Net income dropped 56% at Southfield, Mich.-based Beaumont Health to $142.1 million in 2018, partially due to investment losses of $64 million, a cardiology federal fraud settlement payment of $72 million and a 5.5% increase in expenses, according to Beaumont's 2018 audited financial report.
But business operations as illustrated by net patient revenue continued to climb for the eight-hospital system, rising 6.2% to $4.43 billion in 2018 from $4.17 billion the previous year. In 2017, net patient revenue grew only 1.5%.
"The volumes were higher than we originally anticipated (in 2018), and we were pleased," said John Kerndl, Beaumont's CFO and executive vice president.
As a result, operating income rose 3.4% to $174.4 million for a 3.9% margin in 2018 from $168.6 million and a 4% margin in 2017. Total revenue increased 5% to $4.66 billion last year from $4.44 billion in 2017.
"We had a successful year with strong (patient) volumes given the (market) we operate in," Kerndl said. "We made some pretty substantial investments in people and operations and at the same time ended up ultimately finishing ahead of plan."
However, because expenses rose 5.5%, higher than 2.1% in 2017, and the stock market suffered a major downturn in December because of trade war talk with China, Beaumont's bottom line profit margin dropped to 3% in 2018, down from 7.2% the previous year.
Like most hospital systems, outpatient revenue is growing faster at Beaumont than inpatient revenue and now accounts for 48% of all net patient revenue, Kerndl said.
"We grew inpatient revenue 2% to 3% and outpatient four to five times that," said Kerndl. "This is a national trend. We are seeing the same movement. Our outpatient business is ready to grow."
Beaumont struck several deals in 2018 that executives believe will further increase outpatient revenue and also lower costs for patients and provide them added convenience. First, Beaumont in August formed a joint venture with Wellstreet Urgent Care LLC of Atlanta to build a network of 30 urgent care centers in Southeast Michigan over the next two years. Called Beaumont Urgent Care by Wellstreet LLC, Beaumont invested $2.5 million and owns 50% of the company.
Next, Beaumont announced a plan in September to develop at least two major outpatient centers in Lennox Township in Macomb County and another center not yet located yet in Wayne County with NexCore Group LLC of Denver. In April, Beaumont said it would build a third major outpatient and surgery center on its Royal Oak campus with an unspecified developer. The three facilities are expected to open in the next 12-18 months.
Beaumont also signed a deal in November with for-profit Universal Health Services of Pennsylvania to build a $45 million mental health hospital in Dearborn and expand behavioral health services in metro Detroit.
But Beaumont faced some headwinds as well. The not-for-profit system paid a hefty fine of $87 million to the U.S. Department of Justice to settle a federal whistleblower case for allegedly paying excessive compensation to eight cardiologists to increase patient referrals. The cardiologists were named in the settlement but none was individually charged. Most publicly claimed innocence or had no comment.
Kerndl, who declined to discuss the fraud case, said Beaumont took a $15 million expense in 2017 for the settlement and another $72 million charge in 2018. Also listed in the financial report was $1.4 million in "unrelated settlements" that Kerndl said were legal fees.
Another major expense included several medical malpractice cases Beaumont settled in 2018 that tripled the health system's professional liability and insurance costs to $64 million in 2018 from $22 million the year before. Kerndl, who also declined to discuss the claims, acknowledged there was "one large case that impacted" insurance costs, which were paid by the system's captive insurance company.
The Detroit Free Press reported last September that an Oakland County jury awarded a family more than $130 million in a medical malpractice lawsuit filed against Beaumont Hospital in Royal Oak after a two-month-old child in 2006 sustained severe brain damage, resulting in cerebral palsy. The jury verdict, which Beaumont said it would appeal, is believed to be one of the largest in Michigan history, said Brian McKeen, managing partner of McKeen & Associates, in a news release.
Beaumont also completed a number of business transactions and business unit sales that boosted profits. One included the sale of its home health and hospice business line to Alternate Solutions Health Network of Ohio that generated $140.2 million in revenue, according to the financial report.
