Fairview's operating loss grew to $163.6 million in first half; Allina also posts a loss

Operating losses at Fairview Health Services grew worse through the first half of the year as the cost of labor rose and patients were hospitalized longer due to a shortage of space at transitional and long-term care facilities.

Inflation played a role, too, since operating costs are growing faster relative to reimbursement rates, according to executives at Minneapolis-based Fairview, one of the state's largest hospital operators.

A similar mix of financial factors drove an operating loss during the first six months of the year at Minneapolis-based Allina Health System, as well. Both health systems released second-quarter results last week.

The numbers show how the financial picture for large hospital operators remains uncertain even as health systems saw a significant revenue rebound in 2021 after a financial hit the previous year with the onset of COVID-19.

"In 2022 we experienced a similar COVID spike in the first quarter [as in 2021], but did not see the same second-quarter inpatient volume bounce that we saw in 2021," Joe Gaylord, interim chief financial officer at Fairview, said in a statement. "The lower volume combined with the longer length-of-stay and higher inflation, particularly in labor costs, drove the decline in financial performance."

Allina said in a statement that "health care is facing a substantial staffing shortage, especially on our front line where staff members are directly providing care. This impacts our capacity for patients ... [and] requires us to rely more heavily on cost-intensive temporary staffing models."

With about 31,700 employees, Fairview operates nine inpatient hospitals, including the University of Minnesota Medical Center in Minneapolis.

Through the first six months of the year, Fairview posted an operating loss of $163.6 million on revenue of $3.24 billion — worse than the $71.7 million loss recorded for the same period last year.

The 2022 operating loss was partially offset by $64.4 million in one-time revenue, including the sale of Fairview's ownership interest in Maple Grove Hospital.

Allina owns nine hospitals including Abbott Northwestern in Minneapolis and co-owns a 10th. The health system employs more than 28,000 people.

During the first half of 2022, Allina lost $74 million on $2.36 billion in revenue. That's worse than the year-ago period when the health system posted $85.4 million in earnings.

At Allina, the length of stay for hospital patients has also been a problem "partly due to not being able to move them to the appropriate level of care," the health system said in a statement.

Fairview announced last week that Chief Financial Officer Hayes Batson is stepping down at the end of August after more than three years in the job — a period when the health system posted annual operating losses of $96 million or more each year.

In a statement last week, Fairview chief executive James Hereford said that Batson "has decided to return to his entrepreneurial roots." Previously, the CFO co-founded a behavioral health software company and a consumer digital scheduling company among other leadership positions.

Joe Gaylord, the interim CFO, said Fairview struggled in the second quarter to find beds in other facilities to discharge patients who no longer needed to be in the hospital.

"So what they end up doing is, they stay in the hospital for many more days in a lot of cases — for which we don't get paid," Gaylord said in an interview. "And that crowds out other people."

On labor costs, he said Minnesota has one of the lowest unemployment rates in the country and, even with some recent moderation, has been paying very high rates for temporary nurses who travel from other regions.

"We continue to need to add traveling nurses to be able to staff our beds and our operating rooms and so forth," he said, "and that's very expensive."

Fairview became the largest hospital system in the Twin Cities in 2017 by merging with HealthEast, a system based in St. Paul with historically weak financial performance relative to its peers. On June 30, Fairview closed one of the old HealthEast facilities, St. Joseph's Hospital in St. Paul.

Fairview markets clinic and hospital services in conjunction with the University of Minnesota under the brand M Health Fairview. In 2018, the health system entered into a renewed affiliation agreement with the U that significantly increased financial support for the university and its physicians.

This year, Fairview is paying a minimum of $50 million in fixed academic support and at least $33.6 million to UMPhysicians, the practice plan for doctors at the U. The hospital system has paid $4.6 million already through the first half of 2022 in minimum variable support payments.

"The contract also includes the opportunity for additional variable support payments based on the financial performance of Fairview, which is not expected to be achieved in 2022," the health system said last week in a financial statement.

The losses during the first half of the year were even larger after factoring in investment returns — $304.9 million at Fairview and $285.3 million at Allina.