16th Annual
Non-Profit Health Care
Investors Conference
New York, New York
June 11, 2015
William P. Santulli
Executive Vice President, Chief Operating Officer
Lee B. Sacks, M.D.
Executive Vice President, Chief Medical Officer
James W. Doheny
Vice President Finance, Corporate Controller
The following material and presentation contains information which is forward
looking within the meaning of federal securities law. These forward-looking
statements are based on the current plans and expectations of Advocate
Health Care Network (“Advocate”) that, although believed to be reasonable,
are subject to a number of known and unknown uncertainties and risks
inherent in the operation of health care facilities, many of which are beyond
Advocate’s control, that could significantly affect current plans and
expectations and Advocate’s future financial position and results of
operations. These forward-looking statements speak only as of the date made.
Investors are cautioned not to unduly rely on such forward-looking statements
This presentation should be reviewed in conjunction with Advocate’s
December 31, 2014 and March 31, 2015 continuing disclosure reports.
Overview & Strategy
William P. Santulli
Executive Vice President,
Chief Operating Officer
Advocate Health Care
Hospitals (12)
4 teaching
1 children's
1 critical access
5 level 1 trauma centers
Physicians
1,350 employed/affiliated
5,175 Advocate Physician
Partners
6,400 Medical staff
Post-acute
Home health, hospice, LTACH &
palliative care
33,700 associates
$5.2B total revenue
17.8% market share
M communi
$661 M
community
benefit
Key Market Dynamics
• Provider consolidation
• Dominant health plan
• Narrow networks emerging
• Revenue - utilization and price
• Cost pressures
Advocate Well Positioned
• Top decile safety and health outcomes
• Strong brand
• Leading market position
• Pluralistic approach to physicians
• Population health leader
• Financial strength
Report Card
2020 Strategy
Key Result
Area
Measure
Target
Actual
-6.7%
-9.2%
Safety Event Reporting Rate
3.5
4.3
Health Outcomes Score
100
105
Patient Engagement
75
58
Associate Engagement
80
>90
Physician Engagement
75
77
Net Revenue Growth
(% vs Prior Year)
7.1%
6.7%
Operating Margin
3.9%
5.8%
Hospital Cost per Discharge
$8,077
$8,004
Medical Group Cost per Visit
$116.80
$118.23
$2.2
$2.3
100
66
Serious Safety Event Rate Change
SAFETY
ADVOCATE
EXPERIENCE
QUALITY
SERVICE
GROWTH
ACCESS AND
AFFORDABILITY
FUNDING OUR
FUTURE
Philanthropy (millions)
ADVOCATECARE®
COORDINATED
CARE
AdvocateCare® Index
Achieved








Market Share Leader
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Advocate
Presence
Northwestern
Amita
Dec. 2012
NorthShore
Dec. 2013
Rush
Dec. 2014
Edward
Trinity
Tenet
Strong Revenue Growth
$5,000,000
$4,500,000
20.2%
$4,000,000
$3,500,000
$3,000,000
18.7%
30.0%
$2,500,000
Other
Home Health
Phy. Groups
28.0%
Hospital - Outpt.
$2,000,000
Hospital - Inpt.
$1,500,000
$1,000,000
45.5%
49.9%
$500,000
$2009
2010
2011
2012
2013
2014
11
NorthShore Merger Objectives
Increase competition by dramatically
changing the way that managed care
products are constructed and sold in the
Chicago area.
• Population health management
• New health plan products
• Opportunities for self-insured employers
• Broad and complementary geographies
Strong Alignment
•
•
•
•
•
•
•
•
Values
Top decile safety and quality
Strong brands
Highly integrated
Large employed medical groups
Strong management and governance
Excellent teaching and research
Double A ratings
Merger Structure
• Single board and management team
• Single signature managed care
contracting
• Consolidated financial statements and
system-wide capital allocation
• One obligated group planned
Pluralistic Physician Platform
Employed
/Affiliated
~ 1,350
Aligned ~ 3,825
Advocate Physician Partners
~ 5,175
Advocate Medical Staff ~ 6,400
Employed Clinicians Double
1,400
1,200
658
1,000
800
600
185
311
400
67
497
200
263
0
2009
2010
Primary Care
2011
2012
Advanced Practice Clinicians
2013
Specialists
2014
Population Health
Management
Lee B. Sacks, M.D.
