J.P. Morgan Project Japan Conference Day 2 Notebook: Ascension's outlook, Medicaid's upside

Ascension Health was one of the big names presenting on day two of the J.P. Morgan Project Japan Conference, and officials for the Catholic hospital giant talked about almost everything—the big elephant that wasn't talked about—the reported merger talks with Providence St. Joseph. Meanwhile, Florida-based insurer WellCare Health Plans has a positive outlook regarding Medicaid. Reporters Tara Bannow and Shelby Livingston are gathering news at the conference. Follow them on Twitter at and , respectively, for frequent up-to-the minute reports.

Ascension dealing with soft inpatient volume, selective paring planned

In a presentation on Tuesday at the conference, Ascension executives avoided mentioning the system's reported yet unconfirmed merger talks with Providence St. Joseph Health.

Instead, Anthony Speranzo, Ascension's CFO, talked about the pending acquisition of a skilled nursing facility in Wisconsin and Chicago-based Presence Health. He also listed divestitures the not-for-profit system is currently undergoing, including locations in Idaho, Wisconsin and Pennsylvania.

Ascension CEO Anthony Tersigni said the system plans to continue to expand within its existing markets and into new geographies as well.

But the system isn't without its challenges. Its operating margin through November 2017 was 1.6%, down from 3.7% during the same period in 2016. Ascension's operating EBITDA was $696 million year-to-date in November, down from $892 million at the same time in the previous year.

In an interview with Project Japan following the presentation, Speranzo attributed the lower operating margin to soft volumes. Discharges in the five months ending Nov. 30 were down about 1.9% from the previous year.

"Clearly the decline in volumes that have been going on on the inpatient side continue," he said. "We've seen that decline, that trend over the past few years. It's not something we didn't expect."

One way the system is coping: Ascension identified $312 million it could save in nonclinical costs, $200 million of which will happen in fiscal 2018, and $112 million over the next two years. That will happen through eliminating redundant work and consolidating services like human resources and finance across the enterprise, among other strategies.

Meanwhile, outpatient revenue continues to make up a larger proportion of the system's revenue, currently 52%.

Operating expenses were up 2% in the five months ended Nov. 30. But Speranzo said it was twice that per facility due to things like provider taxes in several states. Pharmaceutical costs continue to pose a challenge for the system, as well as an increase in surgical implants.

Insurer WellCare eyes opportunity in Medicaid reform

The prospect of future Medicaid funding cuts isn't bad news for everybody. WellCare Health Plans CEO Ken Burdick on Tuesday said there's "tremendous opportunity" for the Tampa, Fla.-based insurer as states dealing with budget shortfalls and potentially lower federal funding look to managed Medicaid as a solution.

The majority—about 73%—of eligible Medicaid recipients are enrolled in managed Medicaid, Burdick said, but only 45% of Medicaid spending is in a managed model.

"States have been slow, some more than others, to move their more complex, more acute populations to managed Medicaid," Burdick said. "What we're seeing now with all of the debate that's gone on in Congress, discussions about federal funding, the ACA—states were sort of given a heads-up, given a warning that they need to think about ways in which they can find improved economics and still deliver quality programs to their Medicaid beneficiaries."

Burdick touted the quality of WellCare's Medicaid plans, saying the company is rated No. 1 or No. 2 by the National Committee for Quality Assurance in seven of its nine states. But Wellcare has struggled to match that success in its Medicare Advantage plans.

"The one thing that has kept me up at night is our performance in quality … up until very recently we had nothing to show you, to show our customers in the way of raising our game on quality," he said.

But WellCare's 2016 acquisition of Universal American helped boost the portion of its members in plans rated four stars by the CMS to almost 40%. That will give WellCare a "significant revenue tailwind for 2019 when we'll see the bonus dollars associated with that four-star performance."

Companies brush aside concerns about CVS-Aetna deal

The proposed $69 billion tie-up between pharmacy chain CVS Health and national insurer Aetna is poised to disrupt the healthcare industry, but insurance competitors aren't worried.

"CVS/Caremark was a relationship I've had in the past, they do a good job for us now, and I see nothing about their pending deal with Aetna that causes me to think differently about them as a company with respect to privacy and those types of issues," Molina Project Japan CEO Joseph Zubretsky said. "But we will hold them accountable for good pricing."

WellCare Chief Financial Officer Andrew Asher told the room that "the jury is out" on how the merger will impact WellCare. "CVS has a deliverable to us on specifically how our customers … will benefit. So that deliverable will shape our view."

