iProtean—Introduction to Quality

Improving quality and reducing cost, while always a staple of board and executive discussions and retreats, has catapulted to the top of the list of priorities because of components of the Accountable Care Act (ACA) and the Medicare Shared Savings Program:  accountable care organizations, medical homes, bundled payments.

 

Designing the structures and operational details within each organization consumes an unprecedented amount of leadership, management, physician and staff time, and uncertainty about the challenges to the ACA, now being decided by the Supreme Court, suggests dual strategies—with and without the structural components of health reform.

 

“The linking of reimbursement to quality is here to stay but the mechanics of how to do so are still in their infancy.  One thing however is certain:  the delivery of high-quality care and the accurate measurement of the ability to do so is the foundation of ACOs as a new model of health delivery . . . Although seemingly complex in their form and implementation, these measures do not represent the end of the quality journey.  They are only the beginning of a long and interesting shift away from volume-based payment toward payment measured by the value of the care delivered.”  (Mark W. Brown, M.D., The ACO Handbook. American Health Lawyers Association, 2012.)

 

To successfully deal with these issues at the board level, board members should have a firm grounding in quality and their responsibilities to ensure high quality care for patients and financial stability for the organization.  In the iProtean course, Introduction to Quality, Barry Bader, Todd Sagin, M.D. and Brian Wong, M.D. discuss the impact of health reform as well as the history of quality, quality as a core responsibility, physician credentialing, six aims that define quality and the quality committee.

 

Barry Bader, Bader & Associates

The healthcare system is in the midst of not merely change, but many people believe transformation in the way we pay for medical care and, as a result, in the way we deliver medical care.  We have predominantly had in this country a fee for service-based system.  Generally, insurers as third parties and government as the provider for the elderly and the poor paid individual fees to doctors, and paid fees to hospitals for visits and procedures.  While there certainly are benefits to a fee-based system, one of its financial incentives is to reward volume:  the more you do, the more you are paid.  Perversely, if a patient goes into the hospital and suffers an adverse occurrence, or develops a hospital-acquired infection, traditionally hospitals and doctors would provide more services to help the patient get better—and they would get paid more.

 

This system is one that we as a country cannot afford any longer.   No matter what happens in Congress, in state capitals  and at the Supreme Court with some specific pieces of healthcare reform legislation, there is a general consensus that we are going to be changing from a payment system that has been volume driven through fee-for-service payments to a system that will be value driven.  In a value-driven system, hospitals, physicians and other providers along the continuum of care are going to be paid based on value; that is, how efficiently they are able to provide high quality outcomes, excellent patient service and excellent patient experience.  So, we are more likely to see insurance carriers and government take populations of patients with certain kinds of medical conditions and provide a global budget to a network of hospitals, physicians and other providers to be able to provide care.  We are going to change from paying for volume to paying for value.  Over time this will fundamentally affect the work of the hospital and health system governing board and its quality committee.

 

How might that change?  Well, value-based care is going to be heavily driven by best practices for treating these particular kinds of patients.  The board and the quality committee will be looking very much at whether the organization is embracing best practices and how well it is following best practices.  They will also want to raise the culture questions, “Are we flexible as we apply best practices so we never lose sight of the needs of individual patients?  Do we provide sufficient discretion for physicians to, when justified, deviate from a protocol?”  The last thing we want is cookbook medicine.  What we want is patient-focused care.  Boards and quality committees are going to be looking at this more frequently and comprehensively.

 

Brian Wong, M.D., The Bedside Trust

There is an old conventional wisdom:  low cost equals low quality.  But the paradigm shift that must occur is that we have to reduce cost and improve quality.  There is an incredible amount of duplication and waste that exists in our healthcare.  Today’s overall cost equation involves not doing less care, but providing less redundant care, less harmful care, less unnecessary care.  That is how you decrease cost.  Those things are fundamental key drivers to improving quality, because how can you say something is quality if it’s redundant or wasteful or inefficient?

