I've always found the expression, "You shouldn't let the inmates run the asylum" amusing. It has so many applications, not the least of which applies to quality patient care and hospital-physician alignment. Let me throw in a disclaimer here, I'm not calling patients mentally handicapped nor hospitals mental facilities—but what I'd like you to think about is the idea that in some way or another your patients really should be running your hospital and by doing so you will end up with better hospital-physician alignment.
With the American Hospital Association reporting in late 2009 that 74% of hospital CEOs are being approached more frequently by physicians seeking employment, the recession coupled with healthcare reform is ushering in a rebirth of the 1980s physician employment boom-but this time around everyone is wiser. All providers-hospitals, physicians, and payers-recognize that they must work together to position themselves for bundled, performance-based payments for care delivery. Working together offers everyone involved the greatest opportunities to succeed.
However, this time, both hospitals and physicians have learned what works for them, and equally important, what does not work. In some instances hospitals are employing doctors, in other cases they are using joint ventures or other management agreements to employ them, but in all instances, the goal is ultimately the same: to bring the physician and the administration to an agreement that unites and aligns everyone toward achieving the same strategic, financial and leadership goals—the biggest goal of all being patient satisfaction.
Over the years several structural and economic physician-hospital alignment models have evolved, including:
Economic models (e.g., joint ventures and employment of physicians by hospitals)
Emerging models (e.g., the anticipated growth of "super groups," the changing roles of physician-hospital organizations, and the potential for gainsharing).
Rather than concentrate on the variety of models out there, this week I'd like to share with you the story of how one system is successfully approaching hospital-physician alignment by putting the patient's needs first.
Seattle's Virginia Mason Medical Center, is an integrated health system that employs 440 of the 900 physicians that work there. Suzanne Anderson, Virginia Mason's senior vice president, CIO and CFO, says the physicians and the hospital work together to create their strategic goals for the year-an inclusionary process, which unfortunately, some hospitals forego during their strategic planning process and that can result in a misalignment between the administration and the physicians.
One of the reasons Virginia Mason approaches the process this way is a longstanding cultural philosophy that started with the hospital itself, which was founded by physicians pooling their energies and resources to build an 80-bed hospital. While over the years more administration has been added, the system continually recognizes the need for physician input and the role these doctors play in the hospital's success. In fact at one point, the physicians had such a strong voice that Virginia Mason was referred to as a physician-led organization, instead of a patient-led one. "Physicians had a dominant voice in direction setting, but now we've moved beyond them to really focus on the patient, and using their needs to set our direction. That's our true North now-what's the right thing to do for our customer base," notes Anderson.
Now when the system goes through their annual goal-setting process, the executive team is comprised of administration and key physician leaders, all of whom collectively determine what the most important areas of focus will be for the coming year in terms of quality, patient satisfaction, staff satisfaction, economics, and integrated information systems. Once they've determined the goals, they line up the resources to achieve them and then work toward implementation, Anderson explains.
"Everyone feels like they own the goals for the hospital; that we are all one," she says.
Aside from the physician's participation in the goal setting process, perhaps one of the most unique pieces of Virginia Mason's hospital-physician alignment is the division of money—which is often where many hospitals find their greatest challenges-Virginia Mason operates with a single bottom line for all the physicians and the hospital.
"When we do contracting with commercial insurers we have one contract office that negotiates contracts for our whole system-we don't have physician and hospital contracts and we have a single bottom line," she explains.
This single bottom line has been in place since the late 1980s, Anderson says, which is when the hospital started employing even more physicians. Though they had been employing and partnering with practices since the 1920s, their employed physician model really took shape in the eighties and early 1990s. As their vision of a patient-led environment took shape, they decided a single bottom line would help everyone achieve that focus.
"When you have an organization that's splitting the bottom line, yet anything left over is going to one component at the organization, you create groups of haves and have nots—that leads to infighting," Anderson says. "Our goal was to optimize the performance of the health system as a whole—not to optimize any one component."
To further that end, their physician compensation model is part productivity-based, but it also has incentive components that encourage professional activities and reward physicians for group efforts and contributions. The idea is to encourage physicians who may be, for example, leading a quality effort, to be able to comfortably do so without concerns about missing out on their own personal earning opportunities.
"Some people look at our model and say we are successful because of our employment components. I'd say it's more than the employment; it's how we manage the health system and engage all of your employees whether physicians or not. That requires constant vigilance," she says.
So while no hospital should let the patients actually run the hospital, by allowing the patients to guide goals and strategies, both the physicians and hospitals can unite and work from common ground to achieve success.
About four years ago I had a problem with my cable bill. You see, for the longest time I just assumed that my cable bill cost what it cost and I was auto-paying it. That was until I was taking my annual inventory of expenses, and I noticed that every few months my bill seemed to go up just a little bit. I wasn't buying a lot of on-demand movies, so it gave me pause.
I called the cable folks and they started rattling off a litany of reasons for my bill "adjustments"—there were tax increases, rate increases, promotional channels (that I'd never declined and thus were added automatically)—all because I wasn't paying attention. I should've. I estimated that I lost about $150 that year with all their shenanigans, but it was all completely legal and it was my fault for missing it. Needless to say, now I check my cable bill every month and I will likely never autopay that one again.
Keep my cable bill tale of woe in mind because I'm about to offer you a hard pill to swallow; as many as 40% of your payers are likely underpaying you AND they aren't doing it intentionally AND they aren't violating your contracts. In fact, what's happening is actually your mistake and it's costing hospitals and practices approximately $1.5 billion, or roughly $300,000 annually per hospital.
IMA Consulting, a Chadds Ford, PA firm, offers some insights on what mistakes hospitals are making that cause losses through contractual underpayments in Manage Your Payer Contracts to Optimize Collections. The fact is that payer contracts are complex and with healthcare reform taking effect, your contracts are likely to become much more complex in the next several years. Some hospitals and health systems are already using contract tracking software and that's very useful in preventing underpayments—the thing is the software is about to be outpaced by these new and improved payer contracts. So your contract software "failsafe", if you've been fortunate enough to have one in place, is about to give way.
