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Investigating hospitals

Maya Kaufman - POLITICO New York

Melanie Evans - The Wall Street Journal

Kristen Hwang - CalMatters

John Hillkirk - KFF Health News

IRE Conference 2024 - Anaheim, CA

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Source: https://www.politico.com/news/2024/03/13/beth-israel-sends-er-patients-elsewhere-00146554

I want to start with a story I’ve been working on about a hospital in Manhattan that’s in the process of gradually closing. Executives at Mount Sinai, a massive health system that acquired Beth Israel about a decade ago, said it was financially unsustainable to keep running the hospital and started giving employees notice. They even handed out these pins. But the thing is hospitals, unlike other enterprises, can’t just do what they want. Hospitals are subject to an enormous amount of rules and regulations by the federal government and local governments. For example, they have to treat any patient who comes in to their emergency room under a law known as EMTALA. And in many states, hospitals have to get approval of significant changes, like closures. In the case of Beth Israel, health care workers were telling me that the hospital had started shutting down services even though the state hadn’t approved its closure plan. And because of that, patients with emergency medical needs who were walking in the door were being sent away to other hospitals. So, was this hospital violating federal and state laws?

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Why investigate hospitals?

Via WSJ:“As Hospitals Grow, So Does Your Bill”

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What’s in a hospital?

Acute-care hospital — treats emergency and/or short-term medical needs, may be part of a larger health system

Emergency department or ER — the “front door”
Inpatient services — capacity is measured in terms of beds

“Med/surg” floors — treat a wide range of conditions
Beds for more specific needs, such as: labor & delivery, psychiatry

Outpatient services/ambulatory care

May be classified as “extension clinics” of the hospital
Elective (non-emergent) surgical procedures

Hospitals have, on average, 130 staffed beds. Some have a handful. Some have 500+!

Source: Definitive Healthcare

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Who works at a hospital?

Doctors (physicians)

Interns, residents and fellows

Nurses (RNs, NPs, LPNs)
Allied health professionals

Patient care associates, technicians

Administrators and executives

Where to find them:

Ask a union rep to connect you
Social media - search for posts that tag the hospital or its location

Hospital administrators love LinkedIn!

Colleges/universities - many teach and put their contact info online
Lawsuits and court records - who’s suing the hospital? (Who are they suing?)

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Who’s in charge?

U.S. Centers for Medicare & Medicaid Services

Sets the rules for participating in Medicare

Inspection reports at hospitalinspections.org or request from CMS regional office

State health agencies

Responsible for licensing hospitals, approving major projects (certificate of need laws)
Often handle inspections on behalf of CMS

Also:

IRS (sets tax exemption standards for nonprofit hospitals)
Federal Trade Commission (reviews hospital mergers, can sue to block them)
Justice Department (investigates health care fraud)
Private accrediting organizations (e.g., Joint Commission)

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Source: https://www.politico.com/news/2024/03/26/new-york-mount-sinai-beth-israel-hospital-00148987

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How do hospitals make money?

Patient care revenue

Medicare
Medicaid – often pays below cost
Commercial insurance – pays the highest rates

“Other” revenue

Governmental grants (e.g. Covid aid)
Cafeterias, parking lots

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Source:

https://www.crainsnewyork.com/health-care/new-york-city-hospital-data-indicates-available-beds-health-care-workers-say-otherwise

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How do hospitals really make money?

Market power — vertical and horizontal consolidation

Enables hospitals to negotiate even higher rates with commercial insurance plans

Outpatient surgeries at extension clinics

Enables hospitals to tack on “facility fees”

Revenue cycle management
Reducing length of stay
Optimizing payer mix
Innovation arms and joint ventures

Commercialized research/royalties through spin-off companies

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Financial documents

Melanie Evans, The Wall Street Journal

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Who owns hospitals?

Hospitals in the U.S. fall into three broad categories that create different financial reporting requirements: government-owned, investor-owned and nonprofit.

