Kaiser Permanente posted a meager operating margin for the third quarter as it weathered labor unrest and a surge of COVID-19 patients.
The Oakland, California-based integrated health system generated $38 million in operating income during the quarter ended Sept. 30 on $23.2 billion in revenue, the not-for-profit company disclosed on Friday. That amounts to a 0.2% margin and compares to a 2.1% margin in the prior-year period, when the company recorded $456 million in operating income on just under $22 billion in revenue.
The compressed margin was the consequence of higher expenses from COVID-19 patients, said Tom Meier, the health system’s corporate treasurer.
As an integrated system, Kaiser Permanente’s patients are also its health insurance policyholders.
“Literally all our facilities are staffed and so forth, and then to the extent there is utilization because members are coming in, we’ll incur costs to care for them,” Meier said.
The company’s health plan membership renewals take place near the beginning of the year, so premium revenue was set early, yet expenses continued to climb throughout the year, Meier said. In the third quarter, expenses grew 7.5% year-over-year to $23.1 billion while revenue grew by 5.5%.
“It’s not unusual to see margins deteriorate during the course of the year,” Meier said. “It’s deteriorated a little bit more this year versus the third quarter a year ago because of the ongoing incremental costs of the delta variant COVID-19 surge and related expenses.”
Kaiser Permanente likely will see even slimmer margins next quarter, then rebound in 2022, Meier said.
Half of Kaiser Permanente’s expenses are labor-related. Like other health systems, the company has been forced to pay more for travel nurses and contract labor during patient surges, which has increased workforce costs, Meier said.
The health system is also experiencing significant unrest among its unionized employees. Almost 32,000 Kaiser workers in California, Oregon and Washington announced Thursday they plan to strike Nov. 15. The unions object to Kaiser Permanente’s bid to offer lower pay to new hires compared to current employees, among other things.
Kaiser Permanente also struggled in the third quarter as even more of its 12.5 million health plan members transitioned from more lucrative commercial policies to Medicaid plans, another factor that compressed the margin. Some of those shifts are the result of people losing work during the pandemic.
The health system spent $878 million on capital projects during the third quarter, down significantly from $964 million a year before. With the COVID-19 pandemic lingering, Kaiser Permanente is rethinking its capital program to make sure it’s allocating money to the right projects, Meier said.