iProtean—Managing Risk

I’ve been working in healthcare finance for about 26 years and I can’t think of another time when we had this level of risk within the industry. (Eric Jordahl, Kaufman, Hall & Associates)

 

A phrase commonly heard in many industries—risk management—migrated to the healthcare industry several years ago. But the financial crisis has moved risk management to the top of board agendas.  Today’s boards are struggling with how to define and fulfill their governance roles in light of changing regulations. (Deloitte Insights, Governance and Risk Management Services, 2012.)

 

The iProtean course Managing Risk provides the necessary information for board members to discuss their organization’s risk portfolio. Michael Irwin (CitiGroup), Lisa Goldstein (Moody’s Investors Service), Marian Jennings (M. Jennings Consulting) and Eric Jordahl (Kaufman, Hall & Associates) discuss the multiple types or risk, debt and investment risk, the importance of using a balanced portfolio approach, and some of the key challenges for the board’s investment committee.

 

Marian Jennings

The first thing we always think about is the financial risk . . . establishing a clear set of financial targets about your balance sheet and your operating performance, through your finance committee.  So you need to check that off your list.  But even if you have done that well, you need to be cognizant of the other intrinsic business risks in your environment.  The risk of a new business venture—either a new service or entering a new geography is risky.  A risk that you’re doing too many things simultaneously is risky; a risk that the payers are going to fundamentally change the incentives for what you provide and things that are winners today might be losers in the future is risky.  An assumption that what worked for us before will work for us in the future is risky.

 

So it’s important to go through each of these manifestations of risk, think them through, don’t let them paralyze you, actually view them as something that enables you to name them and start taking action to minimize each one.

 

Eric Jordahl

The most important element is to think of risk across the organization, to understand debt related risks and how those risks show up, what they mean, what is the magnitude of those risks, but then to be able to compare how the realization of one of those debt related risks plays out across the organization if other risks are showing up.

 

So if the asset side of the equation is experiencing distress, if the operating side of the equation is experiencing distress, do you really want to be having this piece of debt also carrying risk?  It’s thinking about risk-reward over the continuum of the entire organization, operations, liabilities, assets, where do you have risks, what kind of return are you generating off of those risks, are you realizing a big enough return relative to the potential impact of a realized risk in order to justify holding on to it or do you want to just eliminate it.

 

Michael Irwin

Boards have to be careful that they don’t become too conservative in their debt policies and let me give you an example of what I’m talking about here.  Several years ago I remember attending a finance committee meeting of a small community hospital, and as I was talking about some of the financing options that were available to that organization, one of the trustees said, “Sonny, we don’t do that here.  We’re very, very conservative.  We only borrow in the fixed rate market and on the investment side all we do is invest short term and roll over treasury bills or treasury notes.  That’s the way we like it, very conservative.”  And I pointed out to them that in fact inherent in those two decisions, by not looking at how the balance sheet works—the left hand side and the right hand side of the balance sheet have to be working together—that two conservative policies actually lead to a speculative position on interest rate.

 

In the example I just gave, that organization would do just fine in a higher interest rate environment when they would get a higher investment return on their short term investments while their interest rates were fixed.  However, over the last 10 or 15 years, and this is away from the financial crisis, that would have been a poor decision because they would have fixed the interest rate on their debt, leaving them with a fixed level of interest expense, but their investments would have been reduced year over year over year during a period of high liquidity in the markets and low returns on treasuries and other short term investment instruments.

 

So a better alternative and one we see evolving now is for organizations to have a mix of both fixed and variable rate debt on the right hand side of their balance sheet which better reflects what they’re doing on the investment side of their balance sheet where they’ve got some exposure to equities, some exposure to alternative investments that match up on a long term investment horizon, and yet the short term investments provide a natural hedge for the variable rate exposure they would have in the variable rate component of their debt.  So in a market that would see increasing interest rates, their interest expense would go up a little, but their non-operating income would also go up to offset that. It’s that kind of hedging position that I think organizations should try to achieve.

 

Lisa Goldstein

From our perspective, whether it be a debt portfolio assessment or a portfolio assessment on investment strategies, we want to get an understanding that the hospital and the board are fully aware of the rewards and the risks involved in whatever balance sheet strategies they take.