Now, missing one or two contract payments isn't much money, but missing a lot can add up to hundreds of thousands to millions over time. What makes this area so confounding is that contractual underpayments are difficult to identify—they simply aren't obvious, not only to the hospital but also to the payer—which is why I say this isn't intentional on their part. After all, most payers are also using older systems and software, but even if they did discover that they were underpaying you, do you think they would alert you to it?
Robert Sutton, partner at IMA Consulting and co-author of the article looking at this problem offered his strategies for remedying this situation.
Negotiate simple contracts. Sutton suggests that these contracts be clear and concise and simple enough that your biller can understand them. This will also make the contract more likely to work with your existing contractual management software.
Assemble a team. This group will work on the negotiations together—including representatives from each department that will be impacted by the contract (e.g., the CFO, patient accounting, patient access, HIM and legal). This group, which should also include key physicians on the staff, should be responsible for reviewing not only proposed contracts but also modifying the existing ones or those about to expire. They should also be in charge of monitoring any rate changes in the contracts and alerting the rest of the staff. Sutton recommends that this group create a matrix to track the different dates and key distinguishing details of the contracts. Be sure to make note of any provision that deviate from the hospitals standard contracts.
Make technology top-priority. It's not about having some contract tracking software in place, Sutton says, it's about using that technology to the fullest. "The contract updates have to make it into the system in a timely manner and they need to be checked regularly," he says. "The person who does this needs to be a part of the contract negotiation team and they need to fully understand all the different pieces of each contract." Eventually the contract software will catch up with the new payer contracts that are likely to unfold in the coming few years, but until it does, this person is a linchpin for ensuring facilities are fully reimbursed. Moreover your patient accounting contract management system or module should be configured to determine reimbursement for each level of service; this will help you collect your A/R at the time of billing.
Take time to educate. It seems like taking the time to educate your staff is the last thing you have, well, time for. Fact is, you must make the time to educate everyone who is involved with these contracts or you will continue to see your net revenue reduced. Depending on how many contracts you have and how frequently they change, you should set up regular meetings with your teams to review any and all adjustments to these contracts. Use the matrix you developed as a starting point, but don't allow that matrix to be the only training tool you use. By getting these folks in the same room, they will educate one another and you can be sure that all the correct information is disseminated simultaneously.
These strategies can mean the difference between unaccounted for net losses in revenue and your hospital bringing in thousands more this year. What my cable bill taught me a few years back is this: when you rest on your laurels, you lose money. It's unfortunately but no one is going to point out where your hospital is losing money, it's up to you to find the problems and fix them.
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When it comes to your hospital or health system credit rating, most CFOs do everything they can to try to get, or keep, a AAA rating. But really, what does that rating truly mean? Maybe it shouldn't mean that much.
Banks, and a host of investors, use these ratings to help guide them in their lending and investing practices but when the ratings are wrong their mistakes can misdirect a lot of people. Thanks to a host of bad predictions by ratings agencies and some rather nefarious activities by many large corporations in the finance industry, the economy took a bit of a turn and with it so did many businesses, hospitals, and investors.
To be fair, the rating agencies—of which there are 10, but three are the most well-known and used (Standard and Poor's, Moody's and Fitch)—aren't always wrong in their analysis and rating. Nevertheless, it seems in the last ten years the ones they have been wrong about have cost all of us dearly—financially. See my other column if you want to read more about that.
I have worked in finance and I have worked in publishing and I can tell you that both industries have their pluses and minuses. But one thing I didn't enjoy about finance was all the SEC compliance rules. They are truly a pain point for many working in the industry, but they are a necessary evil. That is until you realize that it's mostly toothless paperwork that's mostly filed by the honest minions while the less-than-honest folks are still doing whatever they can to earn a buck.
I suppose it shouldn't surprise me, or any of you, to learn that after the banking industry was investigated and many of them were found to be conducting business in a less-than above board manner, that now the investor's rating agencies are about to undergo scrutiny. It's important for healthcare financial leaders to be aware of how some pending legislation and legal actions might influence investor ratings in the years to come. But first, allow me to make a wild prediction—not an accusation—investigators are going to find out that ratings agencies may have been more flexible with some ratings scores than with others. Are you shocked? I doubt it.
I hate to be a pessimist, but it seems to me that money has a tendency to encourage folks to do the wrong thing. I'm not sure what happened to the moral backbones that people used to have, but it seems a lot of people would rather walk "easy street" than take in the view from the "high road"—and a lot of those people seem to gravitate toward the finance industry.
There is a fantastic article in CFO magazine this month about the credit rating disaster. Take the time to read it and educate yourself on what's going on behind the scenes—it's history that is worth reading, but not worth repeating.
The CFO magazine article recounts numerous examples of how Standard and Poor's and Moody's Investors Service have flubbed their ratings reviews for various large companies (e.g., giving Enron an investment grade credit days before it went into bankruptcy, and let us not forget about these agencies stellar predictions for mortgage-backed securities). What's always surprising to me is how they can get it so wrong, but there aren't any ramifications.
With so many people dependent on these reports, shouldn't they be more consistently correct? If a heart surgeon continually told all his patients that they were going to live long full lives, but after the surgery only half of them lived a week, I'm sure he would be fired and sued. Let's just say that as far as their educated predictions go, neither rating agency has been accurate enough lately to get a job as a fortune-teller at the circus. Is that harsh? Not when you consider how many millions of people count on these ratings and how many billions of dollars have been lost in the past few years because of their misplaced optimism (translation AAA ratings) with various large companies and banks.
As a hospital leader, you know how important outcomes are. Patients arrive at your hospital looking for help, you explain things and then give them a general prediction of the results for their treatment. Now, those "odds," for lack of a better term, aren't always right, but more often than not things go according to plan and the desired outcomes are achieved. If that wasn't the case, your hospital would be out of business, or at the very least it would be waist deep in malpractice suits.
Then again, your end goal is to make a specific person well vs. the rating agencies' goal of making money for themselves. That profit motive is their primary motivator. Now, if you are motivated to make a profit, then you are motivated to find the biggest source of money to get that profit. NEWSFLASH—the biggest source of money isn't Ma and Pa Store Owner on Main Street who is looking to invest a little money for their retirement. Nope, it's Mr. Fat Cat Big Business, the companies that need the ratings to entice Ma and Pa to invest in the first place. The ratings agencies shouldn't be allowed to profit by working with these companies.
