During the pandemic, the University saw its first profits in years in its largest two operations — healthcare services and instruction. With tuition hikes galore and a growing healthcare industry, the trend seems to continue.
A few months ago, the University announced that it would be raising tuition by 4.9% for the 2024-25 school year. In response, the student body let out a collective groan.
This tuition hike marks the third of its magnitude in three years, which could be taken as a sign that USC is struggling to operate financially. Alas, it is not. In fact, the coronavirus pandemic ushered in record profits on nearly every front for the University, and those profits do not seem to be subsiding in the immediate future.
Of course, “pandemic” and “money maker” aren’t usually synonymous terms — considering the economic recession caused by the former — but USC found a way to make it work.
Prior to the pandemic, the University was consistently operating at a loss with its two biggest services: instruction and healthcare. From 2013 to 2019, USC spent 3% to 10% more on its instruction services than it gained from tuition, and it spent 16% to 26% more on healthcare services than it gained from them.
In comparison to other universities, this spending is no cause for concern. Emory University and The Ohio State University spent significantly more on instruction than they earned from tuition — running average losses of 47% and 32%, respectively. However, these losses were offset by these universities’ health centers. In total, OSU ran a deficit of 9%, and Emory ran a deficit of 17%, compared to USC’s 12%.
At USC, these losses were the status quo for many years. When the pandemic struck, USC’s finances started to look a bit more lush.
This growth in greenery started to appear in two places. First, instruction expenses began to stagnate and, eventually, fall. Second, the University’s endowment skyrocketed.
During the 2019-2020 school year, despite the pandemic only arriving in the latter half, instruction expenses already began to droop. USC cut expenses by almost $100 million — the next year, over $1 billion. All the while, the University continued to rake in the same amount of instruction revenue each year. Thus, the 2020-21 school year became the University’s only year of profitable instruction since at least 2008, before the University’s tax forms began tracking instruction revenue.
Nevertheless, donors came to the rescue to ensure that USC’s newfound profits wouldn’t run dry. From 2020 to 2021, the University’s endowment shot up from almost $6 billion to over $8 billion.
Meanwhile, USC’s healthcare services — an industry one might expect to profit from a pandemic — did not see significant changes over those two years. Expenses rose at a rate slightly faster than average, but revenue did not rise to match. Instead, healthcare services continued operating at a loss — until 2022, that is.
In the 2021-22 school year, healthcare services at USC saw a revenue leap of almost $660 million while expenses dropped by over $260 million. As tuition had before it, healthcare now became profitable.
What did all of these profits amount to? Five percent tuition hikes for three years in a row.
Following the University’s profitable 2020-21 school year, instruction expenses suddenly shot up by $2 billion. The 2021-22 school year began with the lowest tuition increase in years — 2% — and ended by ushering in an age of inflation.
Still, between tuition and healthcare, USC made a profit of almost $200 million over those two years. In short, the University walked away from the pandemic with fatter pockets.
At the same time, USC laid the groundwork for a new status quo. While the $2 billion leap in instruction expenses led to a 21% deficit in instruction services in 2021-22, tax documents obtained by the Daily Trojan reveal only a 12% deficit during the 2022-23 school year.
According to Erik Brink, the University’s chief financial officer, “the [instruction] deficit is back to the previous range, which we expect to be the case going forward.”
Further, USC’s healthcare services split into four separate legal entities in 2021, paving the way for their first year of profitability. The four entities — USC itself, the USC Health System Corporate Entity, the Keck Medical Center of USC and the Verdugo Hills Hospital of USC — all constitute USC’s health system but are legally distinct. In the process, the University began excluding pharmacy and dental services from its health system and redefining what would qualify as “health system-related activities.”
In an interview with the Daily Trojan, Daniel Kang — an associate at Klynveld Peat Marwick Goerdeler, a company that audits university financials — said the split was to be expected.
“If there is a profitable business and a way to make the other one profitable as well, but they’re dragging each other down,” Kang said, “just like any successful business practice, the nature is to split the business.”
USC healthcare’s first profitable year points to an optimistic future. The health system that had become accustomed to deficits of 20% showed a profit of 22% in its first full year as a separate legal entity. In USC’s 2022-23 tax form, the healthcare services still listed under the University itself earned a profit of $60 million. The previous year, these services accounted for one-fifth of the University’s total healthcare revenue and one-fourth of the total expenses.
Of course, nothing is ever that simple when it comes to finances. The same healthcare services that are raking in profits for the University are also losing financier trust.
In March, Moody’s Ratings — one of the Big Three credit rating agencies — devalued USC’s bonds because of its increasing reliance on healthcare revenue streams.
“[The downgrade] reflects a challenging operating environment for healthcare that will continue to weigh on health system and overall university margins,” Moody’s wrote.
As Robert Dekle, a professor of economics, puts it, this could have negative impacts on the entire University.
“If they’re downgrading Universitywide bonds, then that means the interest rates are higher for borrowing, and that raises the costs,” Dekle said. “That means that more tuition revenue — for example, as a simple case — has to go cover that.”
Kang said the ever-present need for healthcare, even during recessions, incentivizes universities to continue investment in the sector.
“We can live without Tesla, but it might be a little bit hard to live without our doctors,” Kang said.
He also expressed that university research, including research in the medical field, tends to be forward-looking.
“Universities as a whole … are one of the few institutions left on Earth that are focused on the future,” Kang said. “Quantum computing, space economy — all of these things are generally researched [by] either the government or universities first.”
Kang said the devaluation was not as extreme as some other devaluations that happened last fall.
“Overall, [USC is] still doing better than 99% of the colleges out there,” Kang said.
In 2023, over 46 health systems were also devalued, some dropping close to the lowest bond rating possible.
In spite of the devaluation, Brink maintained that USC would continue to enhance its healthcare sector.
“One of USC’s many priorities is to help transform the future of health. It is our goal to keep more people well across all facets of life,” Brink wrote in a statement to the Daily Trojan. “The intentional investments being made today are expected to benefit USC over time, both financially and reputationally.”
While it is common for universities nationwide to pursue these potential gains by way of their healthcare systems, an article by Bloomberg covering the devaluations pointed out that the same expenditures that seek to boost a university’s profits can also bring them down.
“The medical complexes that burnish universities’ reputations and bring in significant revenue are also becoming a drag on financial performance,” the article reads.
Although, it would seem that the University is tending away from debt altogether. Higher profits and a strengthened endowment lead to more cash available to pass around, meaning deficits are more easily paid off.
Before that happens, though, student tuition will bolster that profit and provide the University with a cozy cushion to boot.
Editor’s Note: A previous version of this article stated that the University saw its first profits in years during the coronavirus pandemic. This article was updated July 22 at 9:14 a.m. to specify that the University saw its first profits in years in its largest two operations during the coronavirus pandemic.
