he said. “The cost structure when we went into those rate negotiations are nowhere near what the cost structures are now.”

Brexler said he planned to ask Independence and Aetna for mid-contract adjustments.

Grand View Health, also in Bucks County, is in the midst of talks with Independence on a new contract to replace one that ended Sept. 30 but has stayed in effect. During an October call with municipal bond analysts, CEO Douglas Hughes described it as an advantage compared with providers stuck in the middle of a contract.

Those negotiations are still ongoing, Hughes said in an interview Thursday.

Independence said it has recently completed major negotiations, without naming the providers, and is in talks with others about ways it can help.

“We recognize the challenges hospitals and physicians face during this time of unprecedented change,” said Independence executive vice president Richard Snyder. “We also have a responsibility to our members and employer partners to keep health care affordable.”

As hospitals adjust to new conditions, not all the changes they make will be popular with patients and their families. For example, a patient who needs to go to a nursing home after a hospital visit might no longer be allowed additional days in the hospital while waiting for a bed to open up at a preferred nursing home, executives said.

Some multi-hospital systems are expected to stop offering certain services at all of their hospitals. “I do bariatric surgery in six hospitals. There’s no reason to do bariatric surgery in six hospitals,” Mahoney said. “I need deep specialization, not duplication.”

Attempts to reduce reliance on high-cost contract nurses to provide adequate staffing will continue.

Temple University Health Systems plans to hire 100 nurses from the Philippines, Temple CEO Mike Young told bond analysts last month. “They are very well trained, very professional,” and will bring a solid group of registered nurses to Temple over the next 18 months, Young said.

Daniel Polsky, a health-care economics and policy researcher at Johns Hopkins University, recently called the industry “notoriously inefficient” and suggested that the current environment window could lead to what he called “needed productive cost reductions.”

If that happens, technology is likely to play a big role.

On Jan. 1, Temple will start to use a software tool that “will give us the ability to more rapidly share cost information with doctors so they can make informed decisions,” chief financial officer Nick Barcellona said last month. That could save thousands of dollars per case in some specialties without diminishing the level of care.

At Penn, Mahoney said, “There are things that nurses and caregivers at bedside deliver that could be done by technology.” A patient’s temperature and blood pressure are already being done by sensors and are in the bedside computer. “You could just pull it out of the computer,” he said.

Remote patient monitoring to bolster bedside care in intensive care units is another area of development at Penn, which says it has one of the largest telehealth centers in the country at Penn Medicine Rittenhouse on South Street.

Health systems are not going to snap back from the current financial troubles, Mahoney predicted. That leaves him worried for the entire industry.

“We all have to readjust, but we don’t have a lot of time,” he said.