The CFO magazine article notes that while Moody's has a compliance group to enforce laws and internal policies, a former employee testified to a House committee that the "credit policy group was routinely overridden by line managers in the name of winning business, while the compliance group was understaffed and had little professional compliance experience."
Shouldn't these agencies be required to be impartial and nonprofit? Moreover shouldn't they be run like Consumer Reports, where they operate based on paid subscriptions from the consumer, which makes them accountable to them for their results?
Some would argue that this type of action is unnecessary. After all, aren't there already safeguards in place? Yes, sort of. The Credit Rating Agency Reform Act of 2006 granted the SEC authority to inspect credit-rating agencies and required it to report to Congress on credit-rating quality and conflicts of interest or inappropriate sales practices. The ratings agencies also added their own—understaffed—internal compliance departments to keep things on the level, though honestly, how deeply are your paid employees going to dig into the company's transactions to find problems when that's their main source of income? Not that deeply. By the way the Moody's employee mentioned above who testified to the House committee was suspended from his job after he complained to the company about their practices.
Congress is gearing up to pass more financial reform legislation in the coming year, but it seems unlikely that it will do more to protect the consumers than previous legislation. The Wall Street Reform and Consumer Protection Act of 2009 passed the House in December, and asked for rating agencies to tighten internal controls, register with the SEC, bear more government supervision, and disclose more detail about their ratings methodologies. Sounds a lot like the 2006 legislation, doesn't it? But it does allow more investors to sue the agencies for gross negligence—now there's an intriguing possibility.
Another bill in the Senate, the Restoring Financial Stability Act of 2010, which calls for many of the same changes as the Wall Street Reform and Consumer Protection Act of 2009, would give the SEC authority to de-register any agency for providing grossly incorrect ratings—you have to wonder how many incorrect, or bad, ratings they'd have to give out in order to get de-registered though. I suspect that will likely be at the discretion of the SEC. Moreover, I can hear the ratings agencies arguing their cases already, "We couldn't know that Company X was swindling millions from their investors, all their financial statements looked great. It's not our fault that they lied to us."
And their argument wouldn't be totally without merit–I'm sure that companies have falsified documents to get a great rating in the past and they will do so in the future too. Nevertheless, these agencies need to step up their game and perhaps be a tad more conservative with those AAA ratings. Then again, if they maintain this poor prediction pace, they may just put themselves out of business.
As a consumer, I certainly don't place as much merit in those ratings as I once did, and neither should you. Naturally, you must be mindful not to ruin your rating, as banks will use these as measures of your stability in order to make capital lending decisions, but when it comes to investing your hospital's capital you should recognize that these ratings are just a piece of the puzzle and you need to do your own due diligence before putting your hospital's money (or your own) into any investment. After all, if the government can't find a way to regulate and penalize these folks, then it is the job of the free market to do it by not turning to them as the best source of information—because clearly they are not.
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At the end of this week, June 11, is the Feast of Saint Barnabas, so it seems fitting that this is the week I should tell you two tales of Saint Barnabas—the man and the New Jersey Health System. Saint Barnabas, the man, was actually Greek (born Joseph) and back in the first century he was a Christian convert and one of the earliest Christian disciples in Jerusalem. Together with Saint Paul he undertook countless missionary journeys to bring converts into the church. Given the nature of the times, encouraging people to forego their other religious affiliations was risky—even life-threatening—yet driven by fervent belief, Saint Barnabas decided not to let fear for his own safety stop him from acting on God's behalf.
Centuries later and in a totally different field, Saint Barnabas Health Care System in West Orange, NJ, which operates nine hospitals as well as several outpatient, nursing and rehabilitation and assisted living facilities, also decided to push fear aside to convert the financial side of their business. The Saint Barnabas System provides treatment and services to more than two million patients annually and employs 18,200 people (4,600 physicians and 445 residents and interns.)
Though a large facility, the recession certainly hadn't passed the system by, and they were in default on their debt, affecting their investor's service bond rating. Moreover, at one point they were operating with 28.5 days cash on hand. However, they also had some positives working in their favor; the system held 25% market share and it was generating $2.8 billion in revenue annually, with daily cash collections of $7 million. Net accounts receivable was 43 days and just 29% of AR was over 90 days, plus it had a 93% clean claims rate. Many CFOs would've maintained the status quo and rode out the recession, but that's what makes this tale so unique.
You see, to achieve the $7 million in cash collection, the system had outsourced most of its collections processes to vendors and they were spending large amounts to bring in that money. Moreover, all their claims were reviewed manually by billers, making it a very labor intensive and costly endeavor. In May 2009 Jay Picerno, a self-described "typical, conservative CFO", joined the system as its executive vice president and chief financial officer. Upon reviewing the situation, he knew something bold—even fearless—needed to be done to bring the system to higher financial ground.
"We had a lot of outside collection agencies so our overall net back on our cash collections wasn't that good," said Picerno, during a MedAssets conference presentation this past April. "We knew long-term we couldn't continue in that direction. So we took a bold step and said we want to fix our balance sheet."
He tinkered with the idea of bringing more technology or adding a strategic in-house team member, but the ideas didn't seem as though they would move the system in a different direction. It was then that Picerno connected with a consulting firm the facility had used before for software, MedAssets, in Alpharetta, GA. Out of these discussions, a new idea was born: embedded teaming to address the back office.
Embedded teaming is similar to a partnership, however the third-party resides within the organization and works side-by-side with the facility. Additionally, MedAssets' incentives and goals were aligned with how well the overall system performed. Goals and objectives for both the front and back end were laid out as part of the projects management and then tracked to ensure that both sides were on target.
"We looked at this and asked, 'how do you flip the revenue cycle without disrupting the cash flow?' because we couldn't afford to do that," says Picerno. "We told MedAssets they could come in to figure it out, but they couldn't talk to our business office or anyone on the back office, and they had to fix the problem and do it for less money than we were doing it today." It was a challenge, yet the embedded partnership prevailed.
Within the first 90 days they transitioned the business office from 254 people to 154. MedAssets absorbed the surplus 100 employees and had them join their overarching collections business. They set up a project management office and implemented a new workflow system. Then they tackled the billing system and insurance verification processes – which were disparate systems—unifying them to help standardize processes and improve the back end. They automated the smaller claims, so staff could concentrate on addressing larger claims. Then they implemented performance goals for their teams to strive for—including daily collections goals.