 

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

Historically we have relied on the medical staff to make sure there was high quality care delivered in our hospitals, and if the board was able to assure there was a high quality, competent, medical staff, that was considered adequate.  The board didn’t really need to look beyond the credentials of the physicians when it thought about quality of care.  However, over the last 10 to 15 years we have become concerned that that alone has not raised the bar for quality in our institutions, and that more is necessary to change the culture of our institutions and the systematic processes in our institutions to assure that safer care, higher quality care is actually achieved.  It is the board’s responsibility to make sure these things happen.  This is critical to the mission of the institution, and the board has to take a leadership role.  In fact, many people believe that it is because boards have not been out front providing such a leadership role that we haven’t made more progress.  Physicians, for example, typically focus on care for their individual patients.  They tend not to be focused on the broader institution and how it functions to assure safe care.  Without the board prodding them and leading the way and setting benchmarks and expectations, it is hard for the rest of the institution to rally around the significant changes that are necessary to instill a culture of quality in our hospitals.

 

Barry Bader, Bader & Associates

We are used to seeing boards have finance committees.  Traditionally, hospital and health system boards did not have quality committees, but if quality is as important a responsibility as finance, and if there is a need for the board to really understand how quality is being assessed and assured and how physicians are being recommended for appointment or disciplinary action, there is a need for a committee that can develop a fuller understanding to do the hard work and to bring well-documented recommendations to the board.  That’s the work of a quality committee.

 

Brian Wong, M.D., The Bedside Trust

The quality committee in my opinion is the most important committee of all because it goes to the heart of the matter.  It goes to why we are in this business which is to take care of patients, improve quality and reduce harm to the patients.

 

The reason there is value in a board quality committee is you have dedicated expertise, dedicated focus on that one subject, just as you have dedicated experts on an audit committee or a strategic planning committee or a finance committee.  This requires some dedicated effort, and all board members need to take a turn on the quality committee to understand how it works, and what is being asked and how it conducts itself.

 

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—Bond Financing Part 2

iProtean—Bond Financing Part 2

 

Balance sheet strength remains an imperative for hospitals and health systems today, but is a significant challenge as organizations transition to a new business model.  A recent report from Moody’s Investors Service noted that nearly all of its rated hospitals cited the need to build balance sheet reserves as a key transition strategy.

 

“As the era of reform and tightened federal funding unfolds, not-for-profit hospitals face an imperative to deliver higher-quality service with lower reimbursement rates per unit of service. The strategic shift now taking place will challenge current business models and require forward-thinking strategies to manage through a transition period that will unfold over the foreseeable future. Hospitals that can manage well during this transition should be able to maintain if not improve their credit ratings. Conversely, hospitals that cannot navigate the payment reductions or reduce their expense structures quickly enough to mitigate the impact may see rating pressure.”

Moody’s Investors Service Special Comment: Doing More with less—Credit Implications of Hospital Transition Strategies in Era of Reform. May 2012

 

Managing this transition to a new business model remains a responsibility of management, with input from the board of directors.  Although trustees do not have to know the intricacies of balance sheet management, they should know the basic dynamics at play in the balance sheet in order to set sound debt and investment policies and thereby ensure a favorable credit rating.

 

In the iProtean course Bond Financing Part 2 our financial experts continue their discussion on the intricacies of capital financing for hospitals/health systems.  Marian Jennings (M. Jennings Consulting), Lisa Goldstein (Moody’s Investors Service), Michael Irwin (CitiGroup) and Eric Jordahl (Kaufman, Hall & Associates) cover bond risks and rewards, the relationship between credit rating and cash, investment capital and the board’s role in the credit rating process.

 

Eric Jordahl, Kaufman, Hall & Associates

Balance sheet strength remains probably the most important driver in a rating right now.  The strength and liquidity of the balance sheet is predominately measured by cash position, but also driven by the cash position relative to debt and the overall debt load.  That said, operations have become particularly important.  A strong balance sheet continues to cure a lot, but if there are hints of deteriorating operations or hints at operational challenges or strategic challenges, rating agencies are much, much faster to take action on the rating, to move the rating down, than was the case pre 2008.

