MANAGEMENT S DISCUSSION CONDITION AND RESULTS OF OPERATIONS FOR ASCENSION AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012

Transcription

1 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR ASCENSION AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012 The following information should be read in conjunction with Ascension s consolidated financial statements and related notes to the consolidated financial statements.

2 and Results of Operations Introduction to Management s Discussion and Analysis The purpose of Management s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), is to provide a narrative explanation of the financial statements of Ascension Health Alliance, d/b/a Ascension (the System), that enables users of the System s financial statements to better understand the System s operations, to enhance the System s overall financial disclosures, to provide the context within which the System s financial information may be analyzed, and to provide the System s financial condition, results of operations and cash flows. Unless otherwise indicated, all financial and statistical information included herein relates to continuing operations. MD&A, which should be read in conjunction with the accompanying unaudited Consolidated Interim Financial Statements and Supplementary Information, includes the following sections: Strategic Direction Organizational Developments Results of Operations Liquidity and Capital Resources Strategic Direction The System strives to create a sustainable person-centric delivery system to serve individuals throughout their lifetime. The System continues to focus on centralization, standardization, optimization and collaboration to provide value-based care to patients and the communities in which the System serves. The System is focused on high quality patient outcomes and quality of care for those served. Across the System, Health Ministries are engaging in population health management pilot programs such as accountable care organizations (ACOs), participating in state health exchanges and leading and participating in emerging healthcare projects across the country. Some of these projects include partnering with the Centers for Medicare and Medicaid Services (CMS) as part of the Pioneer ACO program, Medicare Shared Savings Program, the Center for Medicare & Medicaid Innovation and the Center for Medicare and Medicaid Partnership for Patients, operating a Medicaid Health Maintenance Organization (HMO), and participating in commercial ACOs. Organizational Developments Healthcare Operations The System continues to broaden its healthcare delivery platform, as shown through two significant business combinations during the past two years. Effective April 1, 2013, three regional health systems that formerly comprised Marian Health System, Inc. joined Ascension Health, a subsidiary of the System. The three health systems are as follows: Via Christi Health, Inc. (Via Christi Health), based in Wichita, Kansas; Ministry Health Care, Inc. (Ministry Health Care), based in Milwaukee, Wisconsin; and St. John Health System, Inc. (St. John Health), based in Tulsa, Oklahoma (collectively, the Marian Systems). Prior to this transaction, Ascension Health had a 50% interest in Via Christi Health, which was accounted for under the equity method of accounting. In total, the addition of the Marian Systems into Ascension Health added 32 hospitals and more than 250 clinics to the System in the states of Wisconsin, Minnesota, Oklahoma and Kansas. As of April 1, 2013 this transaction resulted in a contribution from business combinations of $2.0 billion, net of the 50% interest in Via Christi Health, with increases to total assets of $4.9 billion, total liabilities of $2.7 billion and restricted net assets of $0.2 billion, including the contribution of unrestricted net assets non-controlling interests. Prior to this combination, the Marian Systems recognized $3.9 billion in total revenue for the fiscal year ended September 30, For the six months ended December 31, 2013, the Marian Systems recognized 2

