Allina Health income drops 42% as legal, consulting costs climb

More expense for malpractice litigation and increased consulting fees cut into operating income last year at Allina Health System, a Minneapolis-based nonprofit group that's one of the state's largest operators of hospitals and clinics.

Analysts with S&P Global Ratings cited the financial results as well as increased competition as they lowered the outlook at Allina from "stable" to "negative."

Two other rating agencies, however, issued reports this month that characterized the outlook at Allina as stable. Analysts at those agencies said they expect operating margins at Allina will improve this year, despite weak financial results in the first quarter of 2019.

"Management ... attributes the particularly weak results in Q1 fiscal 2019 to an especially weak flu season early in the year and a steep decline in clinic visits because of the polar vortex and subsequent heavy snow storm," Fitch Ratings said in its report. "Management expects volumes and operating margins to rebound through the rest of the year."

Allina Health System operates 12 hospitals including Abbott Northwestern in Minneapolis and United Hospital in St. Paul. The health system includes a network of more than 90 clinics and employs about 29,000 people.

Last year, Allina posted operating income of $86.3 million on $4.37 billion of revenue — a 42% decline from the previous year's operating income of $148.2 million.

The drop in operating income came as a category of spending called "other operating expenses" grew by about one-third, or $56 million, to $223 million. Increased consulting fees and legal expenses were key drivers.

"We are collaborating with several consultants who are helping us evaluate a range of performance data and provide context on what other organizations are doing to achieve top performance outcomes," Allina said.

While S&P Global Ratings lowered the outlook, the agency maintained its long-term rating on bond debt at Allina.

The financial results in 2018 continued several years of "uneven performance" at Allina, said Suzie Desai, a credit analyst with S&P Global Markets, in a statement. She added: "This uneven performance, in conjunction with a market that has further consolidated in the few years since Fairview Health [Services] acquired HealthEast, has reduced Allina Health's clear leading position to a more balanced market position for these two large systems."

The 2018 results at Allina were "below average," said analysts at Moody's Investors Service. In a report this month, Moody's called the first quarter "challenging." For the first three months of the year, Allina posted an operating loss of $17.2 million on less than $1.1 billion in revenue.

Even so, the rating agency maintained a stable outlook for Allina based on its expectation that performance for the rest of this year will improve to historical levels of a roughly 3% margin. The margin was about 2% in 2018.

Fitch Ratings also called the outlook at Allina stable. The "thinner results" in 2018 were not driven by problems with the number of patients seeking care at Allina, the agency said this month. Instead, it cited "an increase in malpractice reserves, due to two unusually large cases," as well as the hiring of a strategic consultant.

In its statement to the Star Tribune, Allina didn't say whether the increased malpractice reserve was connected to particular cases.

Last year, a Hennepin County jury awarded $8.9 million to a Bradford, Minn., mother who said an Allina midwife ignored concerns about the size of her baby during her pregnancy and then mishandled the delivery.

In 2017, the family of a woman who died less than a week after giving birth at Abbott Northwestern Hospital won a judgment exceeding $20 million. Attorneys at the time told the Star Tribune that it was the largest wrongful-death medical malpractice verdict in Minnesota history.

Allina didn't name any consultants hired by the health system but said in a statement: "Our goal is to find opportunities to enhance the care, outcomes, experience and affordability of the services we provide. We believe the best way to control costs is to improve quality."