 

That said, hospitals have struggled for a long time with how much cash to hold.  It is a challenge for boards and management to think about how much is too much cash, or how to find the right balance between cash on the balance sheet and debt on the balance sheet. We continue to believe that cash and liquidity, particularly as we head into healthcare reform, are extraordinarily important.  There is a great deal of uncertainty about how reimbursement models will look and what it will mean to the organization.  I think there is a good level of expectation that a lot of reform is going to be financed on the backs of not-for-profit hospitals.  Having cash resources certainly is going to give the organization a lot more cushion or a lot more ability to navigate through some of those changes . . .

 

Michael Irwin, CitiGroup

A key responsibility of the trustees is in evaluating the risk to which external financing will expose the organization.  One of the key decisions will be whether the organization can take on variable rate exposure, that is, an interest rate that is not fixed but periodically reset.  The advantage of doing a variable rate financing is typically a lower interest rate.  However, the interest rate could rise due to environmental factors outside the control of the organization, as well as anything unique about the organization and any financial challenges it might face in the future . . .

 

In a fixed rate financing, risks are typically transferred to the investors, whereas those risks are held by the organization when you do a variable rate transaction.  As a result, stronger organizations, those in the double A category, and the A category with strong cash flow, strong balance sheet metrics and ample liquidity are more readily able to take the risk associated with the lower cost variable rate debt, while organizations that have a more modest balance sheet and reliable cash flow can choose the safer more stable fixed rate alternative.

 

Eric Jordahl, Kaufman, Hall & Associates

The challenge for hospitals is balancing potential investments against the uncertainty of health reform.  Most organizations believe investments in technology—whether for electronic medical records or other tools that bind organizations or bind previously disparate parties closer together—will be valuable over the long term.  But the challenge really is what is healthcare reform going to look like?  How long will it take? . . . Is there actually going to be a business model where there is economic value attached to those investments?  It is a very large challenge because the magnitude of the investment in information technology that seems to be required is pretty big . . .

 

Marian Jennings, M. Jennings Consulting

What the rating agencies are looking for is a well informed board, a well informed finance committee—people who are not only committed to the hospital and thoughtful individuals, but also have the knowledge and skill that they need in order to perform their fiduciary responsibility . . .

 

The board as a whole plays a very important role in the credit rating process because the rating agencies see you as the policy makers and as the trustee of this asset.  They are looking for the commitment and rigorousness of the board in its fiduciary role to give them comfort that the organization 1) will maintain policies if they have been successful to this point, or 2) is able and willing to take corrective action if and when needed.

 

Lisa Goldstein:  As part of Moody’s review in accessing a hospital’s credit worthiness, we like to meet with a few board members at our initial meetings, either the chairman of the board or, equally as important, the chairperson of the finance committee.  We try to assess in a condensed period of time whether the board understands its responsibilities.  Is it able to articulate, without reading from a script, its responsibilities when it comes to repayment of debt, when it comes to setting financial goals for the hospital, when it comes to developing a vision and a mission for the hospital over the long term?  So we engage in a dialogue with questions and a conversation to assess pretty quickly whether the board understands the gravity of its responsibilities.

 

We understand that not-for-profit board members are indeed volunteers, not compensated for their time.  Nonetheless, we’re looking to see if the board members have an appreciation for the financial performance of the hospital and the responsibilities that issuing debt in the market entails . . .

 

Irwin:  The board plays a very important role in the credit rating process on the front end by developing a formal debt policy for the organization.  Working together with the management team, it is the board’s responsibility to establish aspirational goals from a credit rating side and then develop key target performance metrics and balance sheet metrics that the organization would have to adhere to in order to achieve and/or maintain those goals . . .   In that regard, the board is constantly, over time, going to be answering several key questions; for example, if a project arises, what portion of that project should be funded from cash flow of the organization?  What portion of the project could be funded from philanthropic sources, and what portion of the project could and should be funded with external debt?

 

The tension in the organization is typically going to be around the issue of using your own cash versus using borrowed money, or money raised in a bond issue.  Very often, organizations find that it is a combination of those three things that achieves the balance they are seeking . . .

 

The other question trustees should ask themselves is, “What is the responsibility the organization has to investors and to the investing public after the bond issue is concluded?”  Increasingly, the markets have high expectations for formal investor relations programs . . . So I encourage trustees to work with their senior management team to insure the kind of high quality secondary market disclosure that investors are looking for . . . they will benefit the next time they come to market with a bond issue because investors have been bolstered in their confidence that this organization has made a commitment to a high level of secondary market disclosure.

