UPMC's operating margin has gotten progressively slimmer in recent years, even slipping into negative territory as the large integrated health system juggles volume and expense pressures in a competitive Pennsylvania market.
UPMC's operating margin was essentially flat in the third quarter of 2019, which ended Sept. 30. That's because the Pittsburgh-based academic medical center's operating income dropped to a mere $76,000 on $5.1 billion in revenue in the recently ended quarter, compared with $14.4 million on $4.7 billion in revenue in the third quarter of 2018.
"This happens to be one area where UPMC stands out as weaker than its peer group," said Ken Gacka, senior director and analytical manager for S&P Global Ratings.
Viewed across the nine months ended Sept. 30, UPMC's operating margin climbs to 0.6%. That's compared with 1.4% in the prior-year period. Factoring in income tax and interest expense, however, the margin slips to -0.2% in the nine months ended Sept. 30, compared with 0.4% in the prior-year period.
UPMC's third-quarter results also took a noteworthy hit from its statewide Medicaid managed-care contract for Community Health Choices to the tune of $25 million, the health system's chief financial officer, Rob DeMichiei, said in a statement. That came in the form of startup losses related to CHC's contract with Pennsylvania to provide long-term services and supports. UPMC is one of only three insurers awarded statewide contracts through that program, he said.
Higher pension expenses and increased physician investments related to UPMC's expansion in central Pennsylvania also weighed on UPMC's margin in the third quarter, DeMichiei said.
Gacka noted that CHC was also financially dilutive to UPMC in fiscal 2018 due to startup costs.
"We're seeing that play into 2019 as expected," Gacka said.
UPMC is also still digesting its 2017 acquisition of Pinnacle Health System, a provider that had just acquired four former Community Health Systems hospitals.
While low, Gacka said UPMC's margin is still in the range of where S&P expected it to be: slightly negative through 2019.
UPMC isn't the only major health system that's getting by on a razor-thin operating margin. St. Louis-based Ascension's operating margin was -0.36% in the quarter ended Sept. 30, the first quarter of its fiscal 2020. That was up just 0.09 percentage points year-over-year. Ascension reported a $23.1 million operating loss in the recently ended quarter on $6.5 billion in revenue, compared with a nearly $28 million loss on $6.2 billion in revenue in the prior-year period.
CommonSpirit Health reported a significant $227 million operating loss in the quarter ended Sept. 30 on $7.2 billion in revenue, creating a -3.2% operating margin. CommonSpirit blamed the loss on not having recognized any California provider fee revenue during the quarter.
Compare that to Rochester, Minn.-based Mayo Clinic, which posted a 7.9% operating margin in the recently ended quarter. Mayo reported positive revenue growth across its campuses in Minnesota, Florida and Arizona.