Providence Health & Services had better-than-expected operating results in the first nine months of its fiscal year as it saw higher patient volume and benefited from state programs that help bolster Medicaid payments.
The Renton, Wash.-based system maintained its 2.3% operating margin (PDF) in the nine-month period ended Sept. 30, which was ahead of budget. Revenue increased 15.8% year over year, but expenses were growing just as fast.
Providence received a boost from the return of California's state provider fee program, which was on hold last year while waiting for the CMS to approve its extension. The program, and others like it, collect a tax from hospitals which is then matched with federal dollars and used to increase Medicaid payments.
The system recorded about $520 million in revenue from state provider fee programs, but nearly half of that, or $240 million, related to back payments from the prior year.
Providence also saw higher patient volume than it anticipated almost across the board. Its acute-care admissions increased 9.7% year over year and were 3% higher than budget. Acute outpatient visits increased 8.2% while emergency room visits were up 11.8%. Surgeries increased 7.9%.
Providence has rapidly expanded its affiliations and partners. During the quarter, it signed a letter of intent to combine with Irvine, Calif.-based St. Joseph Health System and aims to close the deal early next year. It also signed a deal with Walgreens to own and operate urgent-care clinics in 25 drugstores across Oregon and Washington. The first six clinics will open in Portland and Seattle in early 2016.
And it plans to develop a joint health and wellness center with Vancouver, Wash.-based PeaceHealth as part of a broader health and wellness collaboration.
The system also has more money, a total of $1.4 billion, flowing through capitated contracts. Capitated and premium revenue represented 13.1% of its total operating revenue in the nine-month period, consistent with the prior-year period.
On the expense side, Providence incurred higher fees related to state provider fee programs as well as higher supply and staffing costs. Drug prices—particularly for sole-source generics and specialty drugs—increased 35% year over year, which was the driver of its 33.1% increase in supply expenses. Providence also had to make use of more contract labor in the period, which led to $85 million in unexpected labor costs.
In total, Providence reported a $241.1 million operating surplus on $10.7 billion in operating revenue during the first nine months of its fiscal year compared with a $215.1 million operating surplus on $9.2 billion in revenue during the same period in fiscal 2014.
Like many systems, however, Providence had to contend with $109 million in year-to-date investment losses due to market volatility. As a result, its net surplus was $95.4 million on $10.7 million in revenue compared with the year-ago period's $744.1 million net surplus on $9.2 billion in revenue.