 

More from Moody’s Investors Service Special Comment: Doing More with less—Credit Implications of Hospital Transition Strategies in Era of Reform

 

“Many hospitals have restructured their debt portfolios since the credit crisis and most have been successful in extending their letters of credit or finding substitute liquidity sources for their variable rate debt.  Others have chosen to refinance variable rate debt with fixed rate bonds given the favorable rate environment and desire to remove bank risk from their structures.  However, some have chosen to leave “orphan” swaps outstanding in order to avoid large termination payments.  The result is that these organizations remain exposed to the possibility of needing to fund large swap collateral calls, which for certain organizations, exceeded $100 million at various times in the last three years. Certain organizations which have unwound their swap programs have done so at the cost of reducing cash, or taking on additional debt.”

 

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—Bond Financing Part 1

Preliminary medians data for fiscal year 2011, recently released by Moody’s Investors Service, show sluggish top line revenue growth, flat inpatient admissions, but an improved bottom line profitability due to expense reductions.  Overall, the rating agency noted that the data support its negative outlook for hospitals in 2012.

 

“ . . . we believe there are several key developments evident in this preliminary data, including:

  • Operating performance showed stability, as revenue growth rebounded slightly and expense growth was controlled.
  • Balance sheet measures continue to strengthen as hospitals defer capital spending.
  • Exposure to governmental payers as a source of revenue continues to grow.”

(Median Report: Not-for-Profit Hospital Medians Drive Expectation of Low Revenue Growth Given Flat Volume Trends, Payer Pressures, Moody’s Investors Service, April 2012)

 

The iProtean course Bond Financing Part 1 covers the basics of tax-exempt bond financing including the importance of rating agencies’ assessments of a hospital’s/system’s creditworthiness for taking on capital debt.  Healthcare finance experts Marian Jennings (M. Jennings Consulting), Lisa Goldstein (Moody’s Investors Service), Michael Irwin (CitiGroup) and Eric Jordahl (Kaufman, Hall & Associates) discuss tax-exempt financing, investor benefit, funding sources, credit rating agencies and core elements of good governance from the rating agency perspective.

 

Marian Jennings, M. Jennings Consulting

A bond is a debt instrument . . . It is like a loan, but the way to think about it is that when you are issuing a tax-exempt bond, you are going through an ‘authority.’  It is a very specific debt instrument by which the hospital can access capital that it has agreed to repay at a certain interest rate over a certain timing . . .

 

Michael Irwin, CitiGroup

Many years ago hospitals relied on their local bank to provide them with both the working capital and the capital they needed for expansion projects, renovation projects and medical equipment.  Over time, particularly larger organizations recognized that the public debt markets, specifically municipal bonds [tax-exempt bonds], provided them with a form of long term capital that gave them a lower cost and more advantages in terms of the repayment period . . . with the ability to better plan and know for sure what their debt service obligations will be for a specific project over a long period of time.  Obviously that’s a terrific advantage to an organization . . .

 

Lisa Goldstein, Moody’s Investors Service

Tax-exempt bond financing can be a very efficient and economical way to access the capital markets to fund future capital needs.  Not-for-profit hospitals can issue tax-exempt debt or bonds on the market for three primary purposes.  One is for future capital needs, so for example building a new patient tower.  The second reason would be to refinance existing debt like you refinance a mortgage for a lower interest rate for savings and the third reason or acceptable way to issue tax exempt debt is to reimburse the hospital for prior capital expenditures . . .

 

Michael Irwin, Citigroup

The municipal bond market offers not-for-profits the advantage of a lower interest rate and more certain terms of repayment over a long period of time and, thereby, provides the organization with a certainty about how much the cost of borrowing those bonds is going to affect them each year—over as much as a thirty year period.  Other types of bonds include corporate, for-profit taxable bonds.  These are less frequently used by not-for-profits because the interest rate isn’t as low and very often the terms are not as advantageous as they would be in the tax-exempt market . . .

