and Results of Operations The following information should be read with Ascension Health Alliance s audited consolidated financial statements and related notes to the consolidated financial statements. Business Combinations The System continues to grow through two significant business combinations which occurred during the past two years. Effective April 1, 2013, three regional health systems that formerly comprised Marian Health System, Inc. (Marian Health System) have joined Ascension Health, a subsidiary of Ascension Health Alliance (the System). The three health systems are: Via Christi Health, Inc. (Via Christi Health), based in Wichita, Kansas; Ministry Health Care, Inc. (Ministry Health Care), based in Milwaukee, Wisconsin; and St. John Health System, Inc. (St. John Health), based in Tulsa, Oklahoma (collectively, the Marian Systems). Prior to this transaction, Ascension Health had a 50% interest in Via Christi Health, which was accounted for under the equity method of accounting. The System and the Marian Systems share a common mission of serving all, with special attention to those who are poor and vulnerable. Additionally, both share a commitment to providing spiritually centered, holistic care and advocating for a compassionate and just society through actions and words. By adding the strengths and expertise of the Marian Systems to those of Ascension Health, the System creates a combined ministry that is even more able to live the Mission of serving all and position the Health Ministries to meet the needs of the communities they serve. In total, the merger of the Marian Systems into Ascension Health added 32 hospitals and more than 250 clinics in the states of Wisconsin, Minnesota, Oklahoma and Kansas to the System. As of April 1, 2013 this business combination resulted in a contribution from business combinations of $2.0 billion, net of the 50% interest in Via Christi Health, with increases to total assets of $4.9 billion, total liabilities of $2.7 billion and restricted net assets of $0.2 billion, including the contribution of unrestricted net assets noncontrolling interests. For the fiscal year ended September 30, 2012, the Marian Systems recognized $3.9 billion in total revenues. For the quarter ended June 30, 2013, the Marian Systems recognized $1.0 billion in total revenue. Effective January 1, 2012, Ascension Health became sole corporate member of Alexian Brothers Health System (Alexian Brothers), a Catholic healthcare system which operates acute and specialty care hospitals, ambulatory care clinics, physician practices and senior living facilities in Illinois, Missouri, Tennessee and Wisconsin. This transaction resulted in a contribution from business combinations of $326 million, with increases to restricted net assets of $16 million. Symphony and Ministry Service Center Symphony is an enterprise resource planning initiative of Ascension Health Alliance impacting all of the System s Health Ministries. Symphony is intended to facilitate efficiency, focus resources, and provide analytic capabilities that will improve operational and clinical decisions, both at the local Health Ministry and System-wide levels, by providing a single, centralized source of information with a shared database, allowing for immediate information access and retrieval and reducing or eliminating data inaccuracy and duplication.
Through Symphony, the System is implementing new operational practices in finance, human resources, and supply chain, enabled by information technology. As of June 30, 2013, this initiative has been successfully deployed at eight Health Ministries with more than 37,000 users and is expected to be fully implemented in fiscal year 2016. The Ministry Service Center (MSC), a key part of Symphony, provides shared services in the areas of human resources, supply chain and finance to the Health Ministries of the System. Through process transformation, the MSC delivers value by providing services more efficiently, enabling new insights, and facilitating Health Ministry consistency in day to day practices. Results of Operations Volume Trends and Net Patient Service Revenue For the year ended June 30, 2013, the System experienced a 7.0% increase in equivalent discharges and a 5.5% increase in inpatient admissions as compared to the year ended June 30, 2012. Increases in patient volumes are primarily due to the addition of the Marian Systems on April 1, 2013, and Alexian Brothers on January 1, 2012. On a same facility basis (the System excluding the Marian Systems, Alexian Brothers and certain other facilities which do not have comparable operation periods in the prior year), equivalent discharges decreased 1.8% from prior year, a reflection of the national trend toward declining utilization rates in healthcare delivery systems. Outpatient visits increased 8.4% (decrease of 0.4% on a same facility basis) for the year ended June 30, 2013, as compared to the same period in the prior year, primarily due to the addition of the Marian Systems and Alexian Brothers. Observation days increased 8.8% (1.4% on a same facility basis) as compared to the same period of the prior year. The increase in observation days is consistent with the health care industry trend toward avoiding short inpatient stays through ongoing