Pandemic drove combined Q2 losses of $151 million at Allina, Fairview

Two of the state's largest health systems posted operating losses during the second quarter as a statewide shutdown in elective health care torpedoed revenue and drove a shift to online care that could threaten some brick-and-mortar clinics.

Financial results released last week by Fairview Health Services and Allina Health System detailed the effect across two nonprofit groups that collectively run about 20 hospitals and more than 100 clinics.

The health systems received about $108 million each during the second quarter by way of federal funding to support health care providers in the CARES Act. Even so, Fairview during the quarter posted an operating loss of about $66 million, while Allina's operating loss hit about $85 million for the April through June period.

"We're facing some financial realities, but I think it's also important to understand that we're still a strong organization," said Ric Magnuson, the chief financial officer at Allina, which operates Abbott Northwestern Hospital in Minneapolis and United Hospital in St. Paul.

Both health systems are seeing more patients returning for care, but James Hereford, the chief executive at Fairview, said he expects COVID-19 will continue to have some impact on demand for health care services.

"I think we're going to be in this kind of chronic COVID phase for a period of time where we'll see kind of a sinus wave of increases and decreases associated with the societal will to wear masks and to socially isolate, etc.," Hereford said.

"Our assumption is: That's going to have a dampening impact on people's willingness to come into health care organizations, even though most of the objective evidence would say we're one of the safest places to be," he said. "Our anticipation is that's going to have some downward pressure on volumes."

Operating losses during the second quarter aren't a surprise. In early April, the Minnesota Hospital Association forecast a financial hit of $2.9 billion over the 90 days for the state's hospitals and health systems due primarily to the halt of elective health care procedures.

In a financial statement this month, Allina said it was implementing "expense reduction and cash conservation measures" for the remainder of 2020. The health system said it lost about $40 million per week in patient service revenue during the state's seven-week shutdown of nonemergency and elective procedures between late March and early May.

Hospital admissions were off by almost 40% in April compared with the previous year, Allina said, but by the end of June were off by just 10% from a year ago. Surgeries were down 75% in April, but were back to 80% of the previous-year volume in June.

Fairview said in a financial statement the suspension of many types of surgical and clinical care with COVID-19 reduced net patient revenue by $293 million in the second quarter, about 21% below expectations. Fairview's hospitals include University of Minnesota Medical Center in Minneapolis and M Health Fairview Southdale Hospital in Edina.

At the low point, Fairview was down 40% in terms of average weekly volumes and revenue, said Hayes Batson, the chief financial officer. Volume and revenue have mostly recovered but is "still running a little bit below our pre-pandemic normal," Batson said.

"We recognize that we're going to have to make tough decisions and make sure that we keep costs in line with revenue as we go forward, not only this year but well into the future," he said.

Both groups saw a significant increase in health care provided through online "virtual visits," a trend that was one factor behind a decision this summer by Bloomington-based HealthPartners to close seven clinics. Allina officials said they are evaluating where they need to operate clinics.

"When you go from a few hundred to 5,000 visits a day in virtual care, it changes the way you staff and manage and what sites of care — physical assets — you need," said Lisa Shannon, the chief operating officer at Allina.

"We do not have our final plan, but we are — this next quarter is a critical repositioning on what the community needs from us and how we respond."

To help hospitals handle financial challenges with the pandemic, the federal CARES Act and related programs allocated $175 billion for grants to health care providers that do not have to be paid back, according to a report from the California-based Kaiser Family Foundation. About $116 billion already has been allocated, the foundation said, including $50 billion to Medicare providers proportionately based on their total net patient revenue.

Fairview and Allina also are benefiting from a federal program that prepays providers for treating Medicare patients. Hospitals will begin repaying the funds this month as an offset against current and future Medicare billings.

Allina received about $321 million in prepaid funding through the federal Centers for Medicare and Medicaid Services in April, according to a financial statement. Fairview also received over $300 million in prepayments.

Magnuson of Allina said the prepayments and newly increased lines of credit explain why cash and short-term investments increased significantly between Dec. 31 and June 30 — from about $645 million to about $985 million.

At Fairview, cash and short-term investments increased during the time period from $466 million to $688 million. Batson, the chief financial officer, attributed the increase primarily to the prepayments.

With the program, the federal government "did a look back, calculated the previous 12 months of total Medicare fee-for-service payments and then, essentially, allowed organizations to take a piece of that in advance going forward," Batson said. "All that will get paid back."

In the second quarter, Fairview posted an operating loss of $65.8 million on $1.398 billion of revenue. The health system employs more than 34,000 people across 10 hospitals, 91 clinics and a pharmacy division.

Allina during the quarter saw an operating loss of $84.9 million on about $927 million of revenue. The health system operates 11 hospitals and 65 clinics, and employs more than 29,000 people.

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck