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Costs crush UPMC health system's quarterly profit

People walk near the main entrance to the UPMC East Hospital in Monroeville on Thursday, May 31, 2012. The health care giant's profit fell in its most recent quarter as the largest hospital operator in Western Pennsylvania grappled with lower payments from the government and insurers, a shrinking patient market and higher costs for physicians. File photo

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Thursday, Feb. 7, 2013, 12:01 a.m.

UPMC's profit fell in its most recent quarter as the largest hospital operator in Western Pennsylvania grappled with lower payments from the government and insurers, a shrinking patient market, and higher costs for physicians.

The health system is entering a “new normal” in which it will address lowering administrative costs and increasing efficiency to maintain profitability, said Robert DeMichiei, UPMC's chief financial officer.

“We have been focusing this fiscal year on administrative efficiencies,” DeMichiei said. “We have to manage our costs.”

UPMC employs more than 56,000 people — making it among the state's largest private employers — and in recent years added workers at a fast clip. But DeMichiei said UPMC may slow hiring in administrative positions and “be more selective” as it tries to hold down costs.

UPMC is not considering layoffs, spokeswoman Susan Manko said, but is evaluating staff functions and the role of technology in its operations.

Moody's Investors Service, a Wall Street bond-rating agency, last month said its outlook for nonprofit hospitals remains negative as the government cuts Medicare and Medicaid spending, and private insurers work to limit reimbursements.

“Our sector outlook has been negative since 2008, reflecting the lasting impact of the recession on patient volumes, significant challenges facing the industry resulting from changes in how hospitals are paid and heightened pressure from businesses and all levels of government to lower the cost of health care services,” analyst Daniel Steingart said in a Moody's statement.

In its last rating for UPMC in July, Moody's gave the health system an Aa3 rating, its second highest, with a positive outlook because of its scale and dominant market position.

DeMichiei said he expects further pressure on UPMC's finances because of the federal health care law. Moody's estimates that U.S. hospitals will absorb a $300 billion reduction in Medicare payments through 2019 under the Affordable Care Act.

Mark Pauly, professor of health care management in the Wharton School of Business at the University of Pennsylvania, agreed that the outlook for hospitals is “gloomy” as the government starts to “tighten the screws” on payments to reduce government spending.

Nonprofit UPMC, which owns 19 hospitals, reported financial results for the October-December quarter on Wednesday, the second in its fiscal year that will end June 30.

Income from operations was $12.5 million, down from $64.7 million in the same quarter of the previous year. Operating income dropped on higher expenses — primarily higher salaries and the cost of recruiting physicians — and lower net patient revenue, which was affected by lower reimbursements from insurance companies and Medicare and Medicaid, DeMichiei said.

UPMC employed 3,384 physicians as of Dec. 31, an increase of 144 doctors from the end of 2011.

Total revenue was $2.5 billion, up slightly from $2.4 billion in the same period of the year before. The rise was driven by the system's health insurance division, UPMC Health Plan; membership grew by 17.6 percent to 2 million members during 2012.

The gains included a 13 percent rise in commercial health insurance membership to nearly 446,000 members. UPMC Health Plan is the second-largest health insurer in Western Pennsylvania behind Highmark Inc.

Net income in the quarter was $66.4 million, down from $143.7 million the year before. Net income includes investment income and non-operating gains and can vary drastically from quarter to quarter, depending on stock market performance.

UPMC's investment portfolio, which does not fund operations, was valued at $3.9 billion at the end of 2012, up $200 million from June 30.

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or

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