"We went from a traditional healthcare approach [to billing] to a performance-based culture," he says. "We changed everything about every thing."
It was a gamble that paid off, however. With MedAssets coordinating and controlling the back end collections and the health system concentrating on the front end Saint Barnabas quickly started to see a return on this investment. Just 120 days after the project got off the ground, they were already performing better. In March the health system collected $165 million—the most they have ever collected in a single month—and they did so using 100 less staff members.
"Now it's costing us substantially less to collect substantially more," Picerno noted.
Moreover, Saint Barnabas is now operating with 77.8 days cash on hand and their AR net collections are 39.56. It seems finances are looking up for the New Jersey system and even the rating agencies are taking notice—one of them has already adjusted the system's financial outlook to positive.
"Today we have a light at the end of the tunnel and all our lead indicators look good—aging is down, denial rates are down. When you become process-oriented you have very low cost but high return," Picerno says. "We really wanted to move Saint Barnabas to the next level and have an outstanding revenue cycle. Now when a patient steps into our facility [for a procedure] we're able to hand them a bill with the amount that will be due… and that improves cash collection up front."
While Saint Barnabas' decision to use one company to run their back office was a success, what I find most impressive about their tale is the sheer fearlessness that went into putting a system like this into place. Whereas many financial leaders would've stayed put, they press onward in a totally new direction. What is admirable about both Saint Barnabas the man and Saint Barnabas the facility isn't that they succeeded in accomplishing their goals, but that they believed they could achieve it and that they boldly acted to achieve those ends—all the while knowing that this could be a total failure. It's a good reminder for everyone: success is sometimes born out of bravado. Don't be afraid to take on a new direction at your own facilities.
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Healthcare coverage is both a blessing and a curse–it really all depends on whether you are the patient or the hospital. The newly signed Patient Protection Act is designed to help millions of uninsured patients get proper healthcare coverage, yet the fallout from that coverage is likely to have some less than desired effects for hospitals and their bottom lines.
At first blush the new law should help take care of the cost of the uninsured patients who are often arriving at the hospitals emergency department, however, it may also have an unintended side effect, which is that now patients may utilize both the ED and primary care doctors for their general care. In May, Chadds Ford, PA-based IMA Consulting released Will Healthcare Reform Alter the Landscape of the Emergency Department?, looking at the impact new legislation may have on the ED environment. Some of what they found wasn't surprising, such as:
Uninsured ED patients are the primary cause for ED overcrowding and excessive lengths of stay.
Uninsured patients do not see primary care physicians or delay care to the point at which the ED provides the only alternative.
When seen in the ED, their diagnostic course is more complex and time consuming, hence the longer length of visits.
However, what may go against the general thought process is the idea that when people have health insurance they are less inclined to visit the ED.
"One of the pieces of research we looked at was that people who tend to have insurance—particularly Medicare and Medicaid, tend to access the ED more than people who are uninsured," says IMA Consulting Director Bob Gift. "This is possibly because they're not necessarily stuck paying the entire bill."
Gift says people who don't have insurance—though they may opt for the ED when they do become sick—also tend to avoid care altogether, waiting until the last possible moment to access the system.
"Now patients may think, I have insurance so 'what the heck; I may as well go to the ED'," he says. Unfortunately, as most hospital financial leaders will tell you, EDs are already operating at or near capacity and there's already a dearth of primary care physicians. Consider these national statistics:
More than 325,000 patients per hour or more than 119 million annually, seek care in the ED.
From 1993 through 2006, the compound annual growth rate of ED visits was 3.6% and that number continues to climb.
Since 2000, the number of EDs and hospital beds has decreased either due to facility closures or eliminated services (i.e., Deaconess Hospital in Cincinnati, OH and St. Vincent's Hospital in New York, NY).
Just 13% of ED patient visits result in inpatient admissions, with hospitals reporting that currently an increased number of their inpatient admissions are coming through their EDs.
Interestingly, though they are currently seeing more inpatient admissions through the ED, that's likely to change for hospitals in the future, and therein lays the rub. Revenue generated from inpatient admissions that offsets the cost of the ED. In the California HealthCare Foundation report, California's Emergency Departments: Do They Contribute to Hospital Profitability?, far from being a cost burden, the ED actually has a positive influence on hospitals' financial performance. Though EDs lost an average of $84 on each patient treated and discharged, patients admitted to the hospital from the ED generated an average profit of $1,220 per admission—thereby covering any losses generated by patients who were discharged.
However, if the new legislation works correctly, the expectation is that patients will use their new insurance coverage to access primary care and prevent potentially serious problems altogether. Ideally that would decrease the number of visits to the ED or at a minimum the severity of the visit; that would ultimately reduce the number of inpatient admissions as well. While that certainly would be a positive step for patients, it may not turn out so great for the hospitals' financials.
"By opening enrollment to larger numbers of participants who heretofore didn't have coverage, we may find that patients are accessing the system more freely than when they paid of pocket—that's what a number of folks who are looking at this tend to anticipate happening," concludes Gift.
If patients use the primary care physician in conjunction with the ED, then their ED visits are less inclined to need an inpatient stay, causing those admissions to decline. In turn, this will result in the revenue that the inpatient admissions generate to support the ED declining. In essence, a double whammy; hospitals will be providing more care but generating less revenue to pay for the care.
Only time will tell if patients access care in this manner. However, financial leaders should begin tracking how their ED and inpatient admissions are being impacted as individuals are rolled onto government insurance in the coming year. Additionally, facilities should track their primary care physicians usage to see how those numbers change and how they may, or may not, correlate to their ED stats.
What CFOs may find in the coming year is that their EDs are now losing even more money than before and they will need to step up their cost reduction efforts and do an efficiency analysis in order to keep these vital departments viable in the coming years.
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I was struck recently by the conflicting predictions some healthcare and financial industry experts are offering regarding healthcare reform's impact on the healthcare industry. This May, a lot of folks in the know have weighed in on what the economy and the new law will mean for healthcare's financial outlook. Some experts are saying things are looking up, while others are saying things don't look so good. It's hard to know whom to believe; moreover if you're a CFO and attempting to do any predictive modeling or risk assessment for your facility, you have to decide which information to plug in.
