Kaiser Permanente's non-operating income dropped 71% in 2018

Kaiser Permanente saw a modest uptick in operating income in 2018, but a 71% drop in non-operating income, as the integrated health system weathers volatile investment markets.

The Oakland, Calif.-based system reported $1.9 billion in operating income last year, or 2.4% of operating revenue, compared with $1.7 billion in 2017, or 2.4% of operating revenue that year. Meanwhile, its net non-operating income fell 71% to $617 million, compared with $2.1 billion in 2017.

Even so, Kaiser Senior Vice President and Corporate Treasurer Tom Meier said the health system is a long-term investor and doesn't react to market volatility from one year to the next.

"In 2017, it was almost impossible not to earn a return," he said. "The broad market was up over 20%. And just about every one of the indices in 2017 was positive, where in 2018, it was almost a record year for the number of indices that were negative."

And given its massive size, a down market is going to have an even bigger impact on Kaiser's bottom line, Meier said.

Not-for-profit Kaiser, which consists of Kaiser Foundation Health Plan and Kaiser Foundation Hospitals, drew total operating revenue of $79.7 billion in 2018, up 9.6% from the prior year, when it drew $72.7 billion.

Kaiser's net income dropped 34% year-over-year, from $3.8 billion in 2017 to $2.5 billion in 2018. Meier said the system's operating margin held steady at 2.4% year-over-year.

Membership in Kaiser's health plan was 12.2 million as of Dec. 31, 2018, up more than 400,000 members year-over-year, or 3.5%.

"Our membership growth was solid and our financial performance was consistent with our plan," Meier said.

Kaiser spent $3.4 billion on capital projects last year, compared with $3.3 billion in 2017. The system opened 12 new medical office buildings nationwide last year, including offices in Sacramento and San Jose. More than 50 additional medical office buildings are scheduled to open in the next three years. As of Dec. 31, 2018, Kaiser had 694 medical office buildings systemwide, in addition to its 39 hospitals.

Kaiser also added eight new retail clinics in Target stores across Southern California and plans to open nine more this year. The primary-care clinics are a pilot program right now, but depending on their success, might be expanded in all of Kaiser's markets, Meier said.

The system's capital spending also included technology to allow for secure messaging, telehealth, retail and employer-based clinics, and mobile health vehicles. Its website and mobile applications allow patients to communicate with providers and view their medical records. More than 30 million prescriptions were filled through digital channels in 2018—up from 25.5 million in 2017—and more than 50 million lab results were viewed online.

Kaiser dedicated $2.8 billion to community programs last year, about 3.5% of operating revenue, down from 3.9% of operating revenue in 2017. Kaiser said it supports a range of health activities, partnerships and investments that provide care to low-income individuals, address housing instability, train health professionals and support medical research.

"While the healthcare industry experienced considerable changes in 2018, we continued making great progress on delivering high-quality, affordable and accessible care and coverage to more people," CEO Bernard Tyson said in a statement. "Our solid membership growth and financial performance were consistent with our plan."

Kaiser said this week it will lay off another roughly 200 employees in Colorado, just three months after the organization said it would lay off 200 employees. Like any business, Meier said Kaiser regularly evaluates its operations in an increasingly challenging market. This decision is aimed at getting the right people in the right jobs and creating more efficiency, he said.

Last fall, the president of Kaiser's Colorado operations told the Denver Post that skyrocketing hospital prices were to blame for its $65 million in losses over three years. Meier said he was not familiar with that situation.