short-term treatment and assessment, in lieu of inpatient admission. While the System continues to see an increase in observation days, the System has been able to manage this increase as compared to the increases seen in the past two fiscal years of approximately 14% per year, to the slight increase experienced during the fiscal year ended June 30, 2013. Outpatient revenue as a percentage of total gross patient service revenue was 48.4% for the year ended June 30, 2013, which increased slightly from 47.7% for the year ended June 30, 2012. The System was able to achieve a 2.7% increase in net patient service revenue per equivalent discharge both on a consolidated basis and on a same facility basis, due to successful managed care negotiations resulting in improved commercial rates. Additionally, the System experienced a slight increase in the case mix index to 1.51 both on a consolidated basis and a same facility basis for the year ended June 30, 2013 as compared to 1.50 for the year ended June 30, 2012. 2
The following table reflects certain patient volume information and key performance indicators for the year ended June 30, 2013 and 2012. Volume Trends and Key Performance Indicators Year Ended June 30, 2013 2012 Volume Trends Equivalent Discharges 1,391,793 1,300,806 Total Admissions 716,284 678,864 Case Mix Index 1.51 1.50 Acute Average Length of Stay (days) 4.48 4.42 Observation Days 239,333 219,981 Emergency Room Visits 2,594,566 2,390,070 Surgical Visits (IP & OP) 543,811 511,018 Physician Office Visits 7,727,549 6,811,657 Home Health Visits 617,287 530,117 Key Performance Indicators Recurring Operating Margin 3.0% 4.2% Operating Margin 2.3% 6.1% Operating EBITDA Margin 7.7% 11.3% Increases in emergency room and physician office visits are primarily due to the addition of the Marian Systems and Alexian Brothers to Ascension Health. Physician office visits have increased 3.2% on a same facility basis consistent with the transition to deliver healthcare services in the outpatient setting. Income from Recurring Operations and Income from Operations For the year ended June 30, 2013, income from recurring operations was $474 million compared to $628 million for the year ended June 30, 2012, and income from operations was $397 million compared to $931 million for the year ended June 30, 2012. Recurring Operations For the year ended June 30, 2013: Net patient service revenue, less provision for doubtful accounts, increased $1.4 billion, or 9.9%, (an increase of $135 million, or 0.9%, on a same facility basis), as a result of the 7.0% increase in equivalent discharges, primarily due to the addition of the Marian Systems and Alexian Brothers. On a same facility basis, successful managed care negotiations resulted in an approximate 2.8% increase in net revenue realization per equivalent discharge. Partially offsetting these favorable factors were increases in uncompensated care, slight shift from inpatient to observation days and shifts in payor mix. 3
Other revenue increased $390 million, or 40.3%, (an increase of $124 million, or 12.8%, on a same facility basis) primarily due to the following: The addition of the Marian Systems and Alexian Brothers Increase due to the American Recovery and Reinvestment Act (ARRA) meaningful use incentive revenue, both federal and state Increased revenue at TriMedx, a wholly-owned biomedical engineering company, due to the addition of several new customers during the fiscal year Improved investment returns reflected in the investment in Via Christi Health, prior to the addition of Via Christi Health on April 1, 2013 Total operating expenses increased $2.0 billion, or 13.4% ($445 million on a same facility basis), primarily due to the following: Salaries and wages and employee benefits increased $858 million, or 10.8%, (an increase of $96 million, or 1.2%, on a same facility basis) due primarily to focused efforts to improve labor productivity and redesign of defined benefit pension plans. Purchased services expense increased $296 million, or 40.3%, (an increase of $184 million, or 25.1%, on a same facility basis) due to the addition of the Marian Systems and Alexian Brothers and the ongoing transition to a third-party contractor to provide dietary and housekeeping services at a reduced rate across the System. Supplies expense increased $167 million, or 7.4%, (a decrease of $40 million, or 1.8%, on a same facility basis) due to the addition of the Marian Systems and Alexian Brothers, offset by management s continued focus on supply chain management as evidenced by the 0.4% increase in supplies expense per equivalent discharge (no change on a same facility basis) compared to the prior year. Supplies expense was favorably impacted by a decline in inpatient surgical volumes as well as an increase in purchasing rebates due to the new Group Purchasing Organization developed for the System. Other expenses increased $403 million, or 22.6%, (an increase of $145 million, or 8.1%, on a same facility basis) primarily due to: The addition of the Marian Systems and Alexian Brothers Increases in state sponsored provider tax expense in Indiana and other various states Information system improvements Increased repairs and maintenance expense due to growth at TriMedx 4
