By Nancy Kane and Paul A. Hattis Health Care 0 Comments Aug 27, 2022

AS LEGISLATORS ponder whether to resurrect a $350 million “relief” fund for Massachusetts hospitals, we suggest that they first step up the state’s informational capacity to better assure that they are allocating funding to institutions truly in financial need.

We worry that the proposed allocations in the 2022 relief package, as well as unanticipated and abrupt facility and service closures over the last decade or so, raise the concern that policymakers do not have clear criteria for determining which of our state’s hospitals are truly in need and deserving of additional state support.  Ideally, “distress” funding should go to hospitals whose primary cause of poor financial performance is due to a disproportionate commitment to serving low-income (high Medicaid) and/or underserved (behavioral health) populations, and not, for instance, due to over-expansion funded by excessive amounts of debt, or the strategic and financial priorities of out-of-state owners.  Poor financial performance needs to be defined more broadly than simple operational measures of profitability.

While the state collects and publishes a lot of financial data, primarily through the Center for Health Information and Analysis and, to a more limited extent, the attorney general’s public charities division, improvements are needed to address important shortcomings of the state’s financial oversight and monitoring approach.

Here are the shortcomings as we see them:

Too much focus on individual hospitals, not systems. While the state has made an effort to collect system-level audited financial statements, most of the data CHIA publishes is at the hospital level, even though at least two-thirds of our hospital beds are operated by multi-hospital systems.  Systems often make strategic closure and service consolidation decisions reflecting system-level strategic and financial priorities that may not be apparent in any one member hospital’s financial profile.  Consider Steward Health System. While the Massachusetts hospitals owned by Steward appeared to be profitable in 2020 in aggregate, according to CHIA data, the system’s operating losses (Steward owns 40 hospitals in nine  states) have been staggering for the last several years, contributing to a negative net worth of $1.5 billion as of 2020.

Income statements given too much weight.  The CHIA annual hospital profiles show five metrics derived from income statements, two from balance sheets, and none derived from cash flow statements (such as investments in property, plant and equipment, and acquisitions).  The only two balance sheet metrics are net assets (equivalent to net worth) and current ratio.   The data books CHIA produces provide more balance sheet metrics, but are still short of a thorough analysis of financial health, which would involve looking at patterns of these ratios and cash flows to detect financial wealth, financial distress, and strategic investment priorities.

One of the most meaningful liquidity metrics is days of unrestricted cash on hand (current and noncurrent), a metric that can be used to identify accumulated wealth.  For solvency, a metric that captures the impact of operating lease financial burdens (generally not classified as “long term debt”) is increasingly important.  Capital adequacy – how well is the hospital/system maintaining its historic investment in property plant and equipment — can be captured using metrics such as average plant age and  capital expenditures over depreciation expense.  A sources/uses analysis of cash over a longer period of time (5 – 7 years) can reveal where the cash of health systems/hospitals comes from (Is it operations or financing activities?) and where it is used (acquisitions, transfers to other entities, or investments in joint ventures) as another window into long-term strategic priorities and relative financial health.

With the creation of the Health Policy Commission in 2012, a merger or acquisition triggered the provision of more extensive financial data by the involved providers,  followed by  detailed analysis by Health Policy Commission staff of proposed market transactions before they happen and often extensive community engagement regarding the perceived impact.   When this level of state scrutiny and public participation occurs, the process can be consequential as to whether the transaction goes forward or not, and the financial and equity impact of the transaction can be mitigated.

This depth of financial understanding and policy intervention roles tied to mergers and acquisitions should be mirrored by government agency oversight over routine financial data, analysis, and oversight.   The state needs to be better prepared to support new legislative funding initiatives or decision-making by state agencies with timely, relevant financial information.

While we have a public repository of comprehensive financial data at CHIA, what is lacking is the investment in staff capabilities to analyze and interpret for public policy purposes what the data tells us.  Additional resources should be provided to CHIA to carry out more comprehensive oversight and monitoring activities, with the capacity to call on appropriate sister agencies to intervene before a crisis occurs.  This would be a valuable investment of public dollars in a state like ours that depends greatly on our health care providers to meet basic care needs and  drive the overall economy of our state.

Nancy Kane is a retired professor of management at the T.H. Chan School of Public Health at Harvard University and a board member of the UMass Memorial Health system. Paul A. Hattis is a senior fellow at the Lown Institute.

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