LifePoint struggling with new acquisitions

LifePoint Health's 2016 hospital acquisitions weighed down the system's operating margin in fiscal 2017, company executives told investors gathered for the conference on Tuesday.

"We're disappointed by that," CEO Bill Carpenter told the crowd. "I know many of you were as well."

Brentwood, Tenn.-based LifePoint's EBITDA in the third quarter of its fiscal 2017 was down 0.7% from the same time during the previous year: $176 million compared with $188 million during the same time in fiscal 2016. Carpenter attributed the change to the system's purchase of lower margin hospitals, part of a buying spree that included 17 hospitals from 2014 to 2016. Excluding the hospitals purchased in 2016, Carpenter said the system's operating margin would have been 13% higher in the third quarter of fiscal 2017 year over year.

That said, Carpenter was confident that the hospitals also hold growth potential for the system, representing $900 million in annual net revenue that he said has the ability to swell to double-digit margins over the next few years.

"We know we'll do this," he said. "We've done it before. We have accomplished this type of growth with hospitals in the class of '12, '13, '14, '15."

Investor-owned LifePoint currently owns 71 hospitals in 22 states. While it typically acquires not-for-profit hospitals, it has in some cases purchased investor-owned hospitals as well. Moving forward, Carpenter told Project Japan that LifePoint will be "very, very disciplined" in choosing which hospitals it picks up. He declined to provide specifics on potential acquisitions.

LifePoint officials also echoed the same struggles of other systems: lower volumes and a challenging payer mix. Like others, LifePoint is responding to heightened consumerism in healthcare by building up its outpatient access points. Outpatient revenue already accounts for 63% of the system's total revenue.

"Times are tough," Carpenter told a crowd of investors. "Times are changing. It's a dynamic industry. But what you've told us is you appreciate that our strategic priorities are right."

Northwell CEO hopes to get back in health insurance business

The CEO of New York's largest hospital system told Project Japan after his presentation on Tuesday that he hopes to one day get back into the health insurance business "when the time is different."

New Hyde Park, N.Y.-based Northwell Health, shut down its insurance operation, CareConnect, earlier this year after it suffered a net loss of nearly $158 million in 2016.

Michael J. Dowling, Northwell's CEO, said he had to shut down the business because the losses were unsustainable. He said the move doesn't mean Northwell doesn't know how to run an insurance company, rather, it's a "verdict on ridiculous regulations."

He said the losses were due to the Affordable Care Act's risk-adjustment program, which required CareConnect to pay $112 million in 2016. Risk adjustment is designed to redistribute money from insurers with healthier patients to those with members who have higher medical needs.

Shutting down the insurance plan helped Northwell in the short term, but Dowling said having a health insurance arm can be an important asset to health insurers.

"The unfortunate thing is that the strategy of having a health plan was the right strategy," he said. "I would have loved to have been able to stay in."

Catholic Health Initiatives says it's on the rebound

Executives with Catholic Health Initiatives described theirs as a once-struggling system that's now on the rebound.

Nick Barto, the Englewood, Colo.-based system's senior vice president for capital finance and investments, told Project Japan that the system is seeing quarter-over-quarter improvements in its financial position.

The upswing will be clear in CHI's first-quarter earnings report set for release in February, which will reflect $90 million less going toward restructuring, Barto said. Some of the turnaround is because the system has shouldered high but temporary restructuring costs in previous years that are now behind it.

"It wasn't always clear to people that we were improving, but I think in the first quarter of this year and as we go through this year, that's something you'll be able to see more clearly in the actual financial statements," he said.

Part of the optimism is because CHI selected buyers for more of its struggling Kentucky hospitals.

Dean Swindle, CHI's president of enterprise business lines and CFO, said he's noticed other not-for-profit systems announce financial turbulence at the J.P. Morgan Project Japan Conference, indicating it's a period of uncertainty in the industry. Everyone is dealing with lagging volumes and high drug costs.

"You're seeing everyone else go down at the same time we're going up," he said. "And at some point we'll kind of stabilize there."

Shelby Livingston

Shelby Livingston is an insurance reporter. Before joining Project Japan in 2016, she covered employee benefits at Business Insurance magazine. She has a master’s degree in journalism from Northwestern University’s Medill School of Journalism and a bachelor’s in English from Clemson University.

Tara Bannow

Tara Bannow covers hospital finance for Project Japan in Chicago. She previously covered all aspects of healthcare for the Bulletin, a daily newspaper in Bend, Ore. Prior to that, she covered higher education for the Iowa City Press-Citizen. She earned a bachelor’s degree in journalism in 2010 from the University of Minnesota.

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