 

Eric Jordahl, Kaufman, Hall & Associates

Bond ratings are absolutely essential from a capital markets’ perspective, but also from a strategic perspective.  Bond ratings are one of the absolute most important things that a hospital can have and work to protect over time . . . The importance of a bond rating is that it drives two things.  One is the absolute amount of capital that can be accessed, so how much debt can an organization get, and then equally important, what’s the cost of that capital.  There is a significant spread between the funding cost for a double A organization versus the funding cost for a non-investment grade rated organization.

 

The cost of risk in the world today is materially higher than it has been frankly for as long as I can remember, across all different markets, but particularly fixed income markets.  There are certain pieces of the fixed income markets in particular where risk has become fairly expensive and that’s true in the not-for-profit healthcare sector.  That reinforces that importance of a credit rating.

 

Lisa Goldstein, Moody’s Investors Service

In assessing the credit worthiness or a rating of a not-for-profit hospital, there are five key factors that rating agencies examine.  In no particular order they are financial performance . . . capital and balance sheet management . . .  the legal package that supports or backs the public debt that is being offered . . . market forces . . . and governance and management.

 

We make our opinions and glean our understanding of management and governance through the initial meeting with the not-for-profit hospital as well as the annual updates where we engage with management and board members.  We use comparisons between hospitals to make our assessments of management.  We look at financial performance as an indicator of governance and management.  If a hospital is meeting, if not exceeding, its budget every year, we believe it’s a reflection on good governance and good management.  Likewise if the hospital continues to miss its budget every year, it’s also a reflection of governance and management and maybe some of the short falls that need to be addressed.  While it’s hard to quantify in certain ratios unlike financial performance or market share, management and governance is extremely important in our assessment of the ratings.

 

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—Introduction to Finance

The U.S. Supreme Court will decide on the constitutionality of the Affordable Care Act in June.  Experts expect one of three possible outcomes:  the Supreme Court will rule the entire healthcare law unconstitutional, rule the entire law constitutional, or rule that the individual mandate is unconstitutional while upholding the remaining provisions of the law.

 

A recently released Special Comment from Moody’s Investors Service focused on the potential effects of striking down the individual mandate, specifically that “the individual mandate is the most credit positive feature of healthcare reform, and its elimination would be a clear credit negative for the not-for-profit healthcare sector.”  This combined with the increasing cuts in Medicare and Medicaid under the health reform law and other federal and state budget cuts substantially intensifies financial risk for hospitals.   (Supreme Decision:  Prohibition of Individual Mandate Would Remove Healthcare Reform’s Best Feature for Hospitals. Special Comment from Moody’s Investors Service, April 23, 2012.)

 

In the iProtean course Introduction to Finance, Lisa Goldstein from Moody’s Investors Service and Marian Jennings from M. Jennings Consulting discuss challenges associated with payers as well as hospital accounting basics, tools for monitoring financial performance and the role of the finance committee.

 

Lisa Goldstein, Moody’s Investors Service

Revenues can be very complex.  What is most important for a board member is an understanding of the payers that reimburse the hospital for the services that they provide, for the patients that walk in the front door or through the emergency room.

 

From a revenue perspective there are three to four large payers that board members should be somewhat familiar with and I’ll discuss those.  The largest payer for any hospital is Medicare . . . Medicare on average is 40 to 50 percent, almost half of any hospital’s revenue base.  And there is no negotiating with Medicare.

 

Our primary concern with Medicare, given that it is the largest single payer for any hospital, is what happens when we’re in a state of fiscal crisis like the country is now.  And what we’re seeing now, as we’ve seen in past historical performance, is Congress will reduce Medicare reimbursement to hospitals.  It’s up to the hospitals to commensurately reduce costs in line with the Medicare cuts . . .

 

The second payer, usually about 10% of any hospital’s revenue base, is Medicaid.  Medicaid is primarily for people who do not make a certain amount of income and cannot afford healthcare insurance, or their employer provides no healthcare insurance.  So if they qualify, they can sign up for Medicaid.  Medicaid is funded both by the federal government and by every state and, as we all know, currently states are under tremendous fiscal pressure.  So we are expecting Medicaid reimbursement to be cut to hospitals as well.  Like Medicare, there is no negotiating with Medicaid.  So Medicaid and Medicare combined represent 50 to 60% of any hospital’s revenue base and there’s no negotiating.

