Independence Health addresses losses from 1st year as merged health care system

Independence Health System continued to lose money as it passed its one-year mark at the end of December 2023, though annual losses have shrunk by almost $9 million, according to recently released financial reports.

Reports indicate the health system formed by the merger of Excela and Butler health systems has seen $74.1 million of operational losses over the period between Jan. 1 and Dec. 31, 2023. However, for the same period in 2022 prior to the merger, the systems saw $82.9 million in combined losses.

Independence was officially formed in January 2023. Though the two sides are merged, they still file financial reports separately.

The system saw the financial headwinds coming, and is looking forward to results that arise from ongoing cost reduction efforts, according to Chief Financial Officer Tom Albanesi.

“We anticipated operating losses — unfortunately, the whole industry right now is experiencing operating losses, including some of the much bigger health systems that are out there,” he said. “We knew what we were getting into, and we are working on the financial improvement plan, and we are seeing results from it. We still have got a long way to go, but we are encouraged by what we see so far.”

For the last three months of 2023, Excela saw nearly $5.4 million in losses, while Butler lost just under $4 million. For those same three months at the end of 2022, Excela had $13.3 million in losses, and Butler lost $21 million.

Getting on track

Independence has pointed to pandemic aftershocks, inflation, low reimbursements from Medicaid and Medicare, and an aging regional population as some of its challenges while it loses cash.

In a bondholder meeting in early November, Independence leadership detailed a recovery plan the system put together with FTI Consulting. According to the plan, the system expects to stanch some of its financial bleeding in fiscal year 2024.

Upcoming next steps in that plan include ongoing negotiations with insurance companies to get better rates for the system, Albanesi said, which he expects will show results in the financial reports for next quarter.

“We have contracts with, for instance, Aetna, Highmark, and UPMC Health Plan — those are the three big (companies) in western Pennsylvania — and we are in the process of renegotiating those contracts. We need to get rates that better reflect the inflationary environment we have been experiencing since covid-19,” he said. “We’ve had some successes since Dec. 31 that will be reflected in future quarters’ numbers, but that is the biggest item in the financial improvement plan that you haven’t see any progress on.”

So far, the $32.1 million operating losses for Independence for the six months ending Dec. 31, 2023 are slightly worse than budgeted, Albanesi said.

Volumes, or people coming into the system, and revenues are exceeding budget, he noted, but expenses are outpacing them because of inflation on labor, medical supplies and medications.

The Excela side of the system saw 5,493 patient admissions in 2023, as compared to 4,960 in 2022. Patient days and outpatient and inpatient operating room procedures also were up. Emergency room visits were down slightly, with 21,367 in 2023 and 21,528 in 2022.

Inpatient surgical procedures were up at Butler Memorial Hospital, but slightly down for outpatient surgeries and emergency room visits.

“We’re pleased with where volumes are. One of the challenges every hospital in western Pennsylvania has is we all have about 70% of our payer mix as governmental patients — either Medicare or Medicaid,” Albanesi said, noting that Medicare and Medicaid do not reimburse health systems as much as commercial insurance.

“You basically don’t have a prayer of making money on that 70%, so you have to make money on the other 30%, and it’s getting harder and harder to (do) that.”

Strategies ahead

The health care world is still catching up from the impacts of covid, Albanesi said.

“We had a lot of the workforce, particularly nurses, leave health care or leave working for hospitals and we’re still catching up from where we were then,” he said. “The big challenge that we have is that demand is really strong — we don’t lack for demand right now, (but) we still have a lack of clinicians, primarily nurses, to help treat all the patients that are seeking treatment these days.”

The Butler Health System side has been successful in minimizing the use of agency nurses, a goal that Excela is still working toward, Albanesi said.

Independence cut 226 positions in 2023. Albanesi noted that at this time, no further position eliminations are planned.

The system’s two hospital presidents, Brian Fritz and Karen Allen, confirmed in August that all five of the system’s hospitals — Westmoreland, Frick, Latrobe, Butler Memorial and Clarion — would be part of its future despite the ongoing financial challenges. CEO Ken DeFurio said similarly in June 2023, and system spokesperson Tom Chakurda confirmed that this is still the case on Wednesday.

The health system has more than 1,000 physicians and advanced practice providers and employs 7,300 people.

“While there is much work yet to be done, we are pleased with the trajectory of our progress and confident we are (on) track to achieve the goals we set out to obtain with the formation of Independence Health System,” Albanesi said.