In Nashville, TN, at the Nashville Health Care Council's annual "Financing the Deal" panel discussion, finance industry executives expressed confidence in the healthcare sector. They noted an increased availability of capital and an uptick in mergers and acquisitions activity. In case you missed it, I recently looked at the topic of mergers and acquisitions and there's even more information on this topic in the May edition of HealthLeaders magazine.
Nashville Health Care Council members agree that health reform legislation will have a significant impact on the future of the industry and deal-making trends. They also foresee this legislation having a positive affect on the providers as there will be an influx of new patients created by reform. Although, in order for this to truly be positive, they noted, the providers need to focus on the delivery of high-quality service while reducing costs. So simple a concept; yet so hard for some to actually deliver on.
Contrast this positive outlook with another report that came out this week. On a nationwide scale, hospital CFOs don't share this positive prognosis. In Chicago, just a few days after the Health Care Council held its meeting, a national survey of CFOs and senior comptrollers conducted by Grant Thornton LLP, showed that CFOs in the healthcare industry are less optimistic about the state of the U.S economy and their own company's financial prospects over the next six months compared to their counterparts in other industries.
The survey also reports that a quarter (24%) of healthcare CFOs thought their own facilities' financial prospects would improve (versus 52% for all respondents). Only 16% thought the economy would come out of recession in 2010 (versus 28% of all respondents). The survey indicates that most CFOs and other financial leaders feel that 2011 will be the year we come out of our recession.
So, it seems many CFOs aren't so sure things are looking so bright. Interestingly, neither are two of the key ratings agencies. Consider a report by Moody's Investors Service released about three weeks ago (which I also discuss in a column) saying they are less than optimistic about the affect of healthcare reform on the industry.
In their report they note, "The passage of healthcare reform will bring large scale changes in operating and capital strategies employed by not-for-profit hospitals to deliver healthcare services. These changes will require healthcare leaders to focus even more on multi-year strategies to assure long-term financial sustainability in an era of reform and newly constrained economic reality. . . . The impact of healthcare reform, even with the benefits from reductions in uncompensated care, will ultimately be negative for the industry in the sense that existing operating practices and strategies may be insufficient to maintain credit quality."
Then just last week, Standard and Poor's released a report on healthcare in the U.S. called "Can The U.S. Economy Afford Health Care Reform?" (note, only subscribers can view this report). It looks at the cost of healthcare in the states versus in other G-7 countries. In their press release S&P notes, "The new healthcare bill will not help lower costs. Its emphasis is on increasing coverage. How much the additional coverage will cost is uncertain." I'm going to read between the lines a bit here; they don't come right out and say things look bad, but it doesn't sound like they are saying things look good either with healthcare reform.
Another report came out the same week that may be helpful to CFOs and their predictions of what healthcare reform and the economy may mean for them. The federal Bureau of Labor Statistics shows that healthcare prices overall increased 0.2% in April and were 3.1% higher than a year ago.
These are healthcare consumer prices that are on the rise, like the result of more people being asked to shoulder higher deductibles and offset the current cost of so many uninsured. BLS reports that physician office prices rose 0.4% from March to April, and were 2.4% higher than in April 2009. Also, hospital prices overall increased 0.1% in April and were 3.7% higher than a year ago.
If costs are rising, then the Nashville Health Care Council's footnote that a positive outlook was dependent on providing high quality care at reduced costs doesn't seem to be taking shape – but it's early still, these things can always change.
Keep in mind that the number of uninsured isn't declining just yet. Actually, it could still grow based on the latest unemployment stats. As of May 7 national unemployment rose to 9.9% in April, after having remained steady at 9.7% for the previous three months. The number of unemployed workers hit 15.3 million and the number of long-term unemployed, those without a job for 27 weeks or more, rose to 6.7 million.
We are all familiar with the expression about people and opinions, and when one expert says "up" another five will say "down". Still, it's important to make note of all these surveys and commentaries—the best any financial leader can do is watch them over the course of several months to see whether a direction can be discerned. Fact is, no matter what you decide to put into your forecasts in the end it's always just an educated guess.
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I'm more than a little irked by what I've been reading the past couple of days about the latest possible finance scandal. The New York attorney general has started an investigation of eight banks—Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole, and Merrill Lynch (now owned by Bank of America)—to see if they provided misleading information to Standard & Poor's, Fitch Ratings, and Moody's Investors Service. The information they may have provided would've caused inflated grades of certain mortgage securities. That's no small accusation; investors use these ratings to decide whether to purchase mortgage securities.
Now, I can't be the only one who reads these things and thinks, "Seriously, are these people so greedy that they couldn't see past the dollars in their eyes to realize that what they were doing might hurt millions of people? Was a yacht or a new plane worth demolishing so many people's livelihoods, and seeing multitudes of hardworking people lose their homes?"
It's beyond shameful to think that the mortgage crisis was surrounded by even more calculated lies that were fed to the ratings agencies. No matter how outraged I am about this, I recognize that it's highly unlikely that anyone will get anything more than the usual slap on the wrist. The average American would already be behind bars, but these are no average Americans. They'll be jet-setting in no time, albeit after they've done the usual TV mea culpa, and millions of Americans watch their financial futures drastically diminish.
Why should healthcare finance leaders care about this, though? Well, if it isn't enough that the lack of moral leadership in the finance industry nearly bankrupted more than a few of you, they also drove your charity care numbers up. You now are listening to sad tales of former $100k technology whiz kids who show up at your ER with no cash to pay the bill for their newly broken leg; after all, they have no job. And though they may have the money to pay you, they just can't spare the cash because they are already tapping into their savings and 401(k) plans (if they have any money left in those) to pay for their mortgages. And, they have to pay their mortgages, because if they don't they'll lose their homes and then they'll be worse off.
I'd like to just be angry about situation and blame the financiers, but I know enough to say that in actuality, the healthcare industry didn't do much to stop Americans from going broke either. Sadly, in some respects, the healthcare world is no less scrupulous than the banking industry. No one was crying foul the last 10 years when healthcare rates continued to go up for patients. Certainly all healthcare finance leaders cried out when reimbursements were threatened or when regulations were adjusted, but it seems no one had any time to actually stick up for their patients—to "fight the good fight" against what everyone knew was happening.
