Increased spending on pharmaceuticals drove higher medical costs — and dampened profitability — for HealthPartners' health insurance business last year.

And while U.S. health systems last year saw some easing of the problems that have vexed the industry, including labor costs and delayed patient discharges, these challenges remained for many including HealthPartners' hospitals and clinics.

The end result was another year when operating profit fell short of the 2% to 3% margin that executives say the Bloomington-based nonprofit group needs for long-term growth and to invest in improvements.

"Our [operating] expenses pretty much matched what our revenues were, so that we were really just very close to break-even for the year," said Andrea Walsh, HealthPartners chief executive, in an interview.

The performance means the health system must be more reliant on bond debt financing for major capital projects, including a replacement hospital and health care campus in Stillwater, a specialty center in Woodbury and a new facility for its founding Como Clinic in St. Paul.

HealthPartners is the second largest nonprofit group in Minnesota behind Rochester-based Mayo Clinic.

Its revenue is split roughly in half between a large health insurance business and its division for delivering care, which includes Regions Hospital in St. Paul and Methodist Hospital in St. Louis Park.

For 2023, HealthPartners saw revenue of nearly $8.82 billion and paid a little more than $8.8 billion in expenses, leaving a $15.4 million profit from its combined health insurance and health system operations.

The financial performance was worse than the previous year when HealthPartners netted $87.7 million in profit from health care operations.

Investment returns, however, were much stronger in 2023, accounting for the vast majority of HealthPartners' non-operating profit of $278.8 million.

The Star Tribune uses the word "profit" to describe earnings/income at the state's largest nonprofit groups to reflect the significant money-making capacity of these organizations. These funds, however, are re-invested in nonprofit operations, whereas for-profit companies to varying degrees make earnings available to outside investors.

HealthPartners is one of four large nonprofit groups in Minnesota that sells health insurance. These insurers reported three consecutive years of profits from 2020 through 2022. In general, insurers made money during the early years of COVID-19 as the pandemic kept people from seeking some health care services.

Insurers now say demand is coming back and medical costs are on the rise — factors that explain why Minneapolis-based UCare lost money on operations during 2023.

"We are definitely seeing an increased demand for service and care, with patients and members seeking care for more significant illness — with chronic illness and disease that progressed in what feels like an accelerated pattern post pandemic," Walsh said in a statement. "It's likely a combination of some deferral of care and also new health care needs with an aging population."

HealthPartners doesn't separately report results from its health insurance and health system businesses, but Penny Cermak, the chief financial officer, said in an interview that financial performance last year deteriorated across the whole organization.

The company has more than 26,000 employees, runs more than 90 clinics and hospitals and sells health insurance across six states. Just over 1 million people at the end of last year were enrolled in health plans that HealthPartners either insured or administered.