 

Michael Irwin

So our recommendation to trustees would be as an organization to sit down and look at your investment policy.   An investment policy isn’t something that should be done once and then forgotten.  An investment policy is something that has to be constantly evaluated in light of the market and the resources of the organization.

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here.

iProtean—Hospital and Health System Credit Ratings Summary for 2011

Hospital and health system board members are frequently required to interpret the financial “language” of healthcare—in both the financial statements and ratios of their organization and essential industry reports—in order to make informed decisions. As important as it is to understand the financial picture, the terminology can be daunting.  An excerpt from a recent Special Comment from Moody’s Investors Service illustrates the point.

 

2011 represented a material decline in hospital and health system credit rating volatility, largely due to the benefits from expense reductions that took place at the beginning of the recession, and improved balance sheet measures . . . While negative pressures continue, management teams have been able to maintain margins by creating greater efficiencies and savings.

 

Downgrades were driven in part by volume declines and weaker or negative revenue growth contributing to weakening operating performance and debt service coverage, declines in liquidity, increased debt load that stresses leverage measures, increased competition, and management and governance issues. Most upgrades were due to maintenance of strong financial performance, growth in liquidity, improved debt measures, favorable volume trends, strong market share, and strong management.

 

Moody’s Investors Service. Special Comment. U.S. Not-For-Profit Healthcare Ratings in 2011: Volatility Declined but Downgrades Still Exceeded Upgrades. February 2, 2012.

 

The iProtean course Hospital Financial Statements and Ratios serves as a primer for the financial language used by not-for-profit hospitals. Marian Jennings (M. Jennings Consulting) and Lisa Goldstein (Moody’s Investors Service) cover the basics and intricacies of hospital financial statements and ratios—necessary for those new to healthcare and an excellent review for experienced board members with non-financial expertise.

 

Marian Jennings, M. Jennings Consulting

The reason we are interested in the balance sheet is that it is the foundation for credit worthiness and, in particular, we’re very interested in two questions that we would answer.  One question is, how leveraged are we?  That’s the financial question.  In plain English that means, how much we are relying on debt to support our asset base.

 

The second big question that we want to ask about the balance sheet is how much cash do we have?  Just like in your personal life, cash gives you financial flexibility, so if you have a fair amount of cash on your balance sheet, that gives you more financial stability and flexibility moving forward.

 

Lisa Goldstein, Moody’s Investors Service

As a first step, it is probably most important to review the income statement.  The income statement shows if the hospital is earning money from its core business from operations or, conversely, if it is losing money from operations.  The first area of focus would likely be top line revenue.  Basically it is taking an analysis of your volumes—how many people come to the hospital—and converting it into the ‘sales’ for treating those patients, or revenues as we call it in not-for-profit accounting.  The revenue analysis is a function of looking at the different payers that reimburse hospitals for the care that they provide.

 

From our perspective . . . any hospital board member should look at trends—from year to year.  Are revenues increasing—and revenues should be increasing just as inflation grows every year—or are revenues decreasing?  From a board members perspective, if revenues are actually decreasing from year to year, I would see that as a red flag, and a board member would start asking questions of senior management as to why revenues are decreasing.

 

Marian Jennings, M. Jennings Consulting

Liquidity is a measure of cash, and liquidity ratios indicate cash relative to an organization’s financial needs.  Two key liquidity ratios are:  days cash on hand, which measures the ability to continue operations when payments for services stop, and cash to debt ratio, a calculation of cash compared to outstanding debt.

 

Lisa Goldstein, Moody’s Investors Service

Financial ratios and benchmarking against financial ratios are very important.  It is a way for a finance committee of a board or the entire board to measure how their particular hospital is doing against national trends.

 

There are six key core financial ratios where most of the industry tends to focus.  Two are on the income statement: the operating margin, basically operating income compared to revenues; and operating cash flow, which is your operating margin, then adding back your interest on your debt and depreciation on your buildings measured against revenues.  For those two measurements, the higher the better, so the higher the margin the more profitable you are; you will have a greater ability to fund future capital if you are producing more income, if you are producing more cash flow . . .

 

So right there, that’s six ratios: operating margin, operating cash flow margin, days cash on hand, cash to debt, maximum annual debt service coverage and debt to cash flow.  Those are the six financial indicators that the industry seems to focus on when we evaluate credit worthiness of hospitals.