 

The next most important payers for hospitals are the commercial payers—Blue Cross, Aetna, United, Oxford, Kaiser, etc.  Those are payers that hospitals can negotiate with and, indeed, on an annual basis or every two to three years, senior management teams negotiate with the commercial payers . . . But we’re starting to head into an era or a trend of tougher rate negotiations.

 

These negotiations with the commercial payers are very important because it is the negotiations with the commercial payers that allow the hospitals to subsidize the losses under Medicare or Medicaid.  Sometimes the industry refers to this as cost shifting . . . In the hierarchy of profitability under payers, usually hospitals earn the most margin under the commercial payers where they can negotiate, then Medicare and then Medicaid.

 

The final bucket of reimbursement where there’s really no negotiating—there’s no one to negotiate with or receive rates from—are the people who have no insurance and do not qualify for Medicaid. We sometimes call this self-pay, which refers to people who usually pay their hospital bills out-of-pocket.  This can be anywhere from one to seven percent of the average hospital’s payer mix . . .

 

Marian Jennings, M. Jennings Consulting

It’s really very interesting because I’ve worked in healthcare for over 30 years and we’ve been using the term reimbursement that entire time period, but in fact payers stopped reimbursing hospitals at least 20 years ago and I think that that term “reimbursement” has an implication that is still embedded in our minds—that somehow we incur costs and then someone else will reimburse us for those costs, but in fact that is not how payment for hospitals works in large part.  There are some exceptions.

 

The first payer we always talk about is Medicare.  W I was growing up we had a saying that, ‘when GM sneezed, the country got a cold.’  Now I would say that when Medicare even thinks about sneezing, the whole healthcare industry gets pneumonia.  They’re the biggest payer of healthcare of all types across the country, but in addition, their policies tend to be adopted by the commercial payers and others.  In terms of challenges with working with Medicare, the challenge is you don’t work with Medicare.  There’s absolutely no negotiation.  It’s a federal program and let’s face it, if you ran a federal program, you’re attitude would be, ‘Here’s how much I’m paying.  You can take it or leave it.’  And that is their attitude . . .

 

Lisa Goldstein, Moody’s Investors Service

We view the finance committee as probably one of the most important committees of the board.  Usually the finance committee meets once a quarter, if not once a month, to review financial statements.  With senior management the finance committee helps from a big picture perspective, from a macro perspective, develop the budget . . .

 

When strategies are laid out by a hospital—it’s a mix of financial strategies, capital strategies and fundamental strategies—they should all be enveloped into one main strategy.  Of course, those three components are very much interrelated.  When a hospital develops its budget or long term financial forecast, there can be instances when financial performance greatly deviates from expectations, either to the negative or to the positive.  The finance committee is charged with making any midcourse, swift or unexpected changes to strategy if financial performance is not meeting expectations by a wide degree. And that change in strategy should be developed by the finance committee and the senior management team; for example, the range or margin acceptable to be off budget, either to the negative or to the positive.  If things are going wildly beyond anyone’s expectations, the finance committee may be charged with making, again, mid-course, swift changes to move the organization along to continue to meet these higher performance levels . . .

 

Marian Jennings, M. Jennings Consulting

The finance committee should be a group of individuals who have the background and competencies and interest in finance who can take time every month to focus solely on the financial performance of the organization. The board has a packed agenda and it could not possibly spend that amount of time at every board meeting to ensure the financial integrity of the organization and, therefore, the board needs to appropriately rely on the finance committee.

 

The finance committee, I think of it as a giant schedule or calendar in my head.  That is, there are some things that the finance committee is going to do every month, month in and month out . . . The finance committee also conducts some activities that typically occur on an annual cycle and most importantly the finance committee oversees the development of the operating budget and the capital budget . . .

 

In addition, the finance committee has a core responsibility related to the long-term financial integrity of the organization and that focuses on insuring that we have long-term financial targets that are clear.  For example, what is our financial target for 2016?  What is our expected and targeted bond rating in five years?  How much cash do we want to have on our balance sheet five years from now?  The long term financial policies and goals of the organization need to be formulated by the finance committee, communicated to the board for its consideration and approval, but also, most importantly, understood by every board member.

