Kaiser’s Net Income Continues to Soar On Investment Gains

August 13, 2019

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Source: Modern Healthcare

Not-for-profit Kaiser Permanente’s net income jumped 214% in the second quarter of 2019 year-over-year, hitting $2 billion in the quarter that ended June 30, and continuing what has so far been a strong year for the Oakland, Calif.-based health system.

Kaiser’s 10% profit margin in the quarter was generated by strong equity returns and an accounting change that since Jan. 1 has boosted the health system’s net income.

While Kaiser is benefiting from gains in key indices like the Dow Jones Industrial Average and the S&P 500, which have soared so far this summer, Tom Meier, the health system’s senior vice president and corporate treasurer, said the health system is also vulnerable to downturns.

“Our performance was extremely strong, but I also want to remind you it’s extremely volatile,” he said. “We were in a pretty strong position a year ago as you may recall and then we had the worst December in ’18 since 1930 that wiped out most of our gain.”

He’s not kidding. Kaiser posted a $1.2 billion investment loss in 2018—a nearly $5 billion swing from its 2017 gain. The loss towered over that of other not-for-profit health systems last year.

Kaiser, which includes Kaiser Foundation Health Plan and Kaiser Foundation Hospitals, is also performing well on the operating front. The system managed to pull in $1.1 billion in operating income on $21.4 billion in revenue, a 5.2% margin, in the first quarter of 2019. That’s compared with just $345 million in operating income on $19.6 billion in revenue in the first quarter of 2018, a 1.8% margin.

Kaiser’s expenses grew 5.5% in the second quarter year-over-year, but at a slower clip than revenue, which grew 9.3% during that time. Kaiser attributed the higher revenue to membership growth and accounting estimates that added more than $600 million from lower Affordable Care Act risk-adjustment accruals in the second quarter of 2019.

Membership in Kaiser’s health plans totaled 12.3 million as of June 30, compared with 12.2 million in the prior-year period. Kaiser tends to perform better financially in the first half of a typical year compared with the second half, Meier said. That’s because most members renew or join on Jan. 1, when rates are set. Since rates don’t change over the course of the year, revenue tends to stay flat even as expenses rise, he said.

“First and second quarters are going to be stronger than the third and fourth quarters,” Meier said.

Kaiser spent $710 million on capital projects in the second quarter, compared with $735 million in the prior-year period. The health system said it opened new medical offices in Virginia, Washington and California during the quarter, bringing its total number of offices to 701, along with 39 hospitals. More than 80 medical offices in the design or construction phases are set to open in the next three years.

Kaiser’s second-quarter results build on what has already been a stellar year for the health system. It drew a record $3 billion in net income in the first quarter, a 127% jump from the prior-year period.

That’s due in large part to an accounting provision that as of Jan. 1 requires that changes in estimated fair value of equity securities be reported in non-operating income. The change funneled an additional more than $230 million into Kaiser’s net income category in the second quarter, and almost $900 million in the first quarter, Meier said.


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