Kaiser's net income drops 32% in third quarter

Kaiser Permanente's income took a hit in the third quarter as the massive hospital system and health plan shoulders rising medical expenses from new members and a volatile equities market.

The Oakland, Calif.-based not-for-profit health system's net income shrunk 32% year-over-year during the third quarter, which ended Sept. 30, falling to $884 million.

At the same time, Kaiser's operating revenue grew to nearly $20 billion during the quarter, up nearly 9% from the same period in 2017, in which it was $18.3 billion. During the same period, expenses rose 9.7%.

Tom Meier, Kaiser's senior vice president and corporate treasurer, explained that as membership in Kaiser's health plan goes up, so does the corresponding costs of paying for their care.

Membership in Kaiser's health plan remained stable during the quarter. The plan had 12.2 million members as of Sept. 30, the same number Kaiser reported in its second-quarter 2018 report in August, but up from the 11.7 million the health system reported in the third quarter of 2017.

"Clearly taking care of 12.2 million members costs more than taking care of 11.7 million," he said.

Kaiser's operating income was $636 million during the third quarter of 2018, down 14% year-over-year compared with $740 million during the same period in 2017. Characterizing the year-over-year change as "flat," Meier said, "$636 (million) is sufficient to support our growth and our capital plans and we're comfortable and this in line with our expectations."

Meanwhile, net non-operating income fell even further, to $248 million during the third quarter of 2018, down 52% from $518 million during the third quarter of 2017, in which non-operating income had already seen a nearly 11% decline from the prior year.

It's been a volatile year for equity markets, and Meier said Kaiser doesn't perform better or worse than the rest of the market.

In any case, Kaiser doesn't plan to change its investment strategy in response to market uncertainty, Meier said, describing the system as "long-term investors." Kaiser is big enough to weather down cycles, rather than reacting on a quarter by quarter basis, he said. He noted that 60% of the recovery from the Great Recession in 2008 came within six months after the market bottomed out.

"If you start making adjustments to react to short-term incidences and so forth, you could potentially lose out on the recoveries," Meier said.

Kaiser also says it spent $760 million on capital projects during the third quarter to upgrade and open new facilities and bring on new technologies, $25 million more than it did during the second quarter of 2018. In particular, Kaiser opened a behavioral health clinic in Sacramento and a hearing center in San Rafael that replaces an older facility. The two new California facilities bring its total number of medical offices to 690. Kaiser also has 39 hospitals.

In parallel, Kaiser said it's undertaking extensive redesigns and remodels of many of its existing campuses to further improve member experience. Meier said the system plans to open about 50 medical offices currently in active design or construction within the next one to three years, using a combination of new and existing buildings.

Kaiser's capital spending also goes toward investments in telehealth, an area it's working to grow. Last year, 48 million Kaiser lab tests results were viewed online and 25 million Kaiser prescriptions were refilled online.

Kaiser also finalized an agreement during the third quarter for a major renewable energy purchase that will enable the country's largest integrated health system to achieve its goal of becoming carbon-neutral by 2020.