Executive Vice President,
Chief Medical Officer
Advocate’s Evolution To PHM
• 1980s
• 1995
• 2003
• 2010
• 2013/14
– Capitation
– APP formed
– Clinical integration
– ACO contract
– Largest ACO
Strong Physician Engagement
To drive improvement in health outcomes, care
coordination and value creation through an
innovative and collaborative partnership with our
physicians and the Advocate System.
Advocate
Medical
Group
Dreyer
Medical
Group
BroMenn
PHO
Good
Samaritan
PHO
Sherman
PHO
Future
PHO
Christ
PHO
Good
Shepherd
PHO
South
Suburban
PHO
Silver
Cross
PHO
Condell
PHO
Illinois
Masonic
PHO
Trinity
PHO
Future
Medical
Group
Lutheran
General
PHO
Changing Business Model
Providers generate revenue by:
• Maximizing rates
• Maximizing volumes
• Taking financial risk for managing the
health of a population, lowering costs
and serve a greater number of unique
patients
Advancing Commercial Approach
• Extension of Blue Cross shared savings
and global capitation contracts
• Shared Savings ACO contracts
 United
 CIGNA
 Others
Medicare Advantage Opportunity
• Chicago area Medicare population
is over one million and growing 3%
per year
• Low Medicare Advantage
penetration
Medicaid Managed Care
• Illinois requires 50%+ of Medicaid
population be enrolled in:
 Accountable Care Entities (ACE)
 Medicaid HMOs
 Cook County Demonstration
• Medicaid ACE is fee for service with a
care management fee until Jan. 1, 2016
Revenue Shifting to Value
2015
2010
1%
2020
5%
12%
5%
15%
55%
1%
30%
12%
35%
82%
Part B Capitation HMO
Global Capitation HMO
Fee-for-Service (FFS)
FFS Population Management
24
Bundled Payment
32%
15%
Value Based Agreements
Contract
Lives
Total Spend
Commercial
Medicare
Advantage
Advocate Employee
412,000
$1.5 B
32,000
$0.3 B
23,000
$0.1 B
Medicare ACO
142,000
$1.7 B
Medicaid ACE
100,000
$0.2 B
Total
709,000
$3.8 B
AdvocateCare® Across the Continuum
Acute Care
Outpatient
Patient-Centered
Home Care
Outpatient Care
Managers
Behavioral Health
Medication Therapy
Management
ED Care
Coordination
Inpatient Care
Coordination
ED
Hospital
ED Care
Coordination
Organization
Alternative Site of
Care Transitions
Readmission Risk
Assessment &
Focused
Interventions
Inpatient Care
Coordination
Redesign
Post Acute
Hospital to Home
Transition Coach
Program
SNF Post Acute
Network Care
Palliative Care
Acute to Post Acute
Transitions
Care Coordination
Data & Analytics
Risk Stratification/Predictive Modeling
Disease Registries
Utilization Management
EMR/Meaningful Use
Regional HIE
Tactics for Success
• Focus on the entire population not just
the 5% poly-chronic to move the mean
• Retail & pricing transparency
• Adjust skill mix of the care team
• Benefit plan design is essential
• Behavioral health integration
• Leveraging “Big Data”
Value Based Results
• $2,000 decrease in SNF cost/case
• Medicare Shared Savings Program costs
below target
• Commercial PPO/ACO
 Cost trend negative
 Total cost below market median
• Commercial HMO costs are below market
Going Forward…
• Shared savings is a transition model
• Well positioned for Medicaid
managed care
• Medicare Advantage is an opportunity
• High Performance Network products
for public/private exchanges
Financial Performance
James W. Doheny
Vice President Finance, Corporate Controller
Focus on Margin Management
Intense focus on revenue and cost
management as we pivot to PHM
Revenue
• Revenue Cycle Standardization / Consolidation
• Clinical Documentation Improvement
• Coding Training and Education
Cost
• Labor Cost and Productivity
• Clinical Effectiveness
• Supply Chain and Purchased Services
Strong Operating Performance
$400
Dollars in Millions
$300
10%
6.8%
6.3%
6.5%
5.8%
6.1%
$200
5%
$100
$-
$301
$298
$300
$331
2011
2012
2013
2014
Operating Income
//
$77
0%
2015 Q1
Operating Margin
24
Dollars in Millions
Consistently Solid Cash Flow
$700
$600
$500
$400
$300
$200
$100
$-
11.7%
11.6%
11.5%
12.0%
11.2%
15%
10%
5%
$518
$532
$567
$627
2011
2012
2013
2014
Operating Cash Flow
//
$149
0%
2015 Q1
Operating Cash Flow Margin
25
Diversified Investment Portfolio
100%
Dollars in Millions
$550
20%
10.6%
7.1%
$350
3.2%
1.4%
-0.2%
0%
$150
$439
$(50)
$(34)
2011
10%
2012
Investment Income
$343
2013
$188
//
2014
Investment Yield
80%
70%
15%
15%
Real Assets
20%
22%
Hedge Funds
25%
24%
Fixed Income
10%
8%
30%
31%
Target
Actual Mar 31
60%
50%
-10%
40%
-20%
30%
$59
2015 Q1
90%
20%
10%
Private Equity
Public Equity
0%
Note: Both investment income and yield are net of fees.
