Financial vital signs looking up at Northwestern

Northwestern Medicine is recovering nicely from its bout with COVID-19.

Patient activity has nearly returned to pre-pandemic levels, and coffers are brimming at the 10-hospital network, according to an investor presentation obtained by Crain's. And the system's latest quarterly financial statement shows that Northwestern posted a profit during the nine months ended May 31, despite Illinois' stay-at-home order and a mandate to postpone nonemergency procedures earlier this year.

"Every month we're getting closer and closer back to our high-water mark," Chief Financial Officer John Orsini said July 27 on a conference call with bond investors.

The numbers confirm that one of the area's largest and richest hospital groups is emerging from the first wave of the crisis largely unscathed. Northwestern's upbeat financial outlook underscores how the pandemic further shifts the balance of power in local health care toward deep-pocketed chains with the wherewithal to keep expanding while others struggle to survive COVID-19. The outbreak also will likely boost Northwestern's acquisition-driven growth strategy, as weakened hospitals and physicians groups become more amenable to merger offers.

Some hospitals—particularly those lacking robust virtual care capabilities and large numbers of commercially insured patients—may never fully recover from the financial impact of COVID-19.

Half of all hospitals could lose money in the second half of 2020 without additional government support, according to a new Kaufman Hall analysis. "It's safe to say (Northwestern is) an outlier, especially compared to other hospitals located in large urban settings," says Thomas D'Aunno, director of the health policy and management program at New York University's Wagner Graduate School of Public Service.

Northwestern did take a financial hit during the peak months of COVID-19, posting an operating loss of $63 million in the three months ended May 31, compared with a gain of $51 million in the same period a year earlier. But revenue fell by a relatively modest 10 percent to $1.4 billion in the quarter. And for the latest nine-month period, Northwestern reported an operating gain of nearly $160 million—down 37 percent from 2019.

Slashing compensation for senior management by up to 20 percent, and proportionately reducing pay and benefits for staff, helped Northwestern improve liquidity during the crisis. So did nearly $300 million in federal stimulus payments. On May 31, Northwestern had 419 days of cash on hand, just one day less than it had on Jan. 1.

Observers have been critical of how the Trump administration doled out federal relief to hospitals. Some of the hospitals hit hardest during the pandemic were left out of certain rounds, such as one that provided "high-impact" payments to facilities that admitted at least 100 COVID patients by April 10—an arbitrary threshold and deadline that many safety-net and rural hospitals did not meet.

"There are concerns about equity," D'Aunno says.

Northwestern declined an interview request, but Orsini told investors that, "through February, before the pandemic started, we were having a very favorable year to budget. In our long-range financial plan we had posted results of a 6.8 percent operating margin and a generated cash flow of 13.4 percent."

The time it takes hospitals to recover from COVID-19 will depend on a number of factors, including their financial condition before the pandemic hit. Where a facility is located, as well as the overall health of its patients and their access to well-paying insurance, also affects its financial prognosis. Most patients at Northwestern Memorial Hospital in Chicago's Streeterville neighborhood, for example, have private insurance, according to the latest available state data.

"The payer mix at Northwestern, for the most part, is more attractive than almost any other location in the city," says Tim Classen, an associate professor of economics at Loyola University Chicago's Quinlan School of Business.

Orsini said the system's payer mix and service mix haven't changed much amid COVID-19 and that, "overall, I would not say there's any real area of concern."

Northwestern's hospitals have treated more than 6,700 COVID-19 patients—that's about 4 percent of the state's confirmed cases as of July 21. Its busiest day for COVID-19 was April 21, with 422 coronavirus patients admitted across all its hospitals, which have more than 2,000 beds total.

Despite widespread fear of infection, the hospital chain has managed to bring patients back for elective procedures faster than some rivals. Orsini said overall patient activity had returned to at least 95 percent of pre-pandemic levels by July 21.

The hospital network did 38,357 outpatient surgeries between Sept. 1 and May 31, down nearly 13 percent from the same period a year earlier. Meanwhile, inpatient surgeries were down 16 percent to 16,388.

The type of complex—and expensive—care Northwestern provides also bolsters its finances. Northwestern Memorial Hospital is believed to be the first U.S. facility to perform a lifesaving double-lung transplant on a former COVID-19 patient, and Orsini said there's a "growing list of patients who will be receiving those."

Even as Northwestern refines COVID-era innovations—from telehealth to remote ventilators and double-lung transplants—"we're not stopping our growth agenda," Orsini said, noting that the chain plans to build outpatient sites on land it has purchased throughout the Chicago area and continue "ongoing merger and acquisition discussions."

COVID-19 could make it easier for a strong player like Northwestern to execute a deal, as financially struggling providers look for support from institutions with deeper pockets.

"In this environment there are entities who may not have wanted to align in the past, who may want to align with people in Chicago—whether it be us or others," Orsini said. "We're not going to sit back on our heels, but we're going to continue to look to execute our strategy in the marketplace."

"Financial vital signs looking up at Northwestern" originally appeared in Crain's Chicago Business.