Aurora sees early returns from reform, cost-cutting

Aurora Health Care's operating margin almost tripled in the first half of 2014 with healthcare reform and tight expense control dramatically helping its performance, the Milwaukee-based health system said in a financial disclosure to bondholders (PDF).

Net patient-service revenue soared more than 9.5% in the six months ended June 30. Aurora's allowance for bad debts, patient bills the system reasonably believes it will not collect, fell more than 81%. This occurred, executives said, because more patients gained health coverage under the Patient Protection and Affordable Care Act, both from commercial products on the exchanges and through Medicaid.

However, Wisconsin did not fully expand its Medicaid program. Gov. Scott Walker altered the state's Medicaid waiver this year to extend coverage only to low-income childless adults who earn up to 100% of the federal poverty level. Those who made more and had Medicaid coverage were booted from the program with the state's new plan helping to subsidize private exchange plans for those people.

Aurora said the ACA has resulted in more patients with insurance so far this year, which lowered potential bad debt and lined its coffers with more insurance payments, an effect many hospitals and providers had expected when the ACA was signed into law. Additionally, the system collected more from self-pay patients because it decreased how much those patients would have to pay for their services. Aurora raised its discount offer to 45% from 15% last year, essentially cutting the sticker prices for uninsured patients’ services to almost half.

Although inpatient discharges fell 3.3% in the first half compared with last year, other areas experienced sizable growth. Observation cases, spurred by Medicare’s two-midnight rule, increased 22.5%, while emergency room visits rose 2.9%.

On the expense side of its ledger, Aurora hired consulting firm Navigant in 2012 to help it cut spending. Through December 2013, the organization saved $35 million as a result, and it expects another $35 million to $74 million in savings by the end of 2015. Improvements to the revenue cycle, such as increasing patient collections at the time of service and ensuring bills sent to insurers are more accurate, have netted Aurora $27 million through December 2013 and potentially $45 million more by the end of this year.

Overall, Aurora realized an operating surplus of $200.4 million on $2.24 billion of total revenue in the first half of 2014, compared with an operating surplus of $64.6 million on $2.05 billion in revenue in the same period of 2013. That equates to an 8.9% operating margin in the first six months this year versus a 3.2% margin last year.

Aurora’s total surplus, which includes investment gains, tripled to $231 million.

Aurora owns or operates 15 hospitals throughout Wisconsin, according to the financial report. It closed on a joint venture last month with Bay Area Medical Center in Marinette, Wis. Aurora paid $49.5 million for a 49% stake in the 44-bed hospital. Aurora and University of Wisconsin Health, Madison, also are holding discussions on a potential merger or affiliation, although the system said in the disclosure that “the form of such collaboration, if any, is unknown at this time.”

In August, the system also was one of six in the state to create a new non-equity alliance that has intentions of becoming an accountable care organization.

Follow Bob Herman on Twitter: @MHbherman