Banner Health is working to cut costs from newly acquired University of Arizona Health Network as the academic medical center's losses weigh on its finances.
Phoenix-based Banner saw its operating margin fall to 3.2% in the first six months of the year from 7% during the same period last year.
UAHN had a negative 1.8% operating margin in the period between Feb. 28, when Banner closed its takeover, and June 30, Banner Chief Financial Officer Dennis Dahlen detailed on a call Monday with bondholders.
“We expected an operating loss out of the gate,” he said. “It's better than we expected and better than the run rate before the acquisition. We're on a path to improving it but it's still not at a sustainably profitable position.”
Banner plans to cut $100 million from UAHN's $150 million in overhead by 2018. The first $50 million in cost reductions will come by the end of next year. The savings will come from the corporate office as well as joint purchases of supplies and services.
Banner also plans to transition UAHN onto its own information technology platform, which is with Cerner Corp. UAHN currently uses one from Epic Systems Corp.
In UAHN's Tucson market, Banner is exploring value-based contracts with local insurers. “That marketplace has largely been dormant on the migration of providers taking on risk,” Dahlen said. “Obviously that's in our DNA. And we're finding ready, willing and interested payers to engage with us on that front.”
Banner also discovered that the average length of stay in Tucson is one day longer than at the system's other hospitals for patients with comparable acuities. And UAHN is operating at close to 90% capacity in Tuscon. “By reducing length of stay, we can build new capacity and create new volume,” Dahlen said.
Banner also plans to expand ambulatory services in Tucson and work more closely with community physicians who can serve as a source of referrals. In the Phoenix market, Banner plans to create “destination” institutes that will serve patients with highly complex conditions.
Although Banner anticipates that its capital expenditures will be higher over the next five years—largely due to commitments it made to UAHN—Dahlen noted that it expects its cost-saving and other strategic initiatives to begin to show a positive financial return within the next 12 to 18 months.
Separately, Banner also faced higher operating expenses related to drug costs, particularly for oncology and specialty products. Higher pharmacy costs were a major factor driving a negative 17.5% operating margin in its full-risk Medicare Advantage business.
Banner manages 44,000 Medicare Advantage lives through a joint venture with Blue Cross and Blue Shield of Arizona.
“We have some strategies to counter that,” Dahlen said. “But it's a sticky problem.”
Banner is doing better with its shared-savings contracts, and is in its fourth year participating in the CMS' Pioneer accountable-care organization program. Its operating margin there is 36.8%.
“We're certainly not happy with the fact that we're not profitable in that full-risk business,” Dahlen said, “but we do have initiatives afoot on both the utilization side and the pharmacy side … to mitigate those losses.”
Banner is planning to go to the bond market later this year to raise $400 million to $500 million in permanent financing that will replace a temporary $300 million taxable revolving credit loan that is covering short-term capital needs.
In addition to UAHN, Banner recently acquired 44-bed Payson (Ariz.) Regional Medical Center from Community Health Systems.
Banner last week reported an operating surplus of $107.6 million on $3.4 billion in revenue for the first half of the year. In the prior-year period, its operating surplus was $186 million on $2.7 billion in revenue.