Oregon Health & Science University and Legacy Health are reporting a new round of losses as they work behind closed doors on a proposed merger, underscoring the stakes involved.
The problem? Fast-rising personnel costs and other expenses continue to outpace operating revenue from insurance reimbursements.
Portland-based Legacy reported an operating loss of $42 million — or 6% —
on operating revenues of $709 million for the quarter that ended June 30.
OHSU reported a loss of $67 million on revenue of $1.24 billion —
or 5% — in the same period.
Enter the merger. The two earlier this year announced their intent to explore OHSU absorbing Legacy, but included contingencies for abandoning the idea. OHSU promised no layoffs for six months after the merger.
In July an OHSU website said that in the “coming months” the entities will formally seek government approvals, including from the state’s health care merger review program.
And they depicted their joining as crucial for both, providing OHSU a way to expand its service footprint while raising capital to upgrade Legacy’s six hospitals and network of clinics and other facilities.
Not clear, however, is how that will address the fundamental problem both face: labor shortages and worker pay demands since the pandemic have boosted health care payrolls while insurance payments from Medicaid, Medicare and commercial insurers have lagged.
The new operating losses were caused by “ongoing financial challenges driven by workforce needs and fallout from the global pandemic,” said OHSU spokesperson Sara Hottman.
“The national labor shortage and resulting market wage pressures continue to challenge Legacy’s financial performance.”
A complex picture
Other revenue helped counter OHSU’s operating losses, Hottman noted. These included one-time federal funding plus OHSU investment gains.
“These factors offset negative operating results,” Hottman said.
However, like other hospital system leaders, OHSU executives don’t want to rely on investment returns and one-time grants.
OHSU’s budget for the fiscal year that started July 1 aims to nearly break even following hundreds of layoffs and an announcement of a new “strategic alignment” that includes an increased focus on profitable surgeries.
Still, OHSU and Legacy remain dogged by financial challenges centered on labor costs outstripping revenue.
OHSU is already heavily unionized, but additional workers are organizing in pursuit of higher pay. For instance, a majority of more than 2,000 research workers earlier this year filed authorization cards to form a union.
Legacy, meanwhile, reported spending $3 million on additional staffing to address meal break requirements following a legal settlement with the Oregon Bureau of Labor and Industries. Since then a wave of Legacy workers have unionized with blinding speed.
Plus, both institutions are dealing with Oregon’s new hospital minimum staffing ratios. OHSU and Legacy opposed the bill in the Legislature last year before agreeing to the inevitable in an announced compromise.
“Like health systems locally and across the nation, we continue to face significant financial challenges,” a Legacy spokesperson told The Lund Report. “Legacy continues to take actions to reduce our financial losses by redesigning our care, resetting and advancing our operations, and reducing our spending.”
Pay pressure across the board
At OHSU, faculty salaries now average $289,000 per full-time-equivalent employee, up 30% from four years ago; and full-time registered nurse pay averages $158,000, up 33% from four years ago, OHSU staff told the Board of Directors this summer.
Nor do those figures include costly benefits such as OHSU-funded health insurance and payments to the state Public Employee Retirement System.
The organization remains committed to competitive wages to attract the “best faculty and staff,” the presentation said.
OHSU leaders sought to cut employee health care benefits in contract talks this summer but relented in the face of resistance from the Oregon Nurses Association, AFSCME and other unions. OHSU has about 21,000 workers, including part-timers.
OHSU costs for salaries, benefits, services and supplies grew 15% for the 12 months through June 30, compared to a 12.4% rise in patient care revenues, primarily insurer reimbursements.
The institution remains a long way from its halcyon pre-COVID days when annual operating profits averaged nearly 5%. In a recent presentation to the OHSU Board of Directors, financial staff noted that OHSU operations broke even in 2020-2023. For its most recent fiscal year, which ended June 30, OHSU had an operations loss of $110 million on revenues of $5 billion.
Legacy, meanwhile, has not announced any staff cuts, but says it is being squeezed by labor costs and the need to hire additional workers to comply with the new staffing law.
Legacy’s operating revenue from patient care for the latest quarter rose by less than 1% compared to a year earlier, while compensation costs grew by 4.5% and total operating expenses by 8.5%, the system reported.
“The national labor shortage and resulting market wage pressures continue to challenge Legacy’s financial performance,” according to the system’s filing.
Legacy losses
For the 12 months ending last March 31 – Legacy’s fiscal year – the organization reported an operating profit of $16 million. But the black ink was created by Legacy’s sale of some of its lab operations, a deal that netted the organization $98 million in operating revenue that fiscal year. Without that sale, Legacy faced an $82 million operating loss.
Now, Legacy is facing the downsides of that sale: reported questions about patient care and having to pay the new lab owner, North Carolina-based Labcorp, for services.
Despite their latest operating losses, OHSU and Legacy still have large stock, bond and cash investment portfolios that are doing well. Their returns are calculated separately from operations.
OHSU’s investment portfolios reaped $175 million in growth and income in the last fiscal year. That helped push up OHSU’s net worth – assets minus all liabilities – to $4.3 billion, up from $4.1 billion a year earlier. OHSU’s investment portfolios now total more than $2.8 billion.
Legacy’s net worth – the value of its investments, buildings and equipment – has largely held steady in recent years at about $2.2 billion.
When are we going to realize when you create more money it creates more demand meaning shortages and there are fewer employees to meet the demand, so the price of the employees goes up? The system has created more and more patient care through the Oregon Health Plan and the system has been able to keep up and here we are at the point that the system cannot adsorb anymore without drastic changes.