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Hospitals Cut Pay, Hours In Response To Plunging Revenues

Brick hospital building with road going under sky bridge
Salem Health Salem Hospital. | BEN BOTKIN/THE LUND REPORT
May 12, 2020

Oregon’s big hospital systems were sitting pretty just three months ago after years of steady growth and profits. But now they’re grappling with the sudden monetary fallout of the coronavirus pandemic.

With hospital revenues taking a nosedive, some are securing or dipping into lines of credit from banks for quick cash to help cover costs. Many have cut the pay of top executives and curbed new hiring, travel and other spending unrelated to COVID-19. Next could come demands for wage or benefit concessions from unionized workers, a labor union official predicted.

The moves at Salem Health, the nonprofit hospital and clinic network based in Salem, are typical of the actions so far. In late March, Salem Health took out a $100 million line of credit, said spokesman Elijah Penner. For the March 1-June 30 period, the system expects revenues to fall below budget by $52 million, he said. That’s a big dip for a system with typical quarterly revenues of about $200 million-plus before the pandemic.

Another way in which Salem Health typifies the large systems in Oregon: It’s keeping some details about its actions secret. Penner says the system has cut the pay of top executives, but won’t say whose pay was cut or by how much. CEO Cheryl Nester Wolfe’s annual salary was $1.1 million, according to Salem Health’s filing with the Internal Revenue Service last year.

And, like the other big Oregon hospital systems, Salem Health has a big security blanket: An investment portfolio that totaled about three-quarters of a billion dollars prior to the stock market turbulence induced by the pandemic.

Hospitals Hold Back On Layoffs, Furloughs 

By and large, Oregon’s large hospital systems have not laid off nurses or forced them to take unpaid time off during the pandemic, said Kevin Mealy, spokesman for the Oregon Nurses Association, which represents about 15,000 nurses at hospitals across the state. But the systems have cut back sharply on the number of optional hours they offer workers, he said. For example, Mealy said, a nurse who is contractually guaranteed 20 hours of work a week but has typically been offered as many as 16 additional hours a week has seen those extra hours evaporate as hospitals try to save money.

As labor contracts expire, Mealy said he expects management to point to plunging revenues and seek concessions from workers. 

“I’m sure it will come up when we go into negotiations,” he said, noting that one of the union’s largest contracts, for 2,600 nurses at Oregon Health & Science University in Portland, expires in July.

Late last month, OHSU asked the American Federation of State, County and Municipal Employees Local 328, which represents 7,000 OHSU workers, if it would be willing to open up its contract to discuss “budget issues” related to COVID-19, the local said. The contract runs September 2019 to June 2022. In response, union members are debating whether they should open up negotiations on pay cuts or let OHSU eliminate some jobs, as it is allowed to do under the contract.

The hospital in late March established a $150 million line of credit with a bank, although it has investments and reserves totaling more than $2 billion. The university said last month it expects to lose up to $1.4 billion in revenue over the next 28 months.

Hospitals Have Big Reserves 

Mealy said the big hospital systems in Oregon are financially strong. 

“We’re coming off a period of record profits for hospitals,” he said, in part because in Oregon in 2014 the federal Affordable Care Act expanded the number of people covered by Medicaid insurance. The expansion sharply cut back the number of uninsured people that hospitals ended up treating for free. Hospitals used the infusion of revenue to pursue capital projects and accumulate reserves.

Now faced with a sudden drop in revenue, hospital systems can use reserves or borrow – and right now short-term borrowing is cheap and easy for well-capitalized hospitals.

Rajiv Sharma, a professor of health economics at Portland State University, said it makes sense for hospital systems to use their financial strength to keep their operations largely intact during the COVID-19 emergency.

“It does make economic sense to dip into (reserves) in times of crisis like the situation created by COVID-19,” he said. “The advantages: Maintaining staff and helping suppliers survive in a time of crisis will allow the hospitals to bounce back more quickly and completely when demand returns. The disadvantages: Dipping deeply into reserves now will mean that much less of a cushion will be available in the future if the decrease in demand stretches on for an extended period of time.”

He added that the pandemic underscores a benefit for hospitals that operate in so-called Medicaid expansion states, such as Oregon, compared with non-expansion states, the 14 states primarily in the South, which did not raise income limits for Medicaid eligibility under the Affordable Care Act. 

“Being an expansion state means that Oregon hospitals are more likely to be paid for the care they provide to low-income patients,” he said.

Some Top Execs Face Pay Cuts

Almost all of Oregon’s hospitals are nonprofits, and many have been quick to cut the pay of top executives as the pandemic unfolded.

“That is the right thing to do before cutting essential staff. It does pay for people on the ground,” said Mealy.

OHSU said it will cut salaries of nonunion employees and those making less than $50,000 a year by an average of 10% starting July 1, with higher earners seeing reductions of 35% to 40%. For example, Dr. Danny Jacobs, OHSU’s president, will experience a 40% cut in his salary. That means he’ll lose nearly $620,000 of more than $1.5 million in earnings in the upcoming fiscal year.

The Portland-based Legacy Health system said it is cutting the compensation of President and CEO Kathryn Correia by 30%, and that other top executives are taking cuts of 20-25%. However, Legacy did not reveal what Correia’s compensation currently is. She was hired in 2018, and Legacy has not yet had to disclose her salary in public filings. Her predecessor, Dr. George Brown, was paid $2.6 million in his final year in the top job.

Providence Health & Services, a nonprofit based in Renton, Washington whose operations include eight hospitals in Oregon, is cutting the pay of Rod Hochman, president and CEO, and of Mike Butler, president of strategy and operations, by 50% through the end of the year, a spokesman  said. He declined to provide the current compensation numbers. For the year ending December 2018, Hochman was paid $10.9 million, and Butler was paid $5.6 million. Other top-ranked executives are having their pay cut 10%-20%, said spokesman Gary Walker.

(Read an update: Providence Releases Details On Pay Cuts.)

Another big operation in Oregon, Vancouver, Wash.-based nonprofit PeaceHealth, with four hospitals in Lane County, declined to answer Lund Report questions about whether it has cut executive pay. PeaceHealth also declined to discuss its overall finances during the crisis.

By contrast, Bend-based St. Charles Health System, a four-hospital nonprofit, released its latest quarterly financial report to The Lund Report. The report covers the three months that ended March 31 when the coronavirus crisis was about four weeks old in Oregon. The numbers show the financial toll the pandemic was already taking. The system had an operating loss of $15.6 million for the quarter compared with a profit of $2.3 million for the same period a year earlier. Surgeries and emergency room visits had dropped  compared with the previous year. The system’s investment portfolio dropped $79 million from its pre-pandemic value of nearly $600 million – although the market has substantially rebounded since then. St. Charles said it has drawn on a $60 million line of bank credit to increase on-hand cash and has applied for a raft of federal and state aid for everything from worker safety to telehealth. The system also said it has not cut or furloughed staff, or reduced executive pay.

But beyond cutting costs and seeking government help, Oregon hospital systems are pinning their hopes on revving operations back up again under Gov. Kate Brown’s orders allowing a gradual resumption of some non-emergency and non-COVID-19 care.

Hospitals can begin that process only if they ensure enough beds are available if there is a sudden upsurge in COVID-19 cases, limit their volume of elective surgeries, ensure they have enough supplies of personal protective equipment and conduct extensive testing.

Providence began the ramping up on May 4, Walker said. “Under the most optimistic  projections, operations will not return to normal until later summer at the earliest,” he said.

You can reach Christian Wihtol at [email protected]