The fact is, before the financial crisis that led to the recession, it was the healthcare industry that was putting people out of their homes. In 2008, the Health Matrix: Journal of Law-Medicine noted that half of all foreclosures have medical causes, and that a medical crises put 1.5 million Americans in jeopardy of losing their homes in 2007.
So while relaxed lending standards, increasing interest rates, and irresponsible borrowers—not to mention plain old greed—all factor into the recession, it is likely that the ever-increasing medical costs would have forced increases in the number of foreclosures anyway.
Simply, as employee contributions to healthcare insurance doubled from 1999 to 2008 (the total cost for family coverage averaged $12,680 by 2008, a 5% increase over 2007), employers naturally tried to keep their businesses going. As any CFO will tell you, that meant either laying off staff, cutting benefits, or keeping wages flat. Sadly, if wages remain stagnant, which they did, but everything else goes up—including healthcare costs—things get lopsided.
In some instances, rather than cut benefits, some employers tried to pass along the costs to their already financially strained employees, bringing high-deductible health plans into vogue. A Kaiser survey reports annual deductibles jumped an average of 29%, to $1,344, for those with family coverage in 2008.
It's not news that healthcare is expensive, or that it's also a business. But I do marvel that when the financial woes brought on by unscrupulous finance industry activities hit, many hospitals started seeing even more patients come to them without insurance or the ability to pay. Suddenly, providers started speaking up. A collective cry arose from hospitals nationwide, saying, "We need help. The finance industry has messed up and now even more folks can't pay us. We'll go bankrupt."
Yep, after a bit of squawking, the healthcare industry got its version of a bailout in the form of the Affordable Care Act—at least to some degree. Unfortunately, that law doesn't go far enough and really protect your patients from losing their homes any more than the finance industry bailout helped anyone other than the companies that got us in this mess to begin with. People will still need to choose between paying their high deductibles or their mortgage, and guess what; they're going to pick their mortgage every time.
The only way that's ever going to change is if healthcare providers begin to support the patients and work with (or perhaps in some instances against) the health insurance companies to craft truly reasonably-priced coverage. Still, most healthcare providers are too busy these days trying to clean up the financial mess left behind by the finance industry to put any time into that effort. So, I suspect that it's more than likely that we'll see a repeat of this foreclosure cycle for many years to come. Perhaps that thought will get you as ticked off as it does me.
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Several months back I spoke to Steve Filton, the CFO at for-profit hospital company Universal Health Services in King of Prussia, PA, about the likelihood of seeing more mergers and acquisitions (M&As) of hospitals in the coming year. At the time, he said that since summer 2008 UHS speculated that there would be a shakeout among the nonprofit providers and that many of them may look to merge or sell.
At the same time I was doing research for an article in the May edition of HealthLeaders magazine, there was some discussion around the halls at HealthLeaders Media about the speed with which these M&As would take place and whether, until the recession lifted more, there would be much activity at all.
I'm no prognosticator, but I do spend a lot of time speaking to CFOs and the impression I was getting was one of openness toward the idea of consolidation. Thus, I made the case with my colleagues that there would be a lot of consolidation in the next two years—and the for-profits would be the ones to watch as they would use this financial maelstrom as an opportunity to expand. Not everyone agreed with me, which is to be expected in a room filled with educated healthcare writers, but it looks like Moody's Investors Service may be siding with me on this one.
Last week Moody's released a special comment, "For-profit investment in not-for-profit hospitals signals more consolidation ahead". In it they note, "The for-profits represent potential new partners capable of injecting much-needed capital for modernization and expansion. However, only those capable of attracting for-profit partners will benefit—the remaining independent not-for-profits may face operating challenges and increased competition from their newly capitalized competitors. The net effect is likely to be an increased rate of mergers of not-for-profits with both other not-for-profits as well as for-profit firms."
The comment goes on to say that the possible purchases by for-profit entities of two sizable nonprofit healthcare systems in separate deals may signal a significant shift in the hospital industry toward increased competition and consolidation, placing downward credit pressure on less-competitive systems.
"If finalized, the sale of Detroit Medical Center and Boston's Caritas Christi may be the start of a new wave of acquisitions by for-profits," said Moody's Vice President and Senior Analyst Brad E. Spielman in the release. "They would also place additional stress on the remaining not-for-profits, creating an even greater need for sound management and capital strategies to compete in markets favoring larger hospital systems and chains."
Why merge?
What I find fascinating is the rationale for why hospitals want to consolidate. In the past, the main reason was generally to gain market share or to expand their offering. Now the main reason is just as likely to be economies of scale and better access to capital or out-and-out survival.
Moody's says that two of the reasons for consolidation stem from the reduced access to capital markets and deferral of needed investment. Over the last couple of years, few facilities ventured into construction projects to grow their facilities, and the cost of medical devices and mandated, costly information technology systems continues to increase the hospitals' demand for new capital investment within the industry.
"Hospitals with a strong balance sheet may consider consolidating with other facilities. There are plenty of benefits to doing so," says Mark Reiboldt, vice president of Coker Capital Advisors in Alpharetta, GA. Coker Capital is affiliated with Coker Group, a national healthcare consulting firm—and they felt so strongly that the M&A situation was about to expand that they launched a division in the midst of a recession to address the potential.
Reiboldt says if a facility was able to make it through the roughest part of this recession and they came out looking "relatively good" to investors—after all nearly every hospital took a hit to their credit rating, lost some money in the bond market, and had a few scary days where days cash on hand got a bit too low—they look pretty good from a financial standpoint.
"A lot of not-for-profits have emerged stronger," he says. "That's made these health systems even more attractive to investors."
Who's investing?
That brings me to another interesting point in Moody's comment and one that Reiboldt echoed in his discussion with me. While the most likely scenario is for for-profits and not-for-profits to participate in these mergers, other outside investors are salivating over the chance to invest in healthcare facilities—after all healthcare is still a growth industry, albeit a slow one.
"There's a new group of people who are becoming more interested in investing in hospitals, including private equity firms and large institutional firms," Reiboldt notes. "Financial advisors realize they can't expect the same kind of returns as other investments and they look at this in terms of a long term investment."
