Dignity Health has been taking steps to bring in new revenue and trim expenses but its financial performance nevertheless dipped into the red in its most recent earnings report.
The San Francisco-based system has been struggling to get ahead of its growing expenses, particularly from salary and benefit costs, supplies and purchased services. Revenue, meanwhile, is increasing at a slower pace, particularly as Dignity sees a decline in admissions from commercially insured patients.
Credit rating agency Standard & Poor's last month revised the outlook on Dignity's debt to negative from stable, citing its weaker financial performance.
"This has occurred despite relatively sound utilization statistics, which are up slightly in the current year, although commercial admissions are declining, which is a contributing factor to weaker results,” S&P analyst Martin Arrick wrote in his report.
Dignity already has a number of initiatives in place to attract new private-pay patients and reduce costs. Government insurance programs represented 55.4% of Dignity's patient revenue in the quarter ended March 31, its third fiscal quarter, compared with 52.4% in the year-ago period.
More than a third of California residents have transitioned onto Medi-Cal, the state's Medicaid program, which pays some of the lowest rates in the country. Dignity is moving forward with a marketing push to attract more people with higher-paying private health plans.
It also is seeking partnerships with health systems outside its current geographic regions and has completed a joint venture with Emerus to build several micro-hospitals in the Las Vegas market.
In its core regions, Dignity is building more outpatient facilities as more revenue comes from outside its acute-care facilities. During the quarter, it opened free-standing emergency departments in both Phoenix and Mesa, Ariz., through a partnership with Adeptus. And in the San Francisco Bay Area, it is planning to open 12 urgent-care centers through a new agreement with Access Clinical Partners.
Overall patient volume at Dignity's hospitals is increasing. Admissions were up 1.5% in its fiscal third quarter and were 3.8% higher when adjusted for outpatient activity.
But the costs of caring for those patients outpaced the revenue gain.
Salary and benefit costs in particular shot up in the first half of its fiscal 2016, though the system has been working to stabilize those numbers by focusing on productivity measures. Its headcount at the end of March was 6.8% higher than the previous year.
Purchased services increased 13.1% in the quarter compared with the year-ago period, mostly due to higher medical and professional fees, maintenance costs, its marketing campaign and management costs at Optum360, its revenue-cycle management firm.
The number of physicians participating in Dignity's clinically integrated networks now stands at 5,400, a 9% increase for the quarter. It has 760,000 lives covered under value-based contracts, a 6% increase quarter over quarter and a 27% increase since last June.
In total, Dignity reported an operating loss of $41.7 million for the quarter on $3.2 billion in total revenue. In comparison, it had an operating surplus of $39.9 million on $3 billion in total revenue in the prior-year period.
Its operating margin fell to negative 1.3% from 1.3% during the same period last year.