3 Organizational Developments (continued) $2.2 billion in total revenue, which is included in the System s consolidated financial statements for the six months ended December 31, The Marian Systems offer two care management programs in addition to those mentioned previously. The first is Network Health Plan (NHP) which contracts with various healthcare facilities to provide covered medical services and supplies to NHP participants for a fixed monthly premium. NHP is a fully consolidated entity of Ministry Health Care. The other program is a 50% owned joint venture, CommunityCare Managed HealthCare Plans of Oklahoma, Inc. (CommunityCare). CommunityCare contracts to provide primarily medical services to subscribing participants and St. John Health receives premium revenue from CommunityCare for its participation. CommunityCare is accounted for under the equity method of accounting by St. John Health. Effective January 1, 2012, Ascension Health became sole corporate member of Alexian Brothers Health System (Alexian Brothers), a Catholic healthcare system which operates acute and specialty care hospitals, ambulatory care clinics, physician practices and senior living facilities in Illinois, Missouri, Tennessee and Wisconsin. This transaction resulted in a contribution from business combinations of $326 million and increased restricted net assets $16 million. Clinical Quality and Safety The Institute of Medicine has defined best care as care that is safe, timely, effective, efficient, patient-centered and equitable. Ascension has reflected this definition in its Call to Action to provide Healthcare That Works, Healthcare That Is Safe, and Healthcare That Leaves No One Behind, for Life. This strategic framework has led to an unprecedented, System-wide focus on safety that consisted of significant collaboration across the national health ministry, System-wide training of the workforce in principles of high reliability, and the total commitment of our leaders to role-modeling safety and engaging in safety-promoting behaviors and practices. This safety journey led to Ascension achieving a national leadership position in reducing patient harm in a number of areas, including falls and fall injuries, pressure ulcers, perinatal safety, and adverse drug events. Furthermore, Ascension s current recognition as a national quality and safety leader has led to a significant engagement in several demonstration projects funded by the CMS, including participation in the CMS Partnership for Patients initiative as a Hospital Engagement Network (HEN). HENs help identify solutions to reduce healthcare acquired conditions and work to spread the solutions to other hospitals and healthcare providers. Additionally, Ascension s Excellence in Obstetrics project was referenced in the January 2014 edition of the journal Health Affairs. The journal noted that through implementing a variety of evidence-based clinical and non-clinical interventions such as open and transparent full disclosure communications at five Ascension hospital locations significantly reduced infant harm, resulting in improved care for mothers and babies and a corresponding decrease in malpractice claims and costs. Ascension s Excellence in Obstetrics demonstration site study was made possible in part from a $2.9 million grant from the Agency for Healthcare Research and Quality (AHRQ), as part of its Patient Safety and Medical Liability Initiative. The Excellence in Obstetrics demonstration project began in January 2011 and concluded on June 30, More than 20,000 mothers and their infants participated across the five Ascension demonstration sites, representing one of the largest consented studies for mothers nationally. Patient Satisfaction Ascension strives to understand patient satisfaction by defining its relationship with those we serve. The Net Promoter Score (NPS) was introduced in 2007 as a system-wide metric for measuring and managing patient loyalty in all System sites and facilities. Focused work in improving acute care patient experience has led to significant Net Promoter Score improvement across the System. Since 2007 the System level NPS has increased 23% and variation across all hospitals has been reduced by 36%. 3

