UH reports $104.5 million 2021 operating income

University Hospitals continued its trend of revenue growth last year and nearly doubled its operating income from the year prior.

UH ended 2021 with a net operating income of $104.5 million, compared with $54.7 million in 2020, on about $5.3 billion in revenue, which is up from $4.5 billion the year before.

"Our operating performance in 2021 was really strong," said Mike Szubski, UH chief financial officer, "and that made for, really, a pretty good year."

Part of the revenue growth can be attributed to the addition of Lake Health, a $389 million annual revenue acute care hospital system that formally became part of the UH system in April 2021. In the remaining nine months of the year, the operations of the Lake County provider accounted for $361 million of the system's revenue total and about $3.1 million in operating income.

"In 2021 what we saw was very strong volume recovery, post the Delta variant" of COVID-19, Szubski said. "Through April, May, through the beginning of December, we really recovered very well."

This was made possible by revenue oversight, expense management and, to some extent, federal funds for costs related to the COVID-19 pandemic.

"Our costs far outweighed the amount of federal funds we received," Szubski said. "The federal funds probably covered 25% or so of the cost increases we saw in 2021."

In 2021, UH recognized $101 million of CARES Act funding in 2021, about half of which was for 2021 costs and half was related to 2020 costs. The system calculates its total pandemic-associated costs for 2021 at around $192 million, which includes direct COVID-related costs, increased labor costs to cover staffing shortages and unfavorable experience in the employee health plan.

Staffing shortages are an ongoing and pressing issue for health systems.

"I continue to be very positive that UH is going to move its way through these challenges and, you know, end up in a really good place," Szubski said. "We'll see how the world behaves here relative to staffing and these labor issues. But I'm very confident (and) feel that we're on the right path."

Lake Health added to UH multiple hospitals and ambulatory centers and 3,000 caregivers and 600 physicians into the Cleveland-based health system, according to figures in April 2021.

Lake Health joined UH through a member substitution model where UH gained control of the Lake County provider by entering an agreement with a series of commitments, which aren't made public but can include things like capital investments, workforce agreements, community benefit and more, Bond said.

The member substitution resulted in a non-operating income of $218 million for UH.

"We made ourselves a lot stronger and bigger, and that's reflected in that member substitution" figure, said Bradley Bond, vice president of treasury for UH.

The value of Lake Health joining UH isn't reflected in the nine months of revenue or operating income for 2021, or even in the $218 million in assets it added when it became part of the system, he said.

"It's the physicians and the market and the patients and all the things you don't see in a financial statement that they added value to us," Bond said.

The integration of Lake Health into UH is going "quite well," and it has been a great fit culturally, said Szubski, who's part of the team meeting routinely between Lake and UH leadership.

UH committed and spent $38 million in 2021 toward the Lake enterprise, focusing on things like IT infrastructure, Seidman Cancer services in Lake County and "some significant investment" in radiation oncology, he said.

"We're looking to Lake Health to be somewhat our eastern hub of our radiation oncology services," Szubski said. "We made a commitment for Rainbow pediatric services in Lake County."

The progress has been "fairly rapid" and "very positive," he said.

UH continues to face a number of financial and operational challenges ahead — pressures that not only other health systems, but many other industries, are grappling with as well

The staffing shortage is a significant issue for UH, which has thousands of open positions and is turning to the higher-cost workforce of third-party staffing agencies, Szubski said.

UH and others delayed some outpatient procedures earlier this year as COVID-19 cases rose, which tends to bring down revenue performance. And patient volumes overall — discharges, surgical and procedural volumes, emergency department visits — were down in the first quarter, he said.

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Add in the supply chain disruption and inflationary pressures that virtually everyone is dealing with and you've got "a little bit of a perfect storm going on right now," Szubski said.

Given these challenges, it's difficult to forecast the system's financial performance, but he said, "I suspect that 2022 is not going to come in as strong as 2021. I am willing to say that. And I think most of my colleagues around the country would say something very, very similar."

He expects UH's revenue to continue to grow year over year, but the expense growth likely will outpace it, putting pressure on the operating bottom line.

The financial picture is especially challenging without ongoing federal funding or support to recognize the burden, particularly for health systems, Szubski said, "but I know we're not alone."

Many employers and industries are suffering under these challenges and wondering how much longer inflation, staffing shortages, supply chain strains and other pressures will continue. UH is building action plans around expected opportunities to help meet these financial challenges, Szubski said.

"But I think my personal opinion is that the challenges are going to continue for at least some extended period of time, I would say definitely into 2023," he said. "And, you know, we've just got to keep doing our best just to try to stay ahead of it as best we can."

This story first appeared in our sister publication, Crain's Cleveland Business.