3 Takeaways from Kaiser Permanente's Q1 Earnings

A strong start is expected to give way to more modest returns the rest of the year.

Kaiser Permanente started the year on a positive note by riding “favorable financial market conditions” to a healthy bottom line in the first quarter.

However, the nonprofit health system cautioned that historically, the first quarter is buoyed by the open enrollment cycle while the operating margin in the remaining quarters is usually deflated by steady revenue and incurred expenses.

For the first three months of the year, Kaiser reported a $7.4 billion net gain, $935 million of operating income, and a 3.4% operating margin. All those figures easily surpassed Kaiser’s performance over the same period in 2023, when it reported $1.2 billion in net income, $233 million in operating income, and a 0.9% operating margin.

Here are three takeaways from Kaiser’s first quarter financial activity:

Lifted by Geisinger deal

Kaiser’s $7.4 billion in net income was largely the result of its subsidiary, Risant Health, completing its deal for Geisinger Health.

The acquisition is part of Risant’s vision to form a value-based network, with four to five other systems expected to be added in the next five years.

By bringing in Geisinger, Kaiser received a one-time net asset gain of $4.6 billion. Excluding the deal, Kaiser’s net income for the first quarter was $2.7 billion.

The transaction considerably strengthened the system’s bottom line in the quarter, but will require investment going forward, with Kaiser having designated up to $5 billion to support Risant.

Rising expenses

Though Kaiser’s operating income of $935 million marked an increase of more than 300% over the first quarter in 2023, the system noted that it was still “below historical first-quarter trends leading up to the pandemic.”

The reason? Cost pressures stemming from high utilization, care acuity, and higher prices for goods and services. That led to Kaiser reporting operating expenses of $26.5 billion, representing a nearly 6% increase from the same period last year.

With labor costs weighing heavily on hospital operators, many are turning to trimming the workforce. Kaiser has now laid off around 350 workers in mostly IT and administrative roles since last fall, with 76 more reductions coming by June 21, according to regulatory documents.

Shifting out of private equity

Amidst all the chatter about private equity’s impact on healthcare, Kaiser is planning to sell up to $3.5 billion of its private investment holdings, according to The Wall Street Journal.

The report, which cites unnamed sources familiar with the situation, stated that the move is due to cash constraints as the system works with investment bank Jefferies Financial Group to liquidate assets. Kaiser is also expected to sell off similar sized holdings later this year.

The system and its subsidiaries held almost $100 billion of investments at the end of 2022, most of which were made through its pension system, the report said. Illiquid alternative assets, including private equity and real estate assets, made up nearly 57% of Kaiser’s investments at the time.

The sales point to Kaiser moving away from private equity and into other investment areas.