 

For a complete list of iProtean courses, click here

 

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here

 

 

iProtean – Value-Based Purchasing

Value-based purchasing—tying payment to outcomes, not volume—has become the cornerstone of CMS efforts to improve quality of care while reducing costs. Value-based purchasing (VBP) has financial rewards for hospitals; it also carries risk. As hospitals earn higher performance scores, and incentive payments are earned based on these scores, what happens when hospitals reach their improvement “ceiling?”

 

“Regardless of the position in which a hospital currently finds itself, there is an opportunity to improve and maximize the VBP incentive payment . . . While it is true that increasing a hospital’s payment from improvement gets more difficult the higher the performance score, high performing hospitals should identify key measures that provide the greatest opportunity to increase the hospital’s VBP incentive payment, and begin focusing on measures that will be used in future fiscal years.” “Value-Based Purchasing—What’s Ahead for Healthcare Providers,” Barbara Miltenberger, Sarah Downs, Laura Greene, Husch Blackwell LLP, AHLA Connections, February 2012.

 

The iProtean course New Delivery and Payment Systems spans the rationale for and implications of structural changes to the healthcare system. Todd Sagin, M.D., Brian Wong, M.D., Anjana Patel, Esq., Robin Nagele, Esq. and Dan Grauman offer hospital executives and board members their expertise on and expectations about value-based purchasing, accountable care organizations, bundled payments and medical homes—and the impact of these structural changes on quality.

 

Todd Sagin, M.D., J.D., Sagin Healthcare Consulting

We are moving away from a fee-for-service model, which has dominated healthcare reimbursement for the past many decades, to what is often referred to as value-based purchasing.  This is an umbrella term, but it basically is in reference to payment methodologies that tie payment, not to volume, but to the quality of the services, and usually pays for those services on some kind of a budget.  That is, it establishes an amount that an intervention or a procedure or a healthcare activity is worth, and then it lets you manage the specific healthcare services within that particular budget—and it doesn’t offer you payment unless you meet threshold quality benchmarks.  In this way these new payment methodologies will raise the bar for quality. At the same time they will start to diminish the overutilization of resources that is driving healthcare costs so high in America today.

 

Robin Nagele, Esq., Post & Schell

Value-based purchasing will be a voluntary program for hospitals.  CMS has developed specific benchmarks that hospitals will have to meet to get quality incentive payments [through this program].  The way it works is that the DRGs that exist now will be reduced 1 percent per DRG for hospitals. That money will go into a fund from which hospitals that meet or exceed the quality benchmarks that CMS has developed through the value-based purchasing program will receive additional payments that will be tacked on to the DRG payments.

 

Dan Grauman, DGA Partners

The health reform law provides for several new payment mechanisms and initiatives, trying to move the industry and payments by the Medicare program from a volume based, fee-for-service type system to one where hospitals and doctors are working collaboratively to try to manage the health of the total population.  If care is more integrated, if hospitals and doctors and specialists are working in a more coordinated way, that care is a better experience for the patient and, quite frankly, delivered in a higher quality way.

 

Todd Sagin, M.D., J.D., Sagin Healthcare Consulting

In recent years there have been many studies, demonstration projects and initiatives to try to bring down the high cost of care.  These vary from the use of nurse practitioners, to medical homes, to new reimbursement methodologies including one that is often referred to as bundled payments.  When all these different approaches are put together, bundled payments turns out to be perhaps the most effective way to bring down the high cost of care.

 

For a complete list of iProtean courses, click here

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here

 

For more information about iProtean, click here

iProtean – Health Reform

“The book on U.S. health reform is not yet written. ACA [Accountable Care Act] is a chapter. The market will write others. What’s clear is that the affordability of health care—costs—is a theme that will run through each. It’s time to get serious about costs. To avoid the discussion is to guarantee the demise of the system’s strengths and the certainty of a two tiered system long-term: one for those that can afford it, and a second for those that can’t.”

 

My Take, Paul Keckley, Executive Director, Deloitte Center for Health Solutions. Health Care Reform Memo, February 6, 2012.

 

The iProtean course The New Healthcare Business Model features insights from Ken Kaufman, Dan Grauman, Lisa Goldstein, Anjana Patel and Jeff Bauer on the implications of health reform and the new business model under which hospitals will operate over the coming years.