Which is why the proposed acquisition of Detroit Medical Center by Cerberus Capital Management, may be viewed as a harbinger of mergers to come. Moody's goes so far as to say that these deals could "signal an increased appetite for challenged credits by for-profit investors," as the facility is Ba3 rated.
What did they forget?
When it comes to M&A there are a host of influences that go into the decision to consolidate. One factor that Moody's doesn't touch on in its report is the role that physicians play. These deals sound great but they'll take far more than an investor and C-suite buy-in to happen.
"You have to factor in the relationship the physician has with the hospital and in the community," he says. "They can't do anything without the physicians onboard because if the hospital loses those doctors—if they aren't happy with the deal—then the investor is losing the revenue stream which made the hospital attractive in the first place."
So, to round out the Moody's analysis, investors would need to gauge how their potential hospital investment might be viewed by the folks that make profit in healthcare possible everyday—the doctors. It's highly likely that this factor is something most outside investors would never have had to consider with their previous investment adventures. Nevertheless, if they are going to dabble in healthcare they need to realize that this industry doesn't operate like other industries—though it's still a great investment.
Now that we are five months into 2010, I have a little more time to see if my prognostication that there will be a slew of these M&As taking place will come true. I'll be keeping a watchful eye to see how things progress; I suspect most CFOs will be watching to see how they and their competitors fare during that time as well.
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Many a boxer has been able to dance around the ring again after a solid first blow. They may cough and sputter but they get moving; they put their fists up and they prepare to block and punch. It's when that second blow is delivered so close to the first that it can flatten all but a few prize-winning fighters. This recession has been a fight for most people and businesses. However, it seems the healthcare system in particular is taking a one-two punch. First, there was the variable bond market disaster, which nearly bankrupted many facilities (Pow!), then there was the healthcare reform act (Wham!).
The worst part is yet to come; most facilities haven't felt the sting of the second hit yet. Right now the fist is just in motion, so there is some time for you to still dodge, weave and block—unfortunately a few hospitals are going to take this one on the chin, as surmised by a recent Moody's Investors Service special comment, "Long-term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-Profit Hospitals."
Here are a few of the problems Moody's anticipates for not-for-profit hospitals as Healthcare Reform takes effect in the next few years:
"The ultimate credit effect . . . will be negative despite reduced bad debt expense and charity care provided by expanded insurance coverage for previously uninsured patients.
The key longer-term challenge for not-for-profit hospitals is the reform's reliance on extracting long-term cost efficiencies from hospitals, probably resulting in diminished hospital revenues. The trend will become more pronounced over time as key provisions of the law do not become effective until 2014.
The effects will include more difficult negotiations with private health insurers due to increasing regulatory scrutiny of the insurers by federal regulators. Hospitals also will face reimbursement pressures from government payers as the reform includes provisions that squeeze savings out of Medicare and Medicaid, including initiatives to identify improved operating efficiency.
While the most efficiently operated health systems will take advantage of healthcare reform to leverage economies of scale, many not-for-profit hospitals, especially single site and small hospital systems, may struggle. Industry consolidation resulting in bigger health systems with greater access to credit—already encouraged by current market forces – likely will increase further under healthcare reform."
While the Moody's predictions aren't particularly shocking to most CFOs, they are nonetheless disconcerting. Still, as the saying goes, "There are no problems, only solutions that haven't been found yet."
To help give financial leaders additional insights and potentially alternative outcomes of this legislation, I touched base with David Burik, managing director in the Healthcare division at Navigant Consulting, a Chicago-based, international consulting firm. Here's what he's seeing:
Charity care and bad debt
There's little question that most facilities will see a decline in both of these areas as more coverage is rolled out to Americans. But, it seems Moody's and most folks in healthcare feel it the declines won't be enough to offset the rest of the losses the healthcare may experience based on healthcare reform legislation.
"I don't see a lot of people holding out a lot of hope for this [charity care and bad debt declines] doing much to help long-term. And, . . . if they are going to use the Medicare rates for payment, they're certainly not going to use commercial rates, then it's hard to see how this will be a net gain even though some hospitals will have the highest number of enrolled with benefits," Burik says.
Long-term efficiencies
A little cut here, a little trim there, none of it will be enough to offset the potentially daunting financial future brought on by healthcare reform. Hospitals must figure out where their money is going and how to keep more of it from leaking out. Burik says for years hospitals overlooked areas that weren't generating growth or profit, preferring to weigh lay the discussion under the header of "we'll get to it sooner or later." Well, later has now arrived.
"Now I'm starting to see active discussion of these projects," he says. "Hospitals have to look at structural costs that were carried in the good times for some of these [less fruitful] areas and question whether it makes sense to continue them."
The effort to maintain the status quo, Burik explains, is often what has held facilities back from dropping some programs altogether. "Since the announcement of healthcare reform I think a lot of hospitals recognize that things are no longer the same, so you can't maintain that status quo. They have to find new ways to do business and that could be as simple as outsourcing billing or patient referral lines."
Facilities need to take the time to really assess their programs' profitability, short and long term, against their long-term strategic hospital goals while factoring in the potential outcome that healthcare legislation may have on their facility. Additionally, look for the inefficiencies and eliminate them as swiftly as possible—now isn't the time to be shy about eliminating floundering programs.
Payer negotiations
As if negotiating with payers over the years hasn't been difficult enough, the new legislation is about to make it even harder. Financial leaders should pay close attention to Massachusetts hospitals and insurance companies and how their state's health insurance laws are affecting negotiations. Massachusetts government is getting more militant with local managed care organizations about whether they have been negotiating in the best interest of their clients. This, in turn, has meant more scrutiny on the hospital-payer contracts, Burik says.
That scenario is likely to be played out nationwide, Burik explains, as there is similar language in the healthcare reform bill—which the Moody's comment notes as well.
"Basically we're all paying more for administration cost and getting less. So the government is going to be watching that they don't allow rates to go up … and that leads to difficult climate for negotiations," he says.
Another good example, watch what's happening with WellPoint Inc., the parent company of Anthem Blue Cross, which backed down from a proposed 39% hike of health plan premiums for 800,000 Californians after state officials unveiled an audit showing "numerous and substantial errors" in a filing Anthem said justified the increase.
