Labor costs drive early-year losses at Allina, Fairview

Labor costs and trouble with patient discharges again contributed to financial losses at Allina and Fairview, the two largest health systems in the Twin Cities.

A first-quarter operating loss of $101.6 million at Allina reflects industry-wide trends that hit the Minneapolis-based health system harder than expected, Chief Financial Officer Ric Magnuson said in an interview.

Beyond labor challenges, Magnuson highlighted costly bottlenecks within hospitals due to a lack of capacity for patients at step-down and alternate care facilities.

Both factors also contributed to an operating loss of about $87 million at Minneapolis-based Fairview Health Services during the first three months of the year.

Even so, Chief Executive James Hereford is more upbeat, saying he saw signs of financial improvement at Fairview, which has posted operating losses for each of the last four years.

"Our belief is we've turned a corner," Hereford said in an interview.

For strategic reasons, Fairview is still pursuing its proposed merger with South Dakota-based Sanford Health, Hereford said.

The health system owns the teaching hospital at the University of Minnesota, where leaders have opposed the Sanford combination while seeking state funds to regain control of the medical center campus. Last year, leaders at the U questioned the lack of plans for a financial turnaround at Fairview.

Fairview hopes the U will support the merger in some form, Hereford said, since it could bring more patients to the university for research and specialty care.

"We continue to meet and negotiate in good faith and I think there's a lot of ways to solve this for the betterment of all the organizations involved," Hereford said. "But it's premature to declare victory and to march off into the sunset."

Allina Health System operates 10 hospitals including Abbott Northwestern Hospital in Minneapolis and United Hospital in St. Paul.

During the first quarter, Allina posted an operating loss of $101.6 million on $1.25 billion in revenue. The health system lost about $25 million on operations in the same quarter a year ago.

Revenue from some government health insurance programs has been flat or decreasing, Magnuson said, while labor and supply expenses have grown. In addition, he said, hospital emergency rooms are increasingly serving as safety nets for patients who don't necessarily need hospital-level care but can't access alternate facilities. Finally, nursing homes and other facilities lack capacity to take patients ready for discharge from the hospital.

"Much of this we can't control, it's outside of our walls," Magnuson said. "... I've never seen the cumulative effects from many different impacts — whether it's the labor side, whether it's the disruption on the volume side — to the industry like we're seeing right now. All of that is coming together in not a sustainable way."

During the first quarter, Fairview posted an operating loss of about $87 million on $1.74 billion in revenue. Last year, the health system lost about $68.5 million on $1.6 billion in revenue during the first quarter.

Hereford said this year's operating loss represents a slight improvement compared with the results in 2022, when the first quarter loss would have been $87.4 million but for one-time grant revenue.

The operating loss improved as a percentage of revenue "during a period of unprecedented labor pressure and inflation," the health system said in a statement. "Still very challenged financial performance and not a sustainable path, but we are seeing volumes and revenue improve."