Impairment, Restructuring and Non-Recurring Net impairment, restructuring and nonrecurring losses were $112 million for the year ended June 30, 2013 as compared to a gain of $286 million during the year ended June 30, 2012, primarily due to the $402 million pension curtailment gain recorded in the year ended June 30, 2012 as compared to the $72 million recorded in the year ended June 30, 2013. In addition, Symphony had expenses of $116 million for the year ended June 30, 2013, an increase of $61 million over the prior year. We expect to incur the highest level of expenses from Symphony during fiscal years 2013 and 2014. During the year ended June 30, 2013, approximately $45 million of severance related expenses were recorded for reductions in workforce as a result of management s continued focus on expense management. Nonoperating Gains, Net For the year ended June 30, 2013, nonoperating gains, net were $2.7 billion compared to nonoperating gains of $53 million for the year ended June 30, 2012. This change is primarily due to the contributions from business combinations for the Marian Systems of $2.0 billion during the year ended June 30, 2013, in contrast to the $326 million contribution from Alexian Brothers recorded for the year ended June 30, 2012. Additionally, nonoperating investment return increased $873 million as further discussed in the Investment Return section that follows and gains on interest rate swaps increased $136 million. Investment Return For the year ended June 30, 2013, the long-term investments held in the Alpha Fund, excluding noncontrolling interests and long-term investments held by the self-insurance programs, earned a return of 8.7%, compared to a loss of 0.9% for the year ended June 30, 2012, an increase of 9.6%. The System s cash and investments are invested in a broadly diversified portfolio that is managed by Catholic Health Investment Management Company (CHIMCO), a wholly owned subsidiary of Ascension Health Alliance. Excess of Revenues and Gains over Expenses and Losses The excess of revenues and gains over expenses and losses was $3.1 billion and $984 million for the year ended June 30, 2013 and 2012, respectively. Contributions from business combinations for the year ended June 30, 2013 increased $1.7 billion as compared to the prior year. In addition, investment return increased $873 million as compared to the prior year. These increases were offset by the decrease in curtailment gain of $330 million for the year ended June 30, 2013, as compared to the prior year. Care of Persons Living in Poverty and Community Benefit Programs The unpaid cost of providing care to persons living in poverty and community benefit programs was $1.5 billion for the year ended June 30, 2013, a $154 million, or 11.5%, increase over the year ended June 30, 2012. This increase is primarily attributable to increased charity care provided as a result of the addition of the Marian Systems and Alexian Brothers, economic conditions driving increased charity care in certain markets, further eligibility restrictions and reduced reimbursement in state sponsored Medicaid programs, and increased unreimbursed costs of medical education and community clinics. 5
Liquidity and Capital Resources Ascension Health Alliance The System had net unrestricted cash and investments of $12.0 billion at June 30, 2013, compared to $9.1 billion at June 30, 2012, an increase of $2.9 billion, or 31.6%, of which $2.2 billion is attributable to the Marian Systems. Cash-to-senior debt and cash-to-debt continue to be strong at 204.3% and 183.2%, respectively, at June 30, 2013. Balance Sheet Ratios June 30, 2013 2012 Days Cash on Hand 231 237 Net Days in Accounts Receivable 47 46 Cash-to-Senior Debt 204.3% 216.6% Cash-to-Debt (Senior and Subordinated) 183.2% 190.1% Senior Debt to Capitalization 28.0% 26.1% Total Debt to Capitalization 30.2% 28.7% Capital Financing and Asset Management Through the normal course of its debt management activities, the System remarkets certain series of outstanding put bonds on scheduled remarketing dates, resetting the interest rates to current market levels for new interest mode periods. Total net investments under management by CHIMCO are $25.9 billion and $22.6 billion at June 30, 2013 and 2012, respectively. Of the total net investments under CHIMCO management, $12.8 billion and $9.5 billion are included in the consolidated net assets of the System at June 30, 2013 and 2012, respectively, because these net assets are controlled by the System. On June 18, 2013, the System redeemed or refinanced a portion of the debt of the Marian Systems. The plan of financing included the issuance of $521,865,000 of tax-exempt bonds, Series 2013A and 2013B through the Wisconsin issuing authority, and $425,000,000 of taxable bonds, Series 2013A. The proceeds of the bonds, including original issue premium, were used primarily to refinance certain debt of the former Marian Systems. A portion of the bonds previously issued for the benefit of the Marian Systems remains outstanding. These bonds continue to be secured by the respective Master Trust Indentures, including St. John Health System, Ministry Health Care, Howard Young Medical Center, Inc. (a subsidiary of Ministry Health Care) and Mercy Regional Health Center, Inc. (a subsidiary of Via Christi Health). 6