 

In addition, the finance committee has an enormous amount of what I would call, routine work that it undertakes.  That has to do with approving financial transactions that come about in the course of business for a hospital . . . and debt financing.  Most organizations do not do a debt financing every year, but in terms of looking at the borrowing options, evaluating the pros and cons of each one, insuring that the organization is taking on prudent risk, insuring that they have selected the most appropriate financing vehicle, those are all things that the finance committee would undertake on an ad hoc basis.

 

More from Moody’s Special Comment

“In its entirety, the healthcare reform law is a long-term credit negative for not-for-profit hospitals given the hardwired Medicare rate reductions embedded in the law along with new forms of reimbursement models (such as bundled payments) that also lower reimbursement to hospitals.

 

“Some aspects of healthcare reform have positive credit implications for hospitals, however. Specifically, the individual mandate is the most credit positive feature of healthcare reform, and its elimination would be a clear credit negative for the not-for-profit healthcare sector. The requirement for individuals to obtain insurance, or pay a fine, would result in a significant reduction in uncompensated care delivered by hospitals. It also would improve efficiency in the healthcare system by reducing utilization of expensive emergency room services. Removing the mandate would make the negative features of reform loom much larger compared to the remaining positive elements:

  • An estimated 16.7% of the US does not have health insurance.  Without the individual mandate, this large uninsured share of the patient population would likely continue to grow as employers will be unable or unwilling to bear the growing cost of health benefits. The continued rise in uncompensated care will reduce hospital margins and suppress debt service coverage, creating added credit stress in the sector.
  • Medicare and Medicaid reimbursements are likely to be reduced due to features of the reform law, as well as the systemic pressure to reduce spending on most federal budget programs. Healthcare reform includes more than $150 billion of reduced Medicare reimbursement payments to hospitals and $14 billion of Medicaid disproportionate share funding cuts, spread over 10 years. In addition to provisions in healthcare reform, given the extent of the federal budget deficit and failure of the 2011 Congressional budget “super committee,” additional Medicare spending reductions are certain (this is true irrespective of the Supreme Court’s decision regarding healthcare reform). The most vulnerable not-for-profit hospitals and health systems will be those with the highest reliance on federal government payers.
  • Hospitals will receive lower reimbursement from commercial insurers as these payers will be under intense pressure to offset the increase in premiums resulting from the absence of the individual mandate, which would have allowed insurers to spread the costs of covering the sick among a broader population, including the healthy.”

Supreme Decision:  Prohibition of Individual Mandate Would Remove Healthcare Reform’s Best Feature for Hospitals. Special Comment from Moody’s Investors Service, April 23, 2012.

 

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—Tax-Exempt Status & Community Benefit

The IRS will continue to monitor governance and tax-exempt organizations, and now has the data to support its work, according to a recent Practice Group update from the American Health Lawyers Association.

 

The context for this announcement revolves around the IRS’ increased efforts nearly three years ago to monitor governance and compliance with its regulations by hospitals and other charitable organizations . At the same time, it announced that it would gather information on the governance practices of tax-exempt organizations it was auditing for other reasons.

 

The results of that information gathering were made public last week. According to the IRS Exempt Organizations Director, the data confirm the IRS’ long-standing presumption that effective corporate governance practices enhance tax compliance. The IRS plans to expand its research to a broader, statistically significant group of exempt organizations to verify whether these results extend to the general population of exempt organizations. (From a speech by IRS Exempt Organizations Director Lois Lerner, April 19, 2012)

 

In the iProtean course Tax-Exempt Status & Community Benefit, Elizabeth Mills, Esq., Monte Dube, Esq., Robin Nagele, J.D. and Anne McGeorge discuss why not-for-profit hospitals receive tax-exempt status, what is meant by community benefit, the IRS Form 990, how health reform will affect the 990, executive compensation and the 990, and the 990 review process.

 

Robin Nagele, J.D., Post & Schell

It is important for board members to understand the standards they have to adhere to as an institution to maintain tax-exempt status.  What defines us as a charitable or a tax-exempt organization?  Those standards have actually changed significantly over time . . . The final step in this picture was the adoption in 2007 of the Form 990 developed by the IRS, which now requires hospitals to disclose a great deal of information about how they spend their money and also what kind of benefit they provide to the community.

