Sicker and more expensive Medicaid enrollees who joined the program under Ohio’s Medicaid expansion contributed to ProMedica’s wider operating loss in the first quarter of 2019, the health system said Thursday.
Toledo, Ohio-based ProMedica’s operating loss more than tripled during the quarter to $9.8 million, compared with $2.7 million in the first quarter of 2018. The 80,000 members who joined ProMedica’s Paramount Health Care under Medicaid expansion are markedly more expensive to cover than the rest, Paramount president Lori Johnston said in an emailed statement.
“In 2018, all participating insurers started seeing a sizable increase in the acuity, and therefore, the cost, in the Medicaid expansion population,” she said. “That statewide issue has presented challenges for all five plans.”
Overall medical costs for the plan’s 334,000 members grew 19% year-over-year, the system reported in its first quarter results, contributing to its $28 million operating loss in the first quarter of 2019, a 6.3% negative margin.
“That has caused serious financial issues for us,” Steve Cavanaugh, the not-for-profit health system’s new chief financial officer, said on an investor call Thursday.
The problem is not isolated to Paramount. Five health insurers in Ohio provide Medicaid plans, and some are in talks with state officials about their reimbursement levels, he said. If Paramount continues to lose money, ProMedica would exit the Medicaid business, Cavanaugh said.
Overall, ProMedica drew nearly $1.7 billion in revenue in the first quarter of 2019, up 95% from $852 million in the first quarter of 2018. Most of that was driven by the acquisition of post-acute provider HCR ManorCare, which closed last July. ProMedica’s post-acute division comprised 47% of its total revenue during the first quarter, compared with 2.7% in the prior-year period.
Expenses jumped 99% year-over-year to $1.6 billion in the first quarter of 2019, compared with about $820 million in the prior-year period. Some of the increase was from severance paid to employees that were laid off in April.
ProMedica generated $30.8 million in revenue over expenses after acquisition and restructuring costs in the first quarter of 2019, compared with nearly $8 million in the prior-year period. Cash flow from operations was flat year-over-year at $32 million.
Cavanaugh was president of HCR ManorCare before taking over as ProMedica’s CFO. He replaces Mike Browning, who recently left ProMedica to become the CFO of OhioHealth.
ProMedica hired the consulting firm McKinsey & Company to help it identify post-acquisition synergies between the health system and HCR, Cavanaugh said. ProMedica expects to draw synergies from leveraging a shared campus, HCR operating ProMedica’s legacy post-acute operations, combined benefit programs, standardized payment terms of cost reduction opportunities with vendors and integrated human resources, finance and payroll functions.
ProMedica received Internal Revenue Service approval to convert HCR into a not-for-profit entity in March and plans to roll the company into its ProMedica Obligated Group for bondholders near the end of June, Cavanaugh said.
ProMedica will spend $70 million on capital improvements to HCR’s facilities this year. Cavanaugh said the system is more than capable of covering those costs with significant cash left over.
ProMedica’s post-acute division performed much better than its other sectors in the first quarter, generating $18 million in operating income, and $782 million in revenue. That’s compared with $1.8 million in operating income and $507 million in revenue across its provider segment.
ProMedica’s volumes were mostly down in the first quarter year-over-year. Acute discharges dropped 9% in that time, while emergency room visits dropped 6.6%. Outpatient surgeries fell about 1%. Long-term care patient days declined about 3% year-over-year, and inpatient hospice days dropped 4%.
ProMedica now plans to contract out its post-acute expertise to other health systems. Cavanaugh said the health system is in active conversation with more than 10 not-for-profit health systems across the country that are struggling in that part of their business and looking for a partner. It’s not yet clear what form the partnerships would take; possibly management contracts or joint ventures, he said.
“In fact, our COO is out today on a pitch for this with the CEO of another health system,” Cavanaugh said. “We think this is a real opportunity, ultimately, for growth.”