Kaiser Permanente will invest $10 million in a Colorado safety-net hospital, the latest example of large health systems partnering with smaller organizations struggling to manage rising expenses.
The Oakland, California-based integrated health system will give a $5 million grant to Denver Health and another $5 million in matching funds if area organizations or other health systems financially support the safety-net hospital. Denver Health, which cares for about 30% of the city’s population each year, including many indigent and uninsured residents at its 555-bed hospital and affiliated outpatient network, reported a $23.8 million operating loss in 2022 as its uncompensated care costs increased and its labor and supply costs swelled.
Large health systems benefit from viable safety-net hospitals, which can provide low-acuity care closer to residents’ homes and free up bigger systems’ capacity for tertiary and quaternary care. When safety-net hospitals close, such as Marietta, Georgia-based Wellstar Health System’s Atlanta Medical Center that shuttered in November, area hospitals struggle to fill the void as volume spikes often delay care.
Other profitable, well-resourced systems will likely offer financial aid to area safety-net hospitals as a result, said Mark Pascaris, a senior director at Fitch Ratings and the lead Kaiser analyst.
“Particularly in the environment we are in right now, safety-net hospitals are operating under very tight margins because they have a weak payer mix covering the uninsured, underinsured and Medicaid patients and not a lot of ability to generate good cash flow,” he said. “I would hope, if I were Kaiser, that this would spur additional complementary assistance.”
Some large nonprofit health systems have offered financial assistance to neighboring small, safety-net providers for infrastructure improvements and other designated uses. New Hyde Park, New York-based Northwell Health, for instance, provided one-time funding for some Brooklyn safety-net hospitals.
Direct investment, though, is the exception rather than the norm. It’s more common for large health systems to form a clinical affiliation with smaller organizations to expand access to specialty services or expand their outpatient network in the safety-net’s service area to bolster care in that region. Not all health system boards have the risk tolerance to subsidize neighboring health systems, particularly as expenses remain high and Medicare revenue cuts loom.
Safety-net systems typically bear the brunt of higher-than-average labor and supply costs as they treat the bulk of uninsured, indigent and Medicaid patients, whose care is reimbursed at lower rates than commercially insured patients. Still, there is a limit to how much direct funding a nearby health system can offer, depending on the respective state’s and federal government’s antitrust policies.
Denver Health’s operating loss more than doubled in 2022, marking the third consecutive year of losses. Its uncompensated care costs have doubled from $60 million in 2020 to $120 million in 2022, the organization said in a news release.
Kaiser, which operates Colorado’s largest nonprofit health plan, reported $1.21 billion of net income in the first quarter of 2023 on $25.22 billion of revenue. A Kaiser spokesperson said the organization did not consider a clinical affiliation or another form of partnership prior to the funding commitment.
Going forward, clinical affiliation will likely be a more popular route for large health systems versus directly funding safety-net hospitals, said Vasanta Pundarika, co-head of healthcare investment banking at Matrix Capital Markets Group.
“Short of acquiring a safety-net hospital, I expect to see more clinical partnerships to make sure there is good local urology, gastrointestinal, cardiology and other high-acuity service lines that these large health systems could bring to a safety-net’s geography,” she said.
