Northwell Health, Inc. - Municipal Securities Rulemaking Board

1 Northwell health , Inc. MANAGEMENT S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL PERFORMANCE FOR THE THREE MONTHS ENDED MARCH 31, 2017 and 2016 1 Management s Discussion and Analysis of Recent Financial Performance Northwell health , Inc. ( Northwell ), together with its member corporations and affiliated entities, constitutes an integrated health care delivery system serving the greater New York metropolitan area, and is comprised of 18 owned hospitals, four long-term care facilities, three certified home health care agencies, a hospice network, over 500 ambulatory and physician practice locations, The Feinstein Institute for Medical Research, two health insurance companies, joint ventures, and other entities (collectively referred to as Northwell ). Management s Discussion and Analysis of Recent Financial Performance contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended.

2 The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Northwell expressly disclaims any obligation or undertaking to issue any updates or revisions to those forward-looking statements if or when their expectations change, or events, conditions or circumstances on which such statements are based occur. Management s Discussion and Analysis of Recent Financial Performance is based upon the consolidated financial results of Northwell , since the members of the Northwell health Obligated Group (the Obligated Group ) represented of the total consolidated operating revenue and of the total consolidated assets of Northwell for the year ended and as of December 31, 2016.

3 Accordingly, the discussion below includes the financial results of entities that are not members of the Obligated Group. Refer to the Audited Consolidated Financial Statements of Northwell for the years ended December 31, 2016 and 2015 (the Audited Consolidated Financial Statements ) for the consolidating and combining schedules of Northwell and the Obligated Group. In 2017, Northwell early adopted Accounting Standards Update 2017-07 ( ASU 2017-07 ), Compensation Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which resulted in the classification of the components of net periodic benefit cost subject to fluctuations in interest rates and the investment markets (those other than the service cost) amounting to $ million for the three months ended March 31, 2017 as a component of non-operating gains and losses in the consolidated statements of operations, outside of operating income, rather than in employee benefits.

4 The corresponding 2016 amounts, aggregating $ million for the three months ended March 31, 2016, have been reclassified from amounts previously reported to conform to the 2017 presentation. As a result of this financial statement reclassification, certain financial ratios previously reported in Management s Discussion and Analysis of Recent Financial Performance have been revised to also conform to the 2017 presentation. Refer to Note C to the Northwell Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2016 (the Unaudited Interim Consolidated Financial Statements ) for additional information. 2 Introduction For the three months ended March 31, 2017, Northwell s operating loss[a] and operating margin were ($ ) million and ( ), respectively, compared to operating income of $ million and a operating margin for the three months ended March 31, 2016.

5 Operating cash flow margin was for the three months ended March 31, 2017, compared to for the three months ended March 31, 2016. Total operating revenue grew by $ million or for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, while total operating expenses increased $ million or While year over year operating results have declined due to the timing of certain investments and the loss incurred by CareConnect Insurance Company, Inc. ( CareConnect ), the actual operating loss for the three months ended March 31, 2017, excluding the CareConnect loss, is in line with management expectations. The losses generated by CareConnect are primarily due to the flawed Affordable Care Act ( ACA ) risk adjuster program, which was recently addressed by the New York State Department of Financial Services ( DFS ) through regulatory updates that mitigate a portion of the financial impact of the flawed program in calendar year 2017 and provides additional regulatory relief in calendar year 2018.

6 Operating revenue growth was primarily attributable to increased payment rates and volume (primarily associated with the ambulatory and physician network expansion including investments in joint ventures), continued revenue cycle initiatives, and increased premium revenue associated with membership growth at Northwell s two provider owned health insurance companies, CareConnect and North Shore-LIJ health Plan, Inc. ( health Plan ) (collectively, the health Insurance Companies ). Operating revenue growth was negatively affected by an actuarially determined increase to the ACA risk adjustment program liability which reduced CareConnect s premium revenue, along with an increase in inpatient denial activity from commercial payers and a shift in payer mix from traditional commercial payers to lower paying government and health care exchange payers.

7 The increase in operating expenses was partially attributable to incremental costs associated with the increased patient volume and member enrollment, routine cost of living wage adjustments and the impact of inflation on supply and expense price trends. In addition, continued investments in the following areas contributed to the growth of total operating expenses: (1) facilities and programs to enhance capacity and rebuild infrastructure; (2) investments in population health management and to further prepare for the migration from fee-for-service to value-based payment models, including investments to scale operations relative to member growth at the health Insurance Companies; (3) safety, quality and patient experience initiatives; (4) ambulatory and physician network expansion including investments in joint ventures; (5) information technology ( IT ), including investments in electronic health records and other clinical software; and (6) investments in medical research.

8 Expense reductions as a result of the implementation of productivity and efficiency efforts, program consolidation, and supply chain initiatives (including the continuous review of programs to improve the standardization, distribution and utilization of medical and surgical supplies and pharmaceuticals) helped control the growth rate of expenses. [a] Excess (deficiency) of operating revenue over operating expenses in the consolidated statement of operations is referred to as operating income (loss) for purposes of Management s Discussion and Analysis of Recent Financial Performance. 3 Northwell s net income[b] and net income margin for the three months ended March 31, 2017 were $ million and , respectively, compared to $ million and for the three months ended March 31, 2016.

9 Investment income, including net realized gains and losses, and the change in net unrealized gains and losses and change in value of equity method investments, which totaled $ million and $ million, respectively, for the three months ended March 31, 2017 and 2016, affected the net income reported for each of these periods. Management continues to focus on i) patient experience, safety and quality improvements, ii) market share growth, iii) population health management and value-based payment models, iv) diversifying the revenue streams within the Northwell business model, including entering into joint venture arrangements with various partners, and v) actions intended to improve CareConnect s financial results while continuing to provide affordable insurance products and convenient, high quality services to its members.

10 Maintaining the balance sheet and positive operating results also remain top management priorities so that Northwell can continue to invest in people, programs and facilities to successfully adapt and respond to changes in the health care industry while continuing to meet the needs of the patients and families in all the communities it serves. Operations and Net Income Overview Operating Income, Operating Cash Flow and Net Income The following table presents a summary of key operating performance results and measures for Northwell for the three months ended March 31, 2016 and 2017. ($ s In Millions) Three Months Ended March 31, 2016 Three Months Ended March 31, 2017 Operating income (loss) $ ($ ) Operating margin ( ) CareConnect operating loss [1] ($ ) ($ ) CareConnect impact on operating margin ( ) ( ) Operating cash flow [2] $ $ Operating cash flow margin Net income $ $ Net income margin [1] CareConnect s operating loss includes premium revenue reductions of $ million and $ million for the three months ended March 31, 2016 and 2017 respectively, related to the impact of the ACA risk adjustment program.