PeaceHealth Document Reveals $37.2 Million Net Loss in First 10 Months of Current Fiscal Year

Healthcare chain has tools, assets to withstand losses, which put it $119.8 million below its budget forecast

Pacific Northwest healthcare giant PeaceHealth looks likely to face significant net losses in its current fiscal year, with lower revenue than forecast in the budget and a significant drop in the paper value of the nonprofit’s investments, according to a confidential financial statement obtained by The Lund Report.

Vancouver-based PeaceHealth operates 10 hospitals across Oregon, Washington and Alaska, along with a large network of clinics, labs and other health-related programs. Its fiscal year runs from July 1 through June 30. The financial document obtained by The Lund Report provides a snapshot of PeaceHealth’s current year performance through April 30 – in other words, the first 10 months of the current 12-month fiscal year. While the most recent full-year financial reports for individual hospitals based in Oregon show those institutions turning large profits, including three of PeaceHealth’s four hospitals in the state in its 2014-2015 fiscal year, the parent company is not performing as well in the current year.

Click here for an examination of the last full fiscal year at PeaceHealth’s finances, which includes snapshots into the chain’s Oregon operations.

In first 10 months of the current fiscal year, or from July 1, 2015, through April 30, 2016, PeaceHealth’s patient revenue outperformed expectations. The nonprofit budgeted for $2.36 billion in inpatient revenue, $1.88 billion in outpatient revenue, and $531.6 million in other patient revenue. Instead, it received $2.41 billion in inpatient revenue, $1.89 billion in outpatient revenue, and $524.6 million in other patient revenue. The differences between budget and reality vary by only decimals, but add up fast: PeaceHealth’s total $4.82 billion in total patient revenue was $50.1 million higher than expected over the 10 month period.

One of the typical deductions hospital chains subtract from revenue is also down at PeaceHealth: charity care, which is a write-off taken when a healthcare organization forgives all or part of the bill of a patient unable to pay. Since the implementation of the Affordable Care Act significantly expanded Medicaid enrollment through Oregon’s coordinated care organizations, hospitals are seeing far fewer uninsured patients. PeaceHealth budgeted for $47.4 million in charity care write-offs in the first 10 months of this fiscal year, but has only actually booked $26.3 million in charity care during that period.

But two other deductions from revenue were higher than the company forecast. Its spending on bad debt was $66.6 million, above the $60.8 million budgeted for. Its contractual allowances were $2.79 billion, above the $2.71 billion in the budget. Added together with charity care spending and other revenue, PeaceHealth’s operating revenue for the period was $2.07 billion, about $63.6 million below its $2.14 billion budget forecast.

Meanwhile, operating expenses at PeaceHealth for the first 10 months of the current fiscal year have added up to slightly less spending than the nonprofit anticipated, though some categories are higher than budgeted, and others lower:

  • Salaries and wages were $913.5 million, below the $936 million budgeted.
  • Contract labor cost $88.7 million, more than the $68 million budgeted.
  • Payroll taxes and benefits cost $202.9 million, below the $243.6 million budgeted.
  • Professional fees cost $28.2 million, quite close to the $28.5 million budgeted.
  • Medical supplies cost $181.1 million, more than the $171.6 million budgeted.
  • Drugs and pharmaceuticals cost $105.1 million, above the $102.6 million budgeted.
  • Other supplies cost $21.1 million, below the $23.9 million budgeted.
  • Purchased services cost $177.3 million, below the $191.4 million budgeted.
  • Travel and education cost $17.3 million, above the $14.97 million budgeted.
  • Insurance cost $76.1 million, below the $88.4 million budgeted.
  • Other expenses were $113.7 million, above the $87.7 million budgeted.

Added up, operating expenses were $1.93 billion, or about $31.4 million below the $1.96 billion in spending that PeaceHealth forecast for the first 10 months.

With revenue and expenses both lower than PeaceHealth forecast, the chain’s operating profit was still positive: Not including interest, taxes, depreciation and changes in investment values, PeaceHealth’s operating profit was $148.6 million in the first 10 months of the current fiscal year, about $32.2 million below the $180.8 million operating profit it had forecast.

Non-operating expenses added up fast, however, especially on-paper changes in values of PeaceHealth’s properties.

Interest expenses were close to the forecast -- $25.7 million actual, compared to $26 million in the budget. Depreciation and amortization – a write-down that reflects how fixed assets like buildings and equipment lose value with time, wear and tear – was $117.98 million, compared to $114 million in the budget.

Interest rate swaps, a financial tool often used by large institutions to offset risk of large losses, did not achieve their desired effect for PeaceHealth. The nonprofit did not anticipate any change in the valuation of this tool, so it budgeted $0 for the line-item. Instead, it reported a $40.2 million net loss because of a change in the valuation of its interest rate swaps.

PeaceHealth also anticipated better performance from its investments. It budgeted a $42.5 million net gain through investment income and changes to the fair value of its investments. Instead, it reported a $1.5 million net loss.

The poor performance of its investments and the write-down for interest rate swaps together took a chunk out of PeaceHealth’s bottom line, together contributing a net non-operating loss of $41.7 million. The company had not expected a loss at all – it had budgeted for a $42.5 million gain in this category. Actual performance was $84.2 million worse than budgeted.

That put PeaceHealth into negative territory 10 months into its fiscal year. The chain reported a net loss of $37.2 million from July 1, 2015, through April 30, 2016. It had budgeted for a $82.5 million net income – meaning actual results are a full $119.8 million below expectations.

The income statement obtained by The Lund Report does not show cash flow, financial ratios, or PeaceHealth’s asset and liability balances – it only shows how well income and expenses have performed against expectations. With this information, it’s impossible to draw strong conclusions about the overall health of the organization. But the nonprofit had net assets of $1.8 billion as of June 30, 2014, the most recent full year that is publicly reported. In addition, write-downs for depreciation and for poor investment performance will not necessarily affect the cash flow and operations of the chain – and these are among the areas that pushed PeaceHealth into negative territory.

So the document obtained by The Lund Report is not cause for alarm, on its own. But it does reveal details of PeaceHealth’s operations as a large nonprofit. Looking at these figures, it appears that even in an era of record hospital profits, expenses and swings in investment value can still pose a challenge for multi-billion-dollar institutions.

Courtney Sherwood is on Twitter at @csherwood. She can be reached by email at [email protected].

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