GRAND RAPIDS — Strong earnings for Priority Health — combined with millions of dollars in state and federal aid — enabled Spectrum Health to remain in the black for the first half of 2020 despite operating losses at its hospitals.
Spectrum Health West Michigan, which includes the health system’s hospitals in the region, recorded a $65.0 million operating loss through the first six months of the year, according to a quarterly financial report Spectrum posted online. Spectrum Health Lakeland in St. Joseph, which operates as a subsidiary of the health system, had a $20.6 million operating loss for the first half.
The operating losses stem from a period this past spring when hospitals for several weeks were unable to perform nonessential procedures and surgeries because of state restrictions in response to the COVID-19 pandemic outbreak.
The losses were more than offset by the $179.3 million in net income that Priority Health — Spectrum’s health plan — earned in the first half of the year, plus $1.3 million in earnings at corporate subsidiaries. The revenue led to $95.0 million in net income for Spectrum Health through the first six months of 2020 on total revenue of $3.84 billion.
The bottom line would have fared worse without the $124.2 million in revenue Spectrum Health recorded in the first half from pandemic relief. Spectrum Health West Michigan received $97.3 million in relief payments in the first half and Lakeland Health got $26.8 million, according to the quarterly financial report.
The relief funds were intended to ease the pandemic’s financial hit to hospitals, which not only lost revenue from the inability to perform nonessential procedures and surgeries but from patients deferring care. Hospitals as well had to spend heavily to procure personal safety equipment for staff and medical equipment such as ventilators to treat COVID patients.
The state and federal assistance “all contributed to our industry as a whole being able to navigate this pandemic, I think, pretty successfully,” said Spectrum Chief Financial Officer Matt Cox.
“When you look at our volumes, certainly when you look at March and April, you can see a big drop in volume for scheduled services and we had pretty big losses of revenue as a result,” Cox said. “Having that avenue available to us has been truly fantastic. It’s helped us as an organization navigate this in such a way that we’ll come out the other side still as a great asset for the communities we serve.”
The money came from the federal CARES Act and upfront Medicare payments, plus state relief.
Spectrum Health has received additional relief in the third quarter. Through Aug. 20, the health system received $225 million in Medicare advance payments, $174 million from the CARES Act, and $15 million from Federal Emergency Management Agency to cover part of the costs to buy PPE, according to Spectrum Health’s quarterly financial report.
The report indicates that hospital admissions declined nearly 9 percent in the first half at Spectrum Health West Michigan compared to the same period in 2019. Admissions at Lakeland Health declined nearly 13 percent.
Just as care deferrals hurt the finances of the hospitals, they contributed to strong earnings at Priority Health, Cox said.
As care providers postponed non-urgent care and patient visits to hospitals and physicians, Priority Health experienced reduced medical claims, resulting in midyear earnings that more than doubled from the same period in 2019 and led to premium credits this summer for employers.
The earnings from Priority Health provided the broader health system a hedge from the financial effects of the pandemic on its hospital operations, Cox said. Spectrum Health has fared comparatively better than health systems that don’t own a health plan, he said.
“Spectrum Health, by having both that care and coverage, we have that natural hedge for situations like this where if the delivery system isn’t doing well because of the loss in volume, then the health plan does a little bit better because of the loss in volume,” Cox said. “I think the takeaway is that we have the right model to get through some of the challenges that are thrown at us in this industry.”
The health plan, with nearly 1 million members statewide, typically performs better financially in the first half of a year than the second half anyway, Cox said. As hospitals now catch up on delayed medical procedures, “We do expect in the second half of the year Priority Health’s fortunes to change a little bit” as medical clams rise, Cox said.
“We’re certainly targeting a lower operating margin (for Priority Health) for the year than we experienced for the first six months,” he said. “Priority Health will actually have losses between now and the end of the year because they’ll be paying for all of those additional, backlogged cases.”
Working through those same backlog of cases through the second half also should trim operating losses at the hospitals, Cox said.
The pandemic has caused financial strain across the health care industry. Many hospitals and health systems, Spectrum included, have furloughed staff and sought to cut costs to maintain financial health.
The Michigan Health & Hospital Association in late July estimated that hospitals in the state took a $1.1 billion financial hit this spring from the COVID-19 pandemic.
The net financial effect on Michigan hospitals resulted from the $3.2 billion in revenue lost when hospitals were unable to perform nonessential procedures and surgeries, plus $440 million in emergency expenses, according to an MHA report. The emergency expenses include $93 million on personal protection equipment at an “exponentially higher rate” for staff.
The lost revenue and PPE cost was partially offset by $2.1 billion Michigan hospitals collectively received in federal aid through the CARES Act. The $1.1 billion net financial loss was “growing as hospitals continue to respond to the COVID-19 pandemic,” the association said.
The MHA said at the time that hospitals as well were “treating an increasing population of unemployed patients who have lost private insurance coverage” during the pandemic.