Providence Health & Services, a growing regional giant in the Pacific Northwest, ended last year with the same margin as the year before as growing labor costs and pharmaceutical expenses kept pace with higher demand.
Renton, Wash.-based Providence closed its last fiscal year at the end of December with an operating margin of 1.8%, identical to the margin the prior year. The system—which rapidly expanded in 2014 with hospital acquisitions in California and Washington and the addition of a nine-clinic multispecialty medical group—reported revenue last year was up 16% to $12 billion. Providence also reached a deal last year with Walgreens Boots Alliance to lease space in the retailers' pharmacies to operate clinics.
Another deal in the works with 16-hospital St. Joseph Health System in Irvine, Calif., would expand Providence's foothold in California. St. Joseph also operates in Texas. Providence operates 34 hospital across Alaska, California, Montana, Oregon and Washington.
Patients admitted to Providence's hospitals increased 9% last year and the system also saw growth in its outpatient services, with primary care visits up 13% from the prior year. The higher volume helped to boost revenue. Providence also received $612 million from state Medicaid programs that use tax revenue from providers to increase payments. Roughly $240 million was payment from 2014 that had been delayed.
Accountable care increased the system's capitated revenue by 18% to $339 million.
Providence's expenses also grew 16% last year. The system added roughly 5,000 full-time jobs to its payrolls last year, and salaries and wages increased 14%.
Hiring, however, was not the only factor in rising compensation costs. The system relied more heavily on temporary workers last year, increasing the cost of staffing agency workers by 42% to $69 million. Healthcare analysts closely watch use of staffing agencies for an indication of staffing shortages and its impact on the delivery of services.
Increased use of staffing agencies by hospital operators last fall set off speculation that workforce demand and an improved economy may leave hospitals struggling to fill critical vacancies. Reports on the labor market have since been mixed.
Rising pharmaceutical costs also added to Providence's operating expenses. The system singled out generics with no competition and specialty pharmaceuticals as major culprits.
“Market forces continue to move toward consolidation of generic drug producers, leading to significant price increases,” the system said in its financial statements (PDF). “In 2015, half of drugs purchase by Providence were branded drugs for which we have no ability to negotiate discounted rates.”
Ten drugs accounted for one-third of the wholesale price growth Providence saw last year. Overall, pharmaceutical expenses increased 30%, two-thirds of which was the result of higher prices. Drug costs accounted for 39% of the system's total supply costs.
Providence joined a number of systems to end the year with a net loss, thanks to a drop in investment returns. Investment losses last year totaled $113.6 million compared with investment gains the prior year of $178 million.
Net gain for the year totaled $76.8 million compared with the prior year's net gain of $771.4 million.