University Hospitals posts 5% revenue bump in first half of year
University Hospitals' finances remained strong in the first half of the year despite a high-profile crisis with its fertility clinic last spring that some industry observers believed could have led patients to go elsewhere for their care.
In fact, the system's patient volumes are on the rise — even at the fertility clinic. The health system's payer mix, too, has improved, thanks to its expanded relationship with Medical Mutual of Ohio.
UH in recent years has focused on expanding the reach of its institutes across the region, bringing the services of its Harrington Heart & Vascular Institute, Seidman Cancer Center and Rainbow Babies and Children's Hospital to its hospitals throughout Northeast Ohio. This improved access for patients has been the primary driver behind a 5% increase in revenue for the first six months of the year, compared to the like period in 2017 — growth that Michael Szubski, UH's chief financial officer, called "very good performance in my judgment."
"We continue to see volume growth almost across all major key volume indicators, whether it be discharges, outpatient surgical cases, outpatient procedure volumes," Szubski said. "ED visits are up, our acuity, our case mix index, if you will, is up. So we're taking care of certainly some more serious and acute cases particularly at our main campus."
In the first half of 2018, UH earned $77.3 million in operating income — up 27% from the like period last year — on $2 billion in operating revenue. That represents an operating margin of about 3.8%.
"Our net operating income grew fairly robustly. That's an indicator that our revenues are growing at a higher clip than our expenses," Szubski said.
By comparison, the rivaling Cleveland Clinic — the region's largest health system — had a challenging first half of the year. As Crain's recently reported, for the first six months of 2018, the Clinic had an operating margin of 1.7%, down from 4.5% for the like period last year. Although the Clinic's patient revenue was up in the second quarter of 2018 from 2017, expenses in virtually every category — including salaries, wages and benefits, supplies, pharmaceuticals and more — also grew, resulting in a significantly lower operating income.
As for UH, helping to drive its growth is a major agreement made last year with Medical Mutual of Ohio to include all UH facilities in Medical Mutual's SuperMed network. The move reversed a contractual decision made more than 20 years ago that excluded UH main campus and UH Bedford. Historically, Medical Mutual members who wanted to receive care on UH's main campus, which contains much of the system's specialty programs, would have to pay out-of-network costs.
That has helped drive volumes and improve the system's commercial payer mix, "and that's having some benefit certainly to our net revenues," Szubski said.
The healthy growth of these numbers come alongside news that both S&P Global and Moody's upgraded the health system's outlook from stable to positive.
"The industry is under some significant scrutiny by both rating agencies, so the overall industry has a stable to negative outlook," Szubski said. "So yes, I would have to say I was pleased that we were able to share with both agencies all the good work that's happening and it resulted in an outlook upgrade."
The S&P Global rating outlook upgrade reflects its view of UH's improving balance sheet, including leverage reduction and growth of unrestricted reserves, according to the filing. Moody's upgrade reflects expected further cashflow growth in the next couple of years, "driven by investments in physicians and facilities, continued cost reductions, and synergies from prior acquisitions," according to the filing.
Szubski said UH continues to recruit key physicians to support the system's efforts to grow its reach through added access, "so our employed physician network continues to grow fairly significantly," he said.
Earlier in the year, there was some uncertainty around the financial impact of a storage tank failure. In March, an unexpected temperature fluctuation at UH's fertility clinic affected about 4,000 eggs and embryos, rendering them unviable. UH faces dozens of lawsuits as a result of the failure. In general, they're seeking compensatory and punitive damages. Despite the flurry of pending litigation, Szubski said the system hasn't seen an impact in volumes as a result of the storage tank failure. In fact, the volume of individuals seeking fertility services is up year over year.
At this point, he said, the system has accounted for its deductible and has the financial impact of that failure behind it.
"So we've recorded all of that and that's behind us, and that's reflected in the June financial statements," Szubski said. "So now, to the extent we will have any direct responsibility in any costs that will be associated with the event, we've got that behind us and now our insurance or our reinsurers will pay for anything beyond the deductible."
UH's strong financial performance and overall growth puts it on a path to be able to reinvest in its employees and services.
"I'd like to think that every additional dollar that's generated from our performance goes right back into the organization," Szubski said. "And that allows us to enhance our capital spending, invest in our employees consistently, which we have done, consistently providing a performance increase, a wage increase, and continue to grow the organization. So you know, we continue to add FTEs, add positions within our organization, and continue to be a high-growth organization."
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