(This story was updated at 4 p.m. ET on Monday, April 11.)
The Federal Trade Commission isn't Advocate Health Care's only major challenge right now. The Downers Grove, Ill.-based health system took a step back last year with its capitated, value-based insurance contracts, although it improved those contracts when including its joint venture physician group.
Advocate's direct capitated revenue, which represents lump-sum payments from health insurers instead of fee-for-service payments, dropped 0.5% in 2015, totaling $411.5 million. Advocate also closed last year with lower operating and net margins due to rising expenses and investment losses.
Advocate said in its 2015 financial filings that capitated revenue, which is only 7.6% of its $5.4 billion revenue base, declined because there was a sharp drop in people covered under partial-risk and shared-savings plans through its affiliated physician groups. The number of full-risk patients actually increased by a small amount. Advocate's employed physician practices recorded a 7% drop in total capitated-covered lives.
However, Dominic Nakis, Advocate’s chief financial officer, said the system actually improved its “enterprise-wise” capitated revenue year over year after adding in the performance of Advocate Physician Partners. APP is a joint venture between the health system and 3,600 independent physicians throughout the Chicago area. Although Advocate and APP are “clinically integrated,” APP’s financial data are not consolidated into Advocate’s bondholder records because Advocate only owns 50% of the entity.
When including APP, Advocate’s capitated revenue marginally increased 3.5% in 2015 to $1.15 billion, Nakis said. APP “is the main mechanism to manage value- and risk-based contracts,” Nakis said, and Advocate now has more than 725,000 lives covered under value-based agreements.
The federal government and other payers want to move more toward value-based reimbursement, in which hospitals and doctors are paid for high quality and low costs instead of receiving payment for every test or treatment. Capitated contracts, where providers take on most or all of the financial risk associated with caring for patients, fall on the extreme end of value-based payments.
Advocate is ahead of most of the rest of the country in terms of embracing capitation, but most systems still rely heavily on the fee-for-service payment structure.
A more immediate concern for Advocate comes next week, when it faces a battle with the FTC over its pending megamerger with NorthShore University HealthSystem. Advocate, which employs 34,600, is the largest health system in Illinois. NorthShore controls big patches of Chicago's affluent North Shore suburbs. The FTC has argued the transaction would be anticompetitive and lead to higher prices.
Advocate's $5.4 billion revenue in 2015 was a 3% increase from the year before. Admissions across Advocate's 12 acute-care hospitals went up 1.5%, while outpatient visits rose 1.8%.
After subtracting day-to-day expenses, Advocate posted a $330.5 million operating surplus last year, equal to a 6.1% margin. That compared to 2014's $339.3 million operating surplus and 6.5% margin.
Advocate's net surplus declined 79% year over year, totaling $78.6 million compared to $369.6 million in 2014. Advocate, like other not-for-profit health systems, suffered massive investment losses on the stock markets.