4 Organizational Developments (continued) Ascension Investment Management Effective October 1, 2013, Catholic Healthcare Investment Management Company (CHIMCO) began doing business as Ascension Investment Management. Effective January 1, 2014, all business activities were transferred to a new entity, Ascension Investment Management, LLC (AIM). AIM is a tax-exempt wholly owned subsidiary of Ascension whose purpose is to provide investment advisory services to the System, as well as to other clients. AIM, a federally registered investment advisor, offers expertise in the areas of asset allocation, manager selection and risk management and seeks to provide its clients with benefits such as increased returns, flexible investment choices, investment asset class diversification, access to quality investment managers, administrative ease, cost economies and socially responsible investment choices. AIM manages the Ascension Alpha Fund, LLC (Alpha Fund), in which the assets of the System, as well as those of other clients, are invested. The majority of the System s long-term operating funds are held in the Alpha Fund. Total net investments under management by AIM are $27.6 billion and $25.9 billion at December 31, 2013 and June 30, 2013, respectively. Of the total net investments under AIM management, $13.4 billion and $12.8 billion are included in the total consolidated net assets of the System at December 31, 2013 and June 30, 2013, respectively. The Resource Group Ascension Health Resource and Supply Management Group, LLC (The Resource Group) is a contracting, operations, logistics and change management organization that continuously implements non-labor expense reductions in collaboration with the Health Ministries, physicians and associates, while ensuring that a high level of quality is maintained and accepted for end users. The Resource Group maintains status as a Group Purchasing Organization (GPO), having received this designation from the Office of the Inspector General. A GPO represents a number of organizations, acting as the contracting agent for all its participants, consolidating purchasing volume to stimulate competitive prices and effective utilization of products and services. As a wholly owned GPO, The Resource Group negotiates and manages contracts for its participants, which include the Health Ministries as wellas other healthcare entities and educational institutions, with the goal of effectively managing all participants expenses while supporting quality patient care and other services. For the six months ended December 31, 2013, supplies expense as a percentage of net patient service revenue was 16.5% (16.2% on a same facility basis), compared to 16.2% and 17.2% for the six months ended December 31, 2012, and for the fiscal year ended June 30, 2011, respectively. The slight increase for the six months ended December 31, 2013, was primarily due to increased surgeries, particularly higher cost implant procedures, and an increase in the intensity of procedures performed as evidenced by the increase in case mix index. Ascension Clinical Holdings Ascension Clinical Holdings (Clinical Holdings) provides a standard suite of capabilities and services to enable physician practices to operate more efficiently, and to facilitate the transition to emerging fee-for-value payment models and risk-based contracting arrangements. Clinical Holdings near term efforts are primarily focused on deploying a core set of capabilities and common practice management software platform to the System s Health Ministries employed physician base. The first Health Ministry successfully implemented this common platform across its Physician Enterprise during the three months ended December 31,

5 Organizational Developments (continued) Symphony and Ministry Service Center Symphony is an enterprise resource planning initiative of Ascension. Symphony is designed to facilitate efficiency, focus resources, and provide analytic capabilities that will improve operational and clinical decisions, both at the local Health Ministry and Systemwide levels. Symphony will provide a single, centralized source of information with a shared database, allowing for immediate information access and retrieval and reducing or eliminating data inaccuracy and duplication. Through Symphony, the System is implementing new operational practices in finance, human resources, and supply chain, enabled by information technology. As of December 31, 2013, this initiative has been successfully deployed at ten Health Ministries with more than 50,000 users and is expected to be fully implemented in fiscal year In addition, Symphony was successfully deployed at five additional Health Ministries on February 1, The Ministry Service Center (MSC), a critical and permanent component of Symphony, provides shared services in the areas of finance, human resources, and supply chain to the Health Ministries of the System. Through process transformation, the MSC delivers value by providing services more efficiently, enabling new insights, and facilitating Health Ministry consistency in day to day practices. RESULTS OF OPERATIONS Results of Operations Consolidated Basis The addition of the Marian Systems to Ascension had a significant impact on the consolidated financial results for the six months ended December 31, On a consolidated basis, the System experienced a 19.7% increase in equivalent discharges and a 26.9% increase in outpatient visits as compared to the same period in the prior year. Additionally, net patient service revenue per equivalent discharge increased 3.1% on a consolidated basis as compared with the same period in the prior year. With the addition of the Marian Systems, total operating expense per equivalent discharge increased 7.9%, as compared to the same period in the prior year, primarily due to NHP s claims expense which has no related equivalent discharges; excluding NHP, total operating expense per equivalent discharge increased 3.5% for the six months ended December 31, 2013, as compared to the prior period. On a consolidated basis, recurring operating margin was 3.9% for the six months ended December 31, 2013, as compared to 4.4% for the six months ended December 31, The costs of care of persons living in poverty and other community benefit programs increased $142 million for the six months ended December 31, 2013, an increase of 19.9%, as compared to the same period in the prior year. The most significant increase was in the cost of charity care services provided, which increased $65 million, or 26.7%, for the six months ended December 31, 2013, as compared to the same period in the prior year, primarily due to unfavorable shifts in payor mix, particularly increases in self pay. The increase in the cost of charity care services provided is closely followed by a $62 million, or 25.7%, increase in the unpaid cost of public programs for persons living in poverty. 5