In a joint venture with Alternate, Beaumont invested $9.6 million for a 10% ownership stake of Beaumont ASHN LLC. Alternate owns the remaining 90%.
Beaumont also acquired a 15% interest for $12.3 million in FMS Beaumont Health LLC, a joint venture with Bio-Medical Applications of Michigan Inc., a kidney dialysis company with an office in Plymouth and based in Waltham, Mass., that owns 85%. FMS operates renal dialysis programs in Berkley, Hazel Park, Rochester Hills and Sterling Heights.
While Kerndl declined to state a sale price or discuss the transactions, Beaumont's financial report showed $140.2 million total sales of business units that included proceeds of $125.9 million and membership interests of $21.9 million for a newly formed joint venture.
"There was a sale of the business units. We formed joint venture entities home health and dialysis. Beaumont retains ownership in the joint ventures," Kerndl said.
Beaumont also lowered its expenses when its total uncompensated care costs declined 15.8% to $214.2 million in 2018 from $254.6 million the previous year. Beaumont, which defines uncompensated care as including Medicare and Medicaid unpaid costs of care, uses the American Hospital Association's guidelines on community benefits to calculate uncompensated care.
But Beaumont's financial report also showed bad debt and charity care costs also declined 49% to $29.7 million in 2018 from $58.7 million the prior year. Beaumont changed its accounting practices last year that resulted in zero bad debt reported as a community benefit compared with $47.1 million in 2017.
"Bad debt expense for (2018) was not significant," according to Beaumont's financial report.
Stock market down to close 2018, but rebounding this year
Like many not-for-profit hospital systems in 2018, Beaumont suffered a massive decline in its investment portfolio as the stock market tanked in November and December. Beaumont lost $64.8 million on investments last year, compared with a $175 million gain in 2017.
Detroit-based Henry Ford Health System also had a rough fall when its investment portfolio took a massive hit last fall, losing $55.3 million on investment income. That caused a 41% drop in overall net income to $86.6 million in 2018 for the six-hospital integrated system.
Despite Beaumont dropping $64.8 million in the stock market last year, Kerndl said executives in the health system weren't upset.
"Oddly enough, for us, it is not a disappointment. We look at (the stock market) as long-term investments. If the market is up or down, as long as we are doing better on operations, we aren't disappointed," he said. "We rely on free cash flow for operations" and capital spending.
But during the first quarter of 2019, Kerndl said Beaumont has earned back all of its investment losses. "We have exceeded the drawdown of last year in this quarter," he said.
However, after subtracting federal fraud settlement of $74 million, the $64.8 million in investment losses and $28 million in pension costs from the business unit sales of $140 million, Beaumont ended up with a non-operating loss of $93.6 million in 2018, compared with a gain in 2017 of $156.9 million.
Investing in its workforce
Beaumont's total expenses rose 5.5% to $4.49 billion in 2018 from $4.27 billion.
Besides the legal settlements and investment losses, Beaumont in 2018 also increased salaries, wages and benefits to employees, just as it did in 2017. It increased spending on employees 4.8% to $2.64 billion in 2018 from $2.52 billion in 2017.
Kerndl said Beaumont has been creating a common pay scale for its employees and trying to match higher pay in the market. He said investments in the workforce could continue this year depending on market conditions.
"Our expenses grew because we did a market adjustment for employees and budgeted an increase across the enterprise," Kerndl said. "It was the second year of increased compensation and done by design."
From 2014 to 2016, Beaumont's operating margins rose steadily from 3.1% in 2014, 3.4% in 2015 and 4.6% in 2016. But because of rising expenses and other costs, Beaumont's operating margins dropped to 4% in 2017 and 3.9% in 2018. Kerndl said the decline in operating margins the past two years was expected.
Looking ahead for 2019, Kerndl said he projects low single-digit improvements in operating results. "We are anticipating an improvement. It is trending in that direction. We have a strategy we are executing this year," he said.
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