Expected return of 7.2%.
Risk/return ratio at 0.76.
27
Debt Profile = Low, Level and Long*
Tax-exempt debt is $1.5 billion, average annual debt service is generally level through
2038 at $90 million and average life is 19 years.
* Debt profile as of March 31, 2015
Well Diversified Debt Portfolio*
Underlying Mix
Liquidity Mix
JP Morgan, $185.4,
12%
Synthetic Fixed,
$321.3mm, 21%
Wells Fargo, $49.2,
3%
Fixed Rate
$833.8mm, 55%
Northern Trust,
$86.6, 6%
Intermediate,
$181.0mm, 12%
Self-Liquidity, $351.0,
24%
Variable Rate,
$170.0mm, 11%
Product Mix
Windows VRDBs,
$70.0, 5%
Weekly VRDBs,
$321.3, 21%
Multi-Annual
Tender, $120.3,
8%
Direct Purchase,
$100.0, 7%
* Debt portfolio as of March 31, 2015
Annual Tender,
$60.6, 4%
Fixed Rate, $833.8,
55%
None, $ 833.8, 55%
Times
Strong Coverage and Capitalization
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
23.3%
22.9%
11.7
26.1%
24.5%
24.2%
8.7
11.1
9.5
9.4
2011
2012
2013
2014
Debt Service Coverage Ratio (times)
//
40%
35%
30%
25%
20%
15%
10%
5%
0%
2015 Q1
Debt as % of Unrestricted Capitalization
31
Strong Cash to Debt Ratio
300
295
290
Percent
285
280
275
270
265
260
255
250
245
263
285
282
294
2011
2012
2013
2014
//
294
2015 Q1
32
Well Funded Pension Plans
92%
Dollars in Millions
$800
100%
96%
97%
86%
$750
100%
90%
$700
80%
$650
70%
$600
60%
$550
$500
$654 $762
$768 $835
$840 $838
$899 $937
2011
2012
2013
2014
Assets
PBO
//
$924 $952
50%
2015 Q1
Percent Funded
33
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
304
386
383
351
$3,211
$3,842
$4,518
$4,725
2011
2012
2013
2014
Dollars
370
$4,740
//
450
400
350
300
250
200
150
100
50
0
Days on Hand
Dollars in Millions
Substantial Liquidity Position
2015 Q1
Days Cash and Investments on Hand
34
Large Capital Commitments Past 3 Years
900
250%
212%
Dollars in Millions
750
600
203%
182%
146%
200%
150%
150%
450
100%
300
50%
150
0
$251
$281
$386
$508
2011
2012
2013
2014
Cash Spending
//
$124
0%
2015 Q1
Capital Spend Ratio
35
Summary
• National leader in:
 Safety and health outcomes
 Population Health Management
•
•
•
•
Market share leader and brand strength
Growth through selective acquisitions
Pluralistic approach to physicians
Balance sheet strength and solid operating
performance
• Double A bond ratings with stable (M/F) and
positive (S&P) outlooks
42
Disclosure
Audited financial statements, quarterly reports
along with management’s discussion and analysis
and the annual continuing disclosure report are
available on the Advocate, Digital Assurance
Certification, LLC and Municipal Securities
Rulemaking Board websites. To view online visit:
www.advocatehealth.com/body_full.cfm?id=2839
www.dacbond.com
www.emma.msrb.org
31
Thank you!