6 Results of Operations Consolidated Basis (continued) Ascension The following table reflects certain patient volume Volume Trends and Ke y Performance Indicators information and key performance indicators, on a consolidated basis, for the six months ended December 31, 2013 and Six Months Ended December 31, Volume Tre nds Equivalent Discharges 795, ,947 Total Admissions 400, ,113 Case Mix Index Acute Average Length of Stay (days) Observation Days 147, ,284 Emergency Room Visits 1,472,662 1,245,390 Surgical Visits (IP & OP) 339, ,773 Physician Office Visits 4,681,217 3,506,742 Home Health Visits 371, ,500 Key Performance Indicators Recurring Operating Margin 3.9% 4.4% Operating Margin 3.0% 3.6% Operating EBITDA Margin 8.5% 8.8% Results of Operations Same Facility Basis 1 Volume Trends and Net Patient Service Revenue For the six months ended December 31, 2013, equivalent discharges decreased 2.0% as compared to prior year, a reflection of the national trend toward declining utilization rates in healthcare delivery systems. Inpatient surgeries increased 0.5% and observation days increased 1.8% as compared to the same period in the prior year. Likewise, outpatient volumes continue to grow. Outpatient visits increased 1.1% for the six months ended December 31, 2013 as compared to the same period in the prior year. Additionally, physician office visits have increased 1.8% and outpatient surgeries have increased 4.9% compared to the same period in the prior year, consistent with the transition to deliver healthcare services in the outpatient setting. The System was able to achieve a 3.5% increase in net patient service revenue per equivalent discharge as compared to the same period in the prior year due to the increase in intensity of services provided, volume of surgical cases and favorable rate negotiations in certain markets. This increase is favorable despite the previously mentioned continued increases in uncompensated care, a result of high unemployment and trends toward highdeductible health plans, which shift greater financial responsibility to the patient. Additionally, the System experienced a slight increase in the case mix index to 1.52 for the six months ended December 31, 1 Amount is on a same facility basis, which is the System excluding the Marian Systems and certain other facilities which do not have comparable operation periods in the prior year. 6

7 Results of Operations Same Facility Basis 1 (continued) 2013 as compared to 1.50 for the six months ended December 31, 2012, with more substantial increases in case mix index at certain facilities. Uncompensated Care Charity care costs have increased $22.7 million, or 9.3%, for the six months ended December 31, 2013 as compared to the same period in the prior year. This increase is primarily attributable to economic conditions driving increased charity care in certain markets and further eligibility restrictions in state sponsored Medicaid programs. As compared to the same period in the prior year, bad debt expense has decreased 10.0% due to successful collection efforts at certain health ministries and improved processes for identifying patients qualifying for financial assistance. The unpaid cost of providing care to persons living in poverty and other community benefit programs increased $34 million, or 4.8%, for the six months ended December 31, 2013 as compared to the six months ended December 31, This increase is primarily attributable to the increased volume of charity care as discussed previously. Recurring Operations For the six months ended December 31, 2013: Net patient service revenue, less provision for doubtful accounts, increased $107 million, or 1.4% as compared to the same period in the prior year. The System experienced a 3.5% increase in net revenue per equivalent discharge as compared to the same period in the prior year. Partially offsetting these favorable factors were increases in uncompensated care and shifts in payor mix. In addition to growth in net patient service revenue, other operating revenues have increased $7.7 million, or 1.5%, primarily due to the increase of 34.6% in new customer growth at certain Ascension subsidiaries. Total operating expenses increased $174 million, or 2.3%, as compared to the same period in the prior year primarily due to the following: Salaries, wages and employee benefits decreased $19 million, or 0.5%, compared to the six months ended December 31, 2012, due primarily to focused efforts to right size the labor force and increase productivity, partially offset by increased employee healthcare costs. Purchased services expense increased $32 million, or 7.1%, as compared to the same period in the prior year primarily due to the System s biomedical engineering company s growth in new customers and the additional maintenance expense incurred to serve those customers. In addition, purchased services has increased as a result of the ongoing transition to a third-party contractor to provide dietary and housekeeping services at a reduced rate across the System, which has shifted and reduced the costs in salaries and wages. Supplies expense increased $12 million, or 1.0%, as compared to the same period in the prior year due to management s continued focus on centralized contracts, leading to reduced pricing and additional rebates. The System was able to effectively manage supply costs as evidenced by the moderate increase of 3.1% in supplies expense per equivalent discharge as compared to the same period in the prior year. Other expenses increased $104 million, or 11.2%, as compared to the same period in the prior year primarily due to $32 million of increased facility costs in certain markets and another $32 million increase in state sponsored provider tax expense in Indiana and various other states. 1 Amount is on a same facility basis, which is the System excluding the Marian Systems and certain other facilities which do not have comparable operation periods in the prior year. 7