 

Kenneth Kaufman, Kaufman, Hall & Associates

With the economic forces being the way they are, together with health reform legislation, we are now moving from the Medicare business model to what is being referred to as the ‘post reform business model.’  This business model is going to take a number of characteristics, the most important being the change in the business value proposition.

 

Kenneth Kaufman, Kaufman, Hall & Associates

Board members and healthcare executives must understand that this value proposition is so much harder than the older one.  It will create very significant challenges for many organizations around the country because you are being asked to provide a particular outcome at a particular unit of cost, which has never been the challenge in healthcare.

 

Lisa Goldstein, Moody’s Investors Service

We will go through a period of readjustment by both Medicare and the commercial payers that will greatly impact financial performance of hospitals.  So now is the time for hospital board members, with senior management, to reevaluate their cost structures, reevaluate their business model, reevaluate the processes of delivering high quality, low cost care to the patients who seek healthcare from them.

 

Dan Grauman, DGA Partners

Hospitals need to be preparing on many fronts.  There is a great deal of pressure—and this has been underway; it’s not new—in operating hospitals.  More than ever, hospitals are going to have to try to figure out how to deliver care in the most efficient, cost effective way while doing the right thing for patients and maintaining quality standards.  The interesting thing about operating hospitals is that hospitals can’t do this alone.  There is a high interdependency between hospitals and those who control the utilization of services just by virtue of their pen, by determining what’s needed for the patient—the physician.

 

Anjana Patel, Esq., Sills Cummis & Gross

The goal behind the accountable care organization [ACO] is if you have a group of providers working together in a coordinated fashion, then Medicare will reward you if you meet certain cost cutting metrics and if you achieve certain quality measures.  The reward comes in the form of a bonus payment that will be split up among the different providers within the ACO.

 

Dan Grauman, DGA Partners

Medicare wants to start slow.  They want it to be successful.  They don’t want big failures on their hands, so they are talking about having ‘upside-only’ arrangements where you are responsible for, let’s say, managing the care of Medicare beneficiaries, and there is a fixed budget that you’re working towards.  If you do better than that budget by a certain percent, then you get to share in those savings because you—the hospital and the doctors, working collaboratively—will have better managed utilization of those patients.  And by bringing the cost under budget, you can share in some of the savings.  So that’s how Medicare is viewing this as a first step.

 

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here.

 

iProtean – Healthcare Compliance

In a recent article by Peter Katz, Esq., “Medicare Fraud Strike Force: Past, Present and Future,” he noted, “The last four and a half years have seen a meteoric rise in healthcare fraud prosecutions around the country, primarily due to the Medicare Fraud Strike Force. Its ability to blend investigative and prosecutorial techniques, act quickly and decisively, and dismantle ever changing fraud schemes has created a model that is not only likely to be around for many years to come, but also be copied in other industries as well.” (Peter Katz, Esq., Berkeley Research Group, New York. Fraud & Abuse, 1:1, 2012, American Health Lawyers Association Fraud & Abuse Practice Group)

 

The iProtean Governance course Compliance offers board members a detailed look at the components of compliance. It features Monte Dube, Esq., Anjana Patel, Esq., Robin Nagele, Esq., and Anne McGeorge who discuss regulatory and legal requirements for hospitals, federal and state compliance laws, the board’s role in ensuring compliance, and the IRS Form 990.

 

Compliance has become a major issue for many healthcare organizations, and the health reform law creates additional pressure.  Through the Accountable Care Act, the federal government now has billions of new dollars to combat fraud and waste within the Medicare system. (Anjana Patel, Esq., Sills Cummis & Gross)

 

Local, state and federal laws of many types apply to the operation of your hospital. Whether it’s the EPA overseeing your underground storage tanks, the federal communications commission on your helipad radio, all the way to the Stark and fraud and abuse laws, your board needs to be aware of this regulatory milieu.  (Monte Dube, Esq., Proskauer)

 

Much of the actual compliance work of a board can be delegated to the audit and compliance committee. In addition to the audit responsibility, this committee is responsible for compliance with the myriad federal and state laws and regulations. (Robin Nagele, Esq., Post & Schell)

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here.