Kaiser’s Operating Margin Rises To 3.1% In Second Quarter

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Dive Brief:

• Kaiser Permanente reported a $2.1 billion net gain in the second quarter, representing a solid end to the nonprofit hospital and health plan’s financial performance in the first half of its fiscal year, according to an analyst.
• Kaiser’s operating margin rose to 3.1%, up from 2.9% the same time last year. The Oakland, California-based health system reported an operating income of $908 million as revenues grew at a faster clip than expenses.
• The second quarter marked the first time Geisinger Health’s financial performance was fully integrated into Kaiser’s earnings. While Kaiser did not break out Geisinger’s results, one analyst estimated the system contributed up to $2 billion in revenue during the quarter.

Dive Insight:

Kaiser opened its fiscal year with a strong first quarter, in which the company recorded $7.4 billion in income. Approximately $4.6 billion of that figure was a one-time operating gain from the successful completion of its acquisition of Geisinger Health.

The health system completed the deal through its nonprofit arm Risant Health, which Kaiser announced more than one year ago as a standalone venture to buy and operate nonprofits. Geisinger is currently the only health system in Risant’s portfolio, though Risant plans to purchase Greensboro, North Carolina-based Cone Health later this year.

Risant was billed as an opportunity to expand value-based care while also giving Kaiser access to new geographic markets. However, it wasn’t clear until the second quarter how lucrative Risant might be for Kaiser outside of the first quarter’s one-time assist.

Still, it’s difficult to tease apart exactly how profitable Geisinger is for Kaiser, according to Mark Pascaris, senior director and analytic lead of nonprofit healthcare at Fitch Ratings.

Geisinger is a big system, but Kaiser is “by far the largest not-for-profit health system in the country,” Pascaris said. “The Geisinger acquisition is not really going to move the dial, from just the bottom-line operating margin perspective [as Geisinger] wasn’t even a 10th the size of Kaiser.”

However, it’s likely Geisinger is generating approximately $1.5 to $2 billion in revenue for the system, based on Geisinger’s financial performance prior to the acquisition, according to Pascaris.

The acquisition may also be driving Kaiser to “accelerate performance” as it works to bring Geisinger into the fold, the analyst said. Pascaris pointed to the system’s increased operating margins as evidence Kaiser could be seeing a productivity bump post-acquisition. 

Kaiser also tends to experience higher margins during the first half of the year corresponding with annual enrollment cycles. Operating margins could drop in the back half of 2024 if revenues remain flat and expenses rise with seasonal care demands, the health system said in its earnings release.

Overall, Kaiser reported $29.1 billion in revenue in the quarter, up from $25.2 billion same time last year.

Its net income was flat compared to the second quarter of 2023. While that might raise alarm bells for some, Pascaris said that it’s relative, and Kaiser had a particularly strong second quarter in 2023 because of high investment returns.

Kaiser also had a good quarter for investment income this year, though its returns were slightly down compared with the same time last year. Kaiser recorded $1.2 billion in other income in the second quarter, compared with last year’s $1.3 billion.