Government-owned

18% of general hospitals*
Academic medical centers, safety-net hospitals

Investor-owned

24% of general hospitals*
Publicly traded (HCA Healthcare), private equity (LifePoint Health), private (Prime Healthcare)

Nonprofit

58% of U.S. acute-care hospitals*
"Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3)." - IRS

*American Hospital Association 2022 Annual Survey

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Financial disclosures

Reporting by nonprofit hospitals to regulators and their bond investors

Internal Revenue Service Form 990 and Schedule H
Audited financial statements and notices of delinquencies, defaults, credit rating changes, bankruptcy, mergers or acquisitions, reported publicly under regulations from the Municipal Securities Rulemaking Board

Nearly all hospitals report financial information annually to the Centers for Medicare and Medicaid Services (CMS), the federal agency that oversees two taxpayer-subsidized health insurance programs. Hospitals disclose information to CMS using the Medicare Cost Report.

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Form 990 and Schedule H

The IRS regulates charitable organizations, which don't have to pay certain taxes in exchange for meeting certain requirements.

Tax breaks:

federal corporate income tax
state corporate income tax
state sales tax
local property taxes

Tax subsidies for nonprofit hospitals total more than $60 billion annually, according to research by Gerard Anderson, a Johns Hopkins University professor.

What do they do to earn it?

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Schedule H

The section of the Form 990 where hospitals report their charitable activity to the IRS

Limited federal requirements:

one community health needs assessment every three years
written financial assistance and emergency medical care policies
cap medical bills to patients who get financial aid to amounts generally paid by insured patients
make reasonable attempts to identify patients who could get financial aid before taking extraordinary actions to collect bills

No federal standards for financial aid for patients or how nonprofit hospitals give back to communities.

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Patients who were likely eligible for free or discounted medical care got bills instead.

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Municipal bond disclosures

Nonprofit hospitals can borrow money using municipal bonds, which requires them to disclose information to public repositories.

Offering statements

Detailed description of the bond, terms for repayment or default, financial and operational information about the borrower
MuniOS

Continuing disclosures

Audited financial statements, delinquencies, defaults, credit rating changes, bankruptcy, mergers or acquisitions
Electronic Municipal Market Access (EMMA) service, DAC Bond.

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Roughly 80% of oncologists in the Charlotte, N.C., area work for hospitals, up from half about 10 years earlier.

Among the North Carolina hospital systems that have been buying up oncologists is Novant Health, which employed 75 cancer specialists at the end of the last decade, up from seven in 2010. One of the cancer clinics Novant bought: Lake Norman Oncology in suburban Charlotte, N.C.

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Medicare Cost Report

The cost report is one way to compare financial information across most U.S. hospitals.

Be wary: Entries can be unreliable. Before using a new data element from cost reports, check it out with researchers or auditors who use the cost report.

Key worksheets:

Worksheet S-3: Patient volume
Worksheet S-10: Cost of financial aid
Worksheet G-3: Revenue, expenses and income (loss)

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Big Hospitals Provide Skimpy Charity Care—Despite Billions in Tax Breaks

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Billions in Covid Aid Went to Hospitals That Didn't Need It

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Decoding hospital finances

Kristen Hwang, CalMatters

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Think about it like your own budget

Income
Fixed costs (rent/mortgage, utilities, car payments)
Debt
Savings
Retirement
Credit score

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Important Formulas and Vocabulary

Profitability = “Income”

Total Margin - net income including investments, government transfers, and income from subsidiaries
Operating Margin - net income based on direct patient costs and revenue

Liquidity

Current Ratio - measure of whether a hospital can pay its short term obligations; above 1.5 is very healthy
Days of Cash on Hand = “Savings” - 100 days is a healthy number; for-profits keep very little cash on hand

Adequacy of capital investment

Capital Expenditures/Depreciation Ratio - measure of whether a hospital is investing in its facilities; gives you an idea of where the money is going; should be greater than or equal to 1

Other

Reserves = “net worth” - measure of the size of a system and its stability
Charity Care = “donations” - how much financial assistance a hospital provides patients; differs from “bad debt” in that a hospital does not bill a patient for charity care. A “bad debt” line item indicates that a hospital billed a patient and later determined they would be unlikely to recoup the cost.