8 Results of Operations Same Facility Basis 1 (continued) Impairment, Restructuring and Nonrecurring Losses Net impairment, restructuring and nonrecurring losses were $86 million for the six months ended December 31, 2013 as compared to a loss of $63 million during the six months ended December 31, This change is primarily due to increased Symphony expenses of $32 million for the six months ended December 31, 2013 as compared to the same period in 2012 as a result of deploying larger Health Ministries during the six months ended December 31, 2013, as well as additional preparations for deployments later in fiscal year Nonoperating Gains, Net For the six months ended December 31, 2013, nonoperating gains, net were $705 million compared to $451 million for the six months ended December 31, This change is primarily due to nonoperating investment return increasing $239 million as further discussed in the Investment Return section that follows. Investment Return For the six months ended December 31, 2013, the long-term investments held in the Alpha Fund, excluding non-controlling interests and long-term investments held by the self-insurance programs, earned a return of 6.68% (unannualized), compared to a return of 4.56% for the six months ended December 31, The System s cash and investments are invested in a broadly diversified portfolio that is managed by AIM, a wholly owned subsidiary of Ascension, as previously discussed. Excess of Revenues and Gains over Expenses and Losses The excess of revenues and gains over expenses and losses was $911 million and $735 million for the six months ended December 31, 2013 and 2012, respectively. The increase is primarily driven by favorable investment returns of $239 million as compared to the prior year. 1 Amount is on a same facility basis, which is the System excluding the Marian Systems and certain other facilities which do not have comparable operation periods in the prior year. 8

9 Liquidity and Capital Resources The System had net unrestricted cash and investments of $12.4 billion at December 31, 2013, compared to $12.0 billion at June 30, This increase is primarily due to favorable investment returns and cash generated from operations for the six months ended December 31, Days cash on hand increased 9 days from June 30, 2013 to December 31, 2013 primarily due to favorable investment income and strong expense management which has reduced daily operating expenses by 2.4%. Net days in accounts receivable have remained steady at 47. Cash-to-senior debt and cash-to-debt continue to remain strong at 214.2% and 192.1%, respectively, at December 31, 2013, representing increases from June 30, Debt to capitalization has also shown improvement, decreasing from 30.2% at June 30, 2013 to 28.6% at December 31, Balance Sheet Ratios December 31, June 30, Days Cash on Hand Net Days in Accounts Receivable Cash-to-Senior Debt 214.2% 204.3% Cash-to-Debt (Senior and Subordinated) 192.1% 183.2% Senior Debt to Capitalization 26.4% 28.0% Total Debt to Capitalization 28.6% 30.2% 1 Amount is on a same facility basis, which is the System excluding the Marian Systems and certain other facilities which do not have comparable operation periods in the prior year. 9