 

Monte Dube, Esq., Proskauer

Community benefit is an essential element of tax exemption.  Your hospital is not just not-for-profit under state law.  It is also tax-exempt under federal law.  Tax exemption affords your hospital many benefits.  You are exempt from paying income taxes and property taxes and sales taxes.  Your for-profit competitors have to pay all of those taxes.  In addition, you are entitled to receive charitable donations from the public, which are tax deductible because of your tax exemption.  Similarly, you are entitled to issue tax-exempt bonds at a more favorable rate.  What the IRS increasingly is saying, what Congress is saying, is that in order to maintain the tax exemption that you were given years ago, you have to prove that you are entitled to it.

 

Elizabeth Mills, Esq., Proskauer

Community benefit is the standard for hospital tax exemption today.  This means you promote the health of the community in a charitable manner . . . When the community benefit standard was adopted about 40 years ago, it was shortly after Medicare and Medicaid were enacted and the perhaps naive expectation was, nobody is going to be uninsured anymore.  As you know from reading the newspapers, that is not the case, unfortunately, even today after the passage of healthcare reform.  So there is still great concern on the part of the public, community action groups, the IRS, name your interest group, to see that people who can’t afford healthcare do receive it, and that they are not harassed or pressed for payment when they can’t afford it.

 

Monte Dube, Esq., Proskauer

Just as you as an individual have to file your individual income tax return every year, your hospital organization needs to file an annual tax filing.  It’s called a Form 990 . . . The Form 990 has gotten much more detailed over the last few years but, again, gives hospitals the opportunity to tell the IRS and the public, which is entitled to access that tax filing, exactly how you are providing the kinds of benefits, services, programs and educational opportunities to your community.

 

It is a lengthy, comprehensive form in which you have to disclose both your financial and organizational operations.  You need to disclose as well the types of community benefits that you afford to the public.  As a hospital, in a separate schedule H to the Form 990, you need to disclose your charity care policies, whether in fact you have conflicts of interest on your board and, if so, whether you handle and manage them in an appropriate way.

 

Robin Nagele, J.D., Post & Schell

The new Form 990 requires very specific and in-depth reporting on a whole host of issues from governance to executive compensation to insider relationships and community benefit, and asks for all kinds of data from which the IRS will presumably review hospitals and other tax-exempt entities and make determinations as to whether they are meeting their obligations under the tax laws.

 

One of the questions that the IRS asks is, “How was this document reviewed and approved by the board members?”  And this is really the IRS’s way of bringing the accountability back home, directly into the boardroom.

 

Monte Dube, Esq., Proskauer

Boards need to review and approve the Form 990.  Just as the tax filing is a useful story to tell the public once it is released, it can be a very useful discussion topic within the board’s deliberations.  I find board review of Form 990s to be a wonderful opportunity for management to explain and for boards to learn more about the operations, organization, policies and community benefits afforded by the organization.  It is a great chance for dialogue, rather than being an obligation that management decides to cross off the list.  I would suggest having one special section of every board meeting every year devoted to the Form 990 to enable and allow for give and take between management and the board because it’s a great learning process.

 

 

Excerpt of Prepared Remarks of Lois Lerner, Director, Exempt Organizations (IRS)

“The analysis found a statistically significant correlation between questions related to some governance practices and tax compliance. What are they? Drum roll please!

  • Organizations with a written mission statement are more likely to be compliant.
  • Organizations that always use comparability data when making compensation decisions are more likely to be compliant.
  • Organizations with procedures in place for the proper use of charitable assets are more likely to be compliant.
  • Organizations where the 990 was reviewed by the entire board of directors are more likely to be compliant. This is an important point and one I’d like to highlight. It indicates that having your entire board engaged in what is being reported on the 990 is not only helpful, but it correlates to better compliance.

 

“On the flip side, among the organizations we examined, we saw that those that said control was concentrated in one individual, or in a small, select group of individuals,

were less likely to be tax compliant.”  (Prepared Remarks by IRS Exempt Organizations Director Lois Lerner, at Georgetown University Law School, April 19, 2012)

 

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.

 

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