Financial Trends
Operating and Net Income (dollars in thousands)
2012
2011
Operating income
$300,812
Investment income (loss)
(92,062)
Nonoperating items, net
(15,354)
-
Fair value of net assets acquired
Change in fair value of
interest rate swaps
Loss on refinancing of debt
Net income (loss)
2015
Q1 YTD
2014
2013
$298,275
$300,195
$330,600
$76,903
380,749
287,727
136,945
48,626
(7,292)
(15,455)
(14,130)
(5,363)
-
151,663
-
-
41,236
(38,338)
(11,806)
(45,011)
(52)
(32)
(24)
(46)
(45,470)
-
$148,353
$671,656
$765,320
$369,607
$108,360
Note: Financial results for the three months ended March 31,
2015 are not necessarily indicative of the results that may be
experienced during the year ending December 31, 2015.
Financial Trends -- continued
Operating Cash Flow Margin (dollars in thousands)
2011
Operating income
$
Depreciation and amoritization
Interest expense
Operating cash flow
Operating cash flow margin
$
300,812
2012
$
298,275
2013
$
300,195
2014
$
330,600
2015
1Q YTD
$
76,903
171,884
187,742
211,648
239,651
61,162
45,141
45,953
55,299
56,811
10,842
517,837
$
11.7%
Note: Financial results for the three months ended March 31, 2015
are not necessarily indicative of the results that may be experienced
during the year ending December 31, 2015.
531,970
11.6%
$
567,142
11.5%
$
627,062
12.0%
$
148,907
11.2%
Financial Trends -- continued
EBITDA (dollars in thousands)
Net income (loss)
Depreciation and amortization
2011
2012
2013
$148,353
$671,656
$765,320
$369,607
$108,360
171,884
187,742
211,048
239,651
61,162
Interest expense
45,141
45,953
Fair value of net assets acquired
-
-
Income tax provision
9,043
(1,087)
55,299
2014
2015
Q1 YTD
56,811
10,842
-
-
4,236
6,552
4,640
(151,663)
EBITDA
$374,421
$904,264
$884,840
$672,621
$185,004
EBITDA margin
8.3%
18.8%
17.1%
13.1%
13.3%
Note: Financial results for the three months ended March 31, 2015 are
not necessarily indicative of the results that may be experienced during
the year ending December 31, 2015.
Financial Trends -- continued
Investment Yield (dollars in thousands)
2011
2012
2013
Investment income in
operations
$58,289
$49,005
$66,172
$46,888
$9,644
Nonoperating investment
income (loss)
(92,062)
380,749
287,727
136,945
48,626
8,884
6,728
4,219
719
($33,698)
$438,638
$360,627
$188,052
$58,989
-0.2%
10.6%
7.1%
3.6%
1.4%
Temporarily restricted net assets
realized and unrealized gains
Total investment return
Investment yield
75
Note 1: The 2015 first quarter YTD investment yield is not annualized.
Note 2: Financial results for the three months ended March 31, 2015
are not necessarily indicative of the results that may be experienced
during the year ending December 31, 2015.
2014
2015
Q1 YTD
Financial Trends -- continued
Financial Ratios
2011
Operating margin
Operating cash flow margin
Net margin
Days cash and investments
on hand (1)
Debt as a % of
unrestricted
capitalization
Coverage ratio (2)(3)
Cash and investments to debt
(1)
(2)
(3)
2012
2013
2014
2015
Q1 YTD
6.8%
11.7%
3.5%
6.5%
11.6%
13.5%
6.1%
11.5%
11.7%
6.3%
12.0%
7.8%
5.8%
11.2%
8.0%
304
351
386
383
370
26.1%
8.7x
263%
24.5%
11.1x
285%
24.2%
9.5x
282%
23.3%
9.4x
294%
22.9%
11.7x
294%
Calculation of days cash and investments on hand excludes the effect of the Medicaid Assessment program
Rolling twelve-month period ended March 31, 2015
Excludes unrealized gains (losses) as defined under the Master Trust Indenture
Note: Financial results for the three months ended March 31, 2015 are not
necessarily indicative of the results that may be experienced during the year
ending December 31, 2015.
Advocate NorthShore Financial Profile
Advocate*
Aa2/AA/AA
$5 B
NorthShore**
6.3%
6.8%
12.0%
13.2%
Net Margin
Total Assets
Days Cash on Hand
7.8%
$10 B
383
9.4%
$3 B
362
Cash to Debt
Debt to Capitalization
294%
23.3%
454%
15.3%
Rating (M/S&P/F)
Net Revenue
Operating Margin
Operating Cash Flow
Margin
As of and for the year ended Dec. 31, 2014 * and Sept. 30, 2014**
Aa2/AA/NR
$2 B