Banner Health's operating surplus dropped by more than half in 2015. The Phoenix-based health system had a difficult time integrating its University of Arizona Health Network acquisition.
Banner also posted an unexpectedly large loss from its accountable care organization, Banner Health Network, which had previously been performing well. Banner Health Network is one of nine Medicare Pioneer ACOs still standing, and the ACO also contracts with several private payers and large employers to receive monthly, capitated payments for each covered member.
Banner posted an operating surplus of $128.4 million on nearly $7 billion of revenue in 2015, equaling a 1.8% margin. That was down significantly from 2014, when the system had an operating surplus of $263.3 million on $5.4 billion of revenue, good for a 4.9% margin.
Executives expected the decline in day-to-day operations because UAHN, a major academic medical center, was struggling financially. In the first several months of 2015, UAHN had a negative 1.8% operating margin.
Academic hospitals have costly footprints that stem from their medical training and research. In the case of UAHN, Banner also took over several health plans, a function it previously did not own. The system expects to strip out $100 million of UAHN overhead by 2018.
But UAHN was not Banner's only major challenge. The system's ACO lost $49.3 million in 2015. Executives said in accompanying documents that the deficit was a “significant performance decline from the $7.2 million operating income in 2014.”
Banner Health Network encompasses numerous hospitals, doctors, surgery centers and post-acute facilities throughout Arizona. The goal of the ACO is to lower costs and improve outcomes. Banner's ACO has been held as a high achiever, but last year, several problems surfaced.
Many of Banner's ACO members went to out-of-network providers, executives said in the documents, but Banner was still on the hook for those medical claims. ACOs want to keep members within their network, similar to HMOs, so they can coordinate care and contain costs. Banner Health Network also was tagged with large losses tied to its fully capitated contract with Blue Cross and Blue Shield of Arizona Advantage, a Medicare Advantage plan in which Banner is a joint venture partner. Lower-than-expected risk adjustment payments also played a role, the system said.
No details were provided about Banner's Pioneer ACO, which has been one of the most successful to date in terms of saving money and scoring high quality marks. However, Banner CEO Peter Fine told Modern Healthcare in 2013 that he didn't think the Pioneer program would be a long-term solution.
“I think everyone in this program would prefer people be in the Medicare Advantage plan,” Fine said. “The only way you can reduce the level of care is to have a close relationship between the organization and the individual.”
Banner also absorbed “materially” higher supply expenses last year, which included the “well-publicized increases in pharmaceutical prices.” Nearly all health system leaders have said the recent spike in drug prices has hurt their organizations' bottom lines.
On a same-facility basis, Banner's inpatient admissions dropped 4%, and observation cases soared 11%. Emergency room visits went up 6%, while physician clinic visits jumped 8.4%, according to Banner's financial documents.
Banner's net surplus, including investment income, fell 65% year over year to $83.7 million. Many of the nation's not-for-profit hospitals and health systems lost huge sums of money in the stock markets last year.