Banner Health sees rising expenses chip away at growing revenue

Lower volumes have put pressure on Banner Health's top line, but the Phoenix-based not-for-profit health system still managed to grow its revenue by nearly 4% during the first half of fiscal 2014.

Banner reported total revenue of $2.7 billion for the six months ended June 30, 2014 (PDF), up from $2.6 billion for the year-ago period, even with the continued shift to observation cases, along with lower inpatient surgical and outpatient volumes.

As of 2013, Banner controlled 45.1% of the market share in the Phoenix metropolitan area, up from 42.3% in 2009, according to Fitch Ratings. And in June, Banner closed on its $93 million acquisition of Regional Care Services Corp., including Casa Grande Regional Medical Center, Regional Care Physician's Group, and Casa Grande Regional Medical Center Foundation, all located in Casa Grande, Ariz.

But expense growth, particularly a 7.2% hikes in salaries and benefits and a 5.9% increase in supplies, chipped away at revenue gains from Banner's expanded footprint.

On the $2.7 billion in revenue, the system ended the two quarters with $186.0 million in operating surplus, translating to an operating margin of 7.0%. That's down slightly from an operating margin of 7.1% a year ago when Banner recorded $183.7 million in operating surplus.

But the biggest drop for the seven-state system came to its overall surplus, which sank 43.4%, as a $67.2 million unrealized loss on interest rate swaps somewhat undid last year's gain of $119.6 million on the same. Even so, Banner finished the first half of the year in the black, recording an overall surplus of $238.0 million, compared with a surplus of $420.4 million last year.

Banner is certainly not alone among hospital systems that have seen their margins weaken in the past year. A recent Modern Healthcare analysis found that operating margins at 179 health systems and stand-alone hospitals declined from 3.6% in 2012 to 3.1% in 2013.

Follow Rachel Landen on Twitter: @MHrlanden