Dignity Health, which operates 39 hospitals in Arizona, California and Nevada, continued to grapple with expenses in its fiscal second quarter, as higher volume also meant higher costs.
The San Francisco-based system is now putting a number of initiatives in place to manage those costs, while simultaneously increasing revenue. It also is looking to grow beyond its core geographic area through partnerships with other providers.
In a second-quarter earnings report, Dignity said it saw increased demand in its acute-care activities, physician organizations and joint ventures.
Higher volume and payment-rate increases led to a 4% increase in net patient and premium revenue (PDF) in the three-month period, which ended Dec. 31. In addition, as more uninsured patients gained Medicaid coverage, Dignity's provision for bad debt represented just 1.1% of revenue, down from 1.5% in the same period in the prior year.
Admissions were essentially flat year-over-year, but they increased 2% when adjusted for outpatient services. More of Dignity's revenue is coming from outpatient activity—42%, compared to 40.8% in the second quarter of fiscal 2015.
However, like last quarter, Dignity's expenses continued to outpace its revenue gains. Salary and benefit costs increased 9.3% as the system staffed up for higher volume and longer lengths of stay. Supply costs, particularly for surgery and pharmacy services, rose 8.6% year-over-year.
The system said in an earnings report that it plans to address those costs by “managing corporate overhead expense, strictly adhering to productivity standards, managing length-of-stay, and accelerating initiatives associated with supply usage and purchases.”
It also plans to boost revenue through a marketing effort focused on commercially insured patients, renegotiating certain managed-care contracts that are close to expiring, and taking steps to improve its bill collection processes.
In addition, the system said it is in partnership discussions with other integrated-delivery networks outside its current geographic footprint.
The system's operating margin fell to 0.1% in the second quarter of fiscal 2016, from 10.2% in prior-year period.
Yet the full year-over-year comparison was complicated by a one-time revenue boost that Dignity received in December 2014 from the return of California's provider fee program. The program, which supplements Medicaid payments, was on hold for most of 2014, waiting for the CMS to approve its extension. When that happened in December 2014, Dignity recognized 12 months of provider-fee revenue that month, which artificially inflated those results.
In total, Dignity reported a second-quarter operating surplus of $2.1 million on total revenue of $3.1 billion, compared with an operating surplus of $377.9 million on $3.7 billion in the prior-year period.
The system also increased its capital expenditures, spending $341.6 million in the first half of its fiscal year to renovate its facilities and upgrade its equipment, compared with $336.5 million spent during the same period in fiscal 2015.
Dignity has been making progress on its transition to a consumer-focused, value-based operating model, which was launched in 2010 as its Horizon 2020 strategy.
Without reporting metrics, Dignity said it is seeing the largest improvements under the model in delivering timelier care in its emergency departments and reducing surgical-site infections.
The number of physicians participating in its clinical-integration networks—which focus on standardizing quality metrics, sharing information, peer review and payer contracting—has increased nearly 8% since June 2015.
Dignity has about 100 value-based payment agreements in place covering 715,000 lives, an almost 20% increase in attributable lives since June 2015.
Partnerships and joint ventures continue to be a key part of Dignity's strategy. The system, in the second fiscal quarter, approved a joint venture with micro-hospital company Emerus. The partners will build four micro-hospitals in the Las Vegas Valley that will have a limited number of services such as primary-care clinics, infusion centers or ambulatory surgery centers.
As part of the deal, Dignity also took a minority stake in Emerus.
The agreement follows Dignity's October sale of a 20% stake in St. Joseph's Medical Center in Stockton, Calif., to Kaiser Foundation Hospitals.