Minnesota hospitals showing signs of financial recovery, but still not at pre-COVID levels

Minnesota’s largest hospital systems are doing better financially, all reporting better results in the first half of 2024, benefitting from moderating labor costs and stronger patient demand.

The degree of improvement varies across the health systems, all of which are nonprofits. Rochester-based Mayo Clinic added the most operating profit among the five groups, while Minneapolis-based Allina Health, despite progress, posted an operating loss through the first half of the year.

But most said they’re still not posting margins at the level seen historically for needed reinvestment in operations.

“It’s safe to say that you’re getting back to sort of normal profitability that we’ve seen certainly before the pandemic,” said Allan Baumgarten an independent health care analyst in St. Louis Park. “There are ups and downs, but [it’s] generally steady performance in the 3% to 5% range, especially if they were benefitting from robust investment markets.”

In recent years, Minnesota hospitals have been reporting more financial stress due to inflation, high labor costs and disruptions in demand for care with the COVID-19 public health emergency.

Fairview Health Services, based in Minneapolis, has seen a small amount of operating income so far this year, noteworthy since Fairview previously posted five consecutive years of losses on health care operations.

St. Cloud-based CentraCare and Duluth-based Essentia Health, which both released figures for fiscal years ending June 30, went from roughly break-even the previous year to operating profit margins of about 1%.

Operating income is the profit or earnings that health systems realize from their core health care business after paying all expenses. These figures don’t reflect the complete financial picture, since health systems also have large investment portfolios that have been generating significant amounts of nonoperating income.

Hospitals across the country have reported similar financial stress, and many now are reporting improvements like those in Minnesota, said Rick Gundling, a vice president with the Healthcare Financial Management Association.

The general trend is that financially weaker hospital systems tend to get weaker, Gundling said, while stronger ones get stronger. He said the five health systems recently reporting results in Minnesota fall in the stronger category.

“There’s been continued signs of stabilization, month over month, across the country,” Gundling said. “I think Minnesota is kind of showing the same thing.”

The Star Tribune describes earnings at the state’s largest nonprofit groups as “profit” to reflect the significant capacity for these organizations to make money. Funds typically are re-invested in nonprofit operations, whereas for-profit companies generally make at least some earnings available to investors.

Mayo Clinic, the state’s largest nonprofit group by revenue, had operating income of $812 million during the first half of the year, an increase of roughly 81% compared with last year.

At Mayo, philanthropic contributions factor into both operating and non-operating results. Taken together, Mayo reported a $1.54 billion increase in net assets through the first half of the year, compared with $992 million last year.

With operations in Minnesota and four other states, Mayo employs about 82,000 people.

“The improvement in our 2024 [year-to-date] financial performance is driven by a number of factors, including demand for Mayo Clinic care, philanthropy, favorable investment returns, and careful planning,” chief financial officer Dennis Dahlen said in a statement.

Allina Health lost $63.3 million on operations between January and June, an improvement over last year’s operating loss during the time period of $224.3 million.

Allina this year has seen about $90.7 million in investment income, but also had one-time restructuring expenses of about $48.2 million. That means the health system, overall, posted a $23.7 million loss in terms of net income, which was better than last year.

Allina Health, which employs more than 26,000 full- and part-time workers, is Minnesota’s seventh-largest nonprofit group, with operations that include Abbott Northwestern Hospital in Minneapolis and United Hospital in St. Paul.

“We are still not back to pre-COVID volumes, but we are getting closer,” Allina Health said in a statement. “While revenues have continued to increase, costs have been rising much faster due to inflation and the rate increases from the insurance payers have not kept pace with inflation over the past several years.”

So far this year, Fairview Health Services has seen $7.1 million in operating income, compared with a loss of nearly $128 million during the first half of last year.

The health system is growing market share in several categories of medical services, said Joe Gaylord, chief financial officer, while also hiring staff nurses rather than relying on high-cost temporary workers. Fairview, the state’s fourth-largest nonprofit, owns University of Minnesota Medical Center in Minneapolis and employs about 34,000 people.

“We feel like we’re on the right path to sustainability, as demonstrated by seven consecutive quarters of year-over-year improvement and us turning from unprofitable to profitable in the first two quarters of this year,” Gaylord said in an interview.

For the year ending June 30, St. Cloud-based CentraCare posted about $25 million in operating income on revenue of nearly $2 billion, for an operating profit margin of 1.3%.

“Although we are pleased with our financial performance improvement, a sustainable operating margin that allows us to thrive and consistently reinvest in our mission is 3%,” said Mike Bair, chief financial officer, in a statement. “We are still below this sustainable margin and below our historical operating margin.”

CentraCare also saw during the year about $125.4 million worth of investment earnings.

Duluth-based Essentia Health saw operating income of $20.4 million on nearly $3 billion in revenue -- better than last year’s break-even performance.

Traci Morris, the health system’s chief financial officer, said the margin reflected a legal settlement involving a federal program called 340B, which allows hospitals to buy medications at discounted prices. The operating margin was just under 1%, which falls short of the 2% to 3% needed for make re-investments, Morris said.

“It is absolutely the reimbursement levels,” she said. “Inflation on the expense side is much higher than it has been historically and reimbursement, especially from our government payer programs, has either held flat or in some cases is declining.”

Baumgarten, the independent health care analyst, said that while all hospitals would like higher margins on their operations, “they’re not in a bad place right now for 2024.”

“There’s no question that these numbers show better performance — a better synching of revenues and expenses, the benefit of the Dow going to 41,000 and ... benefits associated with lower inflation,” he said.