Hospital consolidation
Last, but certainly not least, is consolidation. "We always thought we'd be apart of something bigger and let's start the journey to get it done, and that's consolidation. A lot of it is to reduce costs," says Burik.
More than a few healthcare industry analyzers have noted that conditions are ripe for larger numbers of mergers, acquisitions, joint venture and partnerships. Consolidation can be used as a strategy to keep smaller hospitals afloat as well as physician groups.
"The irony is there are more conversations but the hurdles to complete a deal are higher; so the deal flow isn't indicative of the discussions taking place. We're sensing more activity on the part of private equity," Burik explains. "There may not be an appetite to do a full merger on the part of hospitals, but there is no hesitation to schedule a mutually beneficial partnership that delivers economies of scale."
Speaking of scales, it's best for hospitals to get to their fighting weights as quickly as possible. Healthcare reform is a heavyweight fighter that will really packs a wallop if you don't prepare—you'll need all the speed and strength you can muster to out maneuver this behemoth in the hospital financial ring and the prize is ultimately staying afloat.
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I'm currently in the market for a house and let me assure you that the Obama housing tax credit, which ends at the end of April, is creating quite a buying frenzy in my home state of Massachusetts. I read last week that home sales nationwide surged 27% in March; my husband and I can tell you first hand how true that is—we were outbid for a house in the midst of this recession. Still, I suspect that after April 30 this little boom will fall flat and people will return to their senses about what you really should pay for a house.
Having too much debt is precisely why so many people are selling their homes to begin with. With no way to financially dig themselves out from under the weight of their mortgages, many people had to offload their homes to avoid bankruptcy and foreclosure. Many healthcare facilities found themselves in the business equivalent of these circumstances. They had too much in variable rate bond debt and were left holding the empty money bag when the economy tanked. This misstep in risk assessment affected their credit ratings, which in turn made refinancing their debt out of variable rate bonds difficult (which is an understatement)—as lenders now viewed them as riskier. It was a terrible circle to be caught in, but like the housing tax credit, the government did realize they needed to intervene on their behalf.
So, in 2009 the U.S. Department of Housing and Urban Development Section 242 Program (which has been around since 1968) amended its program to offer hospitals an alternative to traditional bank refinancing. The government adjusted the regulation to allow "hospitals to refinance existing loans, without requiring such refinancing to take place only in conjunction with the expenditure of funds for construction or renovation," which was the existing programs original requirement.
"When the credit markets became more restrictive, the lower-rated and non-rated hospitals didn't have good access to capital. The HUD 242 refinance option was initially to fill that void. Now that the credit markets have improved quite a bit and facilities are back to being rated BBB or better, many hospitals have reasonable access to capital. But there is a lot of applicability of this program for non-investment grade, quality hospitals," says Tom Green, CEO at Lancaster Pollard, a Columbus, OH-based healthcare financial advisory company.
Last year, Section 242 of this HUD program was updated (section 223 (f)) to include using the mortgage insurance program to refinance capital debt—which was previously not allowed unless 20% of the project proposed was new money. Once that was lifted, it opened the funding source for hospitals to refinance their variable bond debt.
"This program really opens up the funding option to facilities trying to replace letter of credit financing or bond insurance financing," says Green. "Initially there was a great deal of interest in this program but when hospitals saw the criteria for approval they found they didn't meet the initial criteria."
Recognizing that the eligibility criteria might be off putting, in January of this year the Federal Housing Authority decided to make section 223 (f) permanent, publishing a proposed rule that would regulate the refinancing of capital debt. The comment period for that regulation ended March 30, and now the regulation is awaiting final adoption—there is no word on when the process might be completed officially, though the program is active in the meantime. The final regulation is expected to relax eligibility requirements to allow more hospitals to refinance. Click here to read the new eligibility requirements.
There are additional benefits of using Section 242 (though the speed with which the application is processed isn't among them; it takes months):
the cost of the credit enhancement does not fluctuate with the markets
the non-recourse pricing can be appealing to independent hospitals that may seek to affiliate in the future
the non-recourse price appeals to large systems that want to create a separate financing structure for related hospitals of any size
Traditionally Section 242 has been a low volume program, however, with the relaxing of the criteria that may change somewhat (though not quite to the degree of the housing tax credit frenzy I'm dealing with). "If you've got a hospital that's needed in a community but struggling financially, this program could be a good fit. But it isn't going to result in hundreds of hospitals being refinanced by this program," says Green.
Here are a few more HUD Section 242 details:
Purpose: To help hospitals access affordable financing for capital projects—including new construction, refinancing, and modernization, remodeling, equipment and expansion.
Eligibility: Acute care hospitals with no more than 50% of patient days attributable to the following services: chronic convalescence and rest, drug and alcoholic, epileptic, nervous and mental, mental deficiency, and tuberculosis. For Critical Access Hospitals this restriction does not apply. If your state has a Certificate of Need process, a CON must be issued or pending.
You must grant the FHA-insured lender a first mortgage on the entire hospital, including property, plant, equipment, and receivables. (Note: Exceptions may include leased equipment, off-site property, capital associated with affiliations, etc.)
You must be willing to make monthly payments into a Mortgage Reserve Fund that will build to a balance equal to two years of debt service after ten years.
Over the last three full fiscal years, the hospital's average operating margin must have been equal to or greater than 0.00 and the average debt service coverage ratio equal to or greater than 1.25.
Funding amount: Loan-to-value may not exceed 90%. Maximum loan term is 25 years. One-time fees total 0.8% of loan amount. Fixed annual premium is 0.5% of remaining balance. FHA insures 99% of the loan amount.
Application process: Long; the first step of the application process is for HUD to perform a preliminary review of the hospital and the proposed project with information provided by the hospital and mortgage lender.
By now a good majority of hospitals with variable-rate bond debt have refinanced their way to higher ground, but not everyone has done it. Moreover, being aware that these types of programs are available to your facility could help keep hospitals out of trouble in the future. Of course the key to success all together is not to over leverage your facility—which is why you won't see me overpaying for a house even though the tax credit is about to expire.
Note: You can sign up to receiveHealthLeaders Media Finance, a free weekly e-newsletter that reports on the top finance issues facing healthcare leaders.