Total Margin = (Total Revenue - Total Cost)/Total Revenue

Operating Margin = (Total Operating Revenue - Total Operating Cost)/Total Operating Revenue

Current Ratio = Current Assets/Current Liabilities

Days COH = (Cash + Marketable Securities)/(Operating Expenses - Depreciation)/Days in report period

Capex/Depreciation = Annual Property, Plant & Equipment purchases/Annual Depreciation Expense

Reserves = Total Current Assets

Charity Care = Financial assistance/Total Operating Expense

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Reporting questions to think about

How financially healthy is a hospital/health system?

Does it really need the bond measure it is proposing?
Will Medicaid/Medicare rate increases really help?
Can it afford union raises?

Is a hospital at risk of closure/how did it get that way?

Is giving money to a hospital a good use of public resources? Is it equitable?

COVID payments; emergency loans

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Maternity Deserts

Common reasons for closures:

Declining birth rates
Provider shortages
Financial instability
Rural problems

But what about L.A.?

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Who owns these hospitals?

Publicly traded Fortune 500 company

Fifth largest for-profit system in the U.S.

AHMC; 10 for-profit hospitals in CA

Rebranded as Pipeline; private equity

Publicly traded; 186 hospitals; multiple lawsuits

Private equity

Prospect Medical Holdings; multi-state

Closed after federal fraud investigation

Purchased after fraud investigation

Hypothesis: For-profit hospitals are sacrificing labor and delivery services to make money

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Reserves = Net Worth

Total Current Assets

Hospitals are by and large extremely wealthy
Health systems are even wealthier
For-profit hospitals (surprisingly to me) are on the smaller size
Reserves help hospitals borrow money

Cedars-Sinai

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Payer Mix = Dependents (sort of)

*the proportion of Medicaid, Medicare, commercial and indigent patients at a hospital

Varies widely by state

Medicare: 10%-30%
Medicaid: 5%-31%

Disproportionate Share Hospitals (DSH) get extra money

State-by-state implementation
CA: 40-50+% medicaid

Hospitals that still have maternity wards have far fewer commercial payers than those that have closed
Low-income patients are at greatest risk of losing maternity services
Some of the wealthiest hospitals see the fewest Medicaid patients

Kaisers and Cedars-Sinai

Every hospital is going to say they don’t get paid enough money, and every hospital is going to say that maternity care is a loss leader. Nearly every hospital in California and probably the country loses money on the maternity ward. But a really big caveat to those statements is what kinds of patients does the hospital have.

Medicaid - low reimbursement
Medicare - break even reimbursement
Uninsured/Indigent - no reimbursement
Commercial - high reimbursement to subsidize everything else

Can hospitals really claim that they aren’t getting paid enough? It would be crazy if Cedars Sinai, worth $6.5 billion and serving 2% Medicaid, said it couldn’t afford anything. But you start to look at many of these places with closed maternity wards serve A LOT of low-income patients.

That tells us those patients are the most at-risk of losing services
But keep digging…

Disproportionate Share Hospitals get extra money for serving so many people on public insurance. States determine who qualifies.

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Operating Margin = Income

Operating margins are relatively volatile; best to look at OM over time
Hospitals survive on far thinner margins than you’d expect

Nonprofits ~3%
Wide variation

2022 was the worst financial year for hospitals post-2020

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What is going on in L.A.?

Los Angeles lost 17 maternity wards in the past decade (old-school reporting)
The closures overwhelmingly happened in impoverished neighborhoods where up to 78% of patients had Medicaid (payer mix)
Black and Latino communities most at risk of losing services (hospital discharge data/Census)
For-profit corporations owned 13 of the 17 hospitals that stopped delivering babies. (hospital finance records)
Most hospitals were extremely profitable, the highest margin was 13 times higher than the median hospital operating margin in California. (hospital finance records)
Nonprofit and government-run hospitals were much more likely to maintain L&D even while losing millions of dollars. (hospital finance records)

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Thank You!

Tip sheet and slides available online