Experts Assess Strategies for Boards Leading Through Transition

(A preview of iProtean’s upcoming course, The Board’s Role in Leading Through Transition, featuring Karma Bass and Marian Jennings)

 

Innovative boards are paying attention to their-risk taking appetite. Hospital and health system boards traditionally have been very conservative organizations. It’s a strong history, and it’s a good place from which to start. But going forward, we need to be a little bit less risk averse, because not doing something has its own set of risks. Many hospital boards feed on each other and their perspectives that risk doesn’t work. But as events unfold, we will need to take a look at our culture; we will need to invite new voices into our boardrooms. We will need to ask people to go outside their comfort zones. A board’s job is not always to the institution exactly as it is. In fact, if we don’t change our organizations, if we don’t pay attention to the culture that we are putting forward in our organizations, and if we don’t reward risk takers, then we will run the risk that our organizations will be great until the day they’re gone.

 

The board should focus on what you are trying to accomplish and how you would like to be positioned. And then think about transition as a way to get there, as opposed to thinking that our job is to transition.

 

There are some very practical steps that you can take as a board to increase the ability of your board culture to support the kind of transformation that your organization needs. One step the board should consider is a mentoring program. As you bring new board members on—and even think about this for board members who may have joined within the last 12 months or so—you should pair them up with a more experienced board member, to really give them a vehicle to come up to speed as quickly as possible, but also to understand the dynamics of the board.

 

We need to ensure that when the board convenes, which might be six times a year, or four times a year, that there is enough trust, that we have built up enough personal relationships that we can be candid and respectful, we can be open and we can ask difficult questions in a respectful way, and we can ensure that we are discussing things that matter to the organization, at the right level for the board. And that doesn’t happen by putting talented people in the room together. It happens by mentoring, fostering relationships and intentionally building trust.

 

Another piece that the board needs to consider in looking at creating the culture for the future is being intentional in terms of the kinds of people you are bringing on the board. What are the attributes that they bring; and what are the competencies they bring?

 

For example, I know boards that are intentionally seeking individuals in their community who have worked in an industry or in a business that has undergone rapid change. They feel that those people have the life experiences to realize that what works today may not work at all in the future, and are open to making substantial changes in how you do what you do in order to be ready for the future. That kind of individual, with those kinds of competencies, can really help a board be successful.

 

So, What are the dynamics that we need to create in our board? What are the perspectives we need represented on our board? And what are the skills and life experiences that we need to have?

 

(The Board’s Role in Leading Through Transition will be in your library soon.)

 

 

Strategic Issues for Boards, iProtean’s latest advanced Mission & Strategy course, now appears in your library. It features speakers on cyber-security and the Medicare Access and CHIP Reauthorization Act of 2015—complex topics that stymie many of us! Martin Liutermoza, Global Head of Information Security at Nasdaq, discusses IT security and risk management as well preparing for and mitigating cyber attacks. Seth Edwards talks about MACRA and MIPS versus the Advanced Alternative Payment model.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

Potential Challenges to Tax-Exempt Status for NFP Hospitals

“As the Trump administration moves to reform the federal tax code, the country’s tax-exempt hospitals are bracing for potential challenges to their not-for-profit (NFP) status, with billions of dollars in federal taxes at stake,” according to the Healthcare Financial Management Association (HFMA) in an article released last week.

 

NFP hospitals face increased scrutiny from both the Internal Revenue Service (IRS) and state regulators.

 

Earlier this year for the first time under the Affordable Care Act (ACA), the IRS revoked the tax-exempt status of a rural NFP hospital—which is both a critical access hospital and a disproportionate share hospital—noting the hospital “failed to comply with the requirements of Internal Revenue Code section 501(r) to conduct a community health needs assessment, adopt an implementation strategy, and make it widely available to the public.” (Read the IRS determination letter here.)

 

In addition, Sen. Chuck Grassley (R-Iowa) threatened more IRS action if NFP hospitals fail to meet their legal commitments “to provide treatment for those who can’t pay or can’t pay enough toward the cost of their own care.” (“Tax-Exempt Hospitals Face Growing Scrutiny,” HFMA Weekly, October 20, 2017)

 

One senior analyst foresees more scrutiny of tax-exempt hospitals coming from state regulators. State and local taxes provide the biggest benefits of tax-exempt status to NFP hospitals—a huge benefit given the size of their physical facilities, according to the director of Northwestern University’s Kellogg’s Health Enterprise Management Program.

 

State assessors and attorneys general have taken actions in California, Illinois, New Jersey, Connecticut and Montana. Some of these actions have ripple effects across a state; for example, after a state tax court ruled against Morristown (N.J.) Medical Center in 2015, 35 New Jersey hospitals were sued for property taxes. Many hospitals later settled by making payments in lieu of taxes.

 

NFP hospitals should explain community benefits and go beyond the Form 990 standards. They need to let the public know that they are charitable entities, not just businesses, and combat the view that they are operating the same as for-profit entities, one analyst noted. (“Tax-Exempt Hospitals Face Growing Scrutiny,” HFMA Weekly, October 20, 2017)

 

AHA Report

 

In anticipation of tax-exempt challenges, the American Hospital Association commissioned Ernst & Young to study the value of NFP hospitals’ community benefits.

 

The study found that in 2013, the estimated tax revenue forgone due to the tax exempt status of non-profit hospitals was $6.0 billion. In comparison, the benefit tax-exempt hospitals provided to their communities, as reported on the Form 990 Schedule H, was estimated to be $67.4 billion, 11 times greater than the value of tax revenue forgone. (Estimates of the federal revenue forgone due to the tax exemption of non-profit hospitals compared to the community benefit they provide, 2013, Ernst & Young for AHA, October 2017)

 

To read the study, click here.

 

Some are skeptical of the report’s findings, noting inaccuracy of hospital cost reporting, bills and expenses and the valuation of benefits. The chair of the American Health Lawyers Association’s Tax and Finance Practice Group pointed out that state sales and property taxes are more significant financially than the federal income tax benefit. He said that the report employs “a more expansive definition of community benefit” that also includes Medicare underpayments, professional education, and research, which he conceded may spur disagreement from state tax assessors. (“Tax-Exempt Hospitals Face Growing Scrutiny,” HFMA Weekly, October 20, 2017)

 

 

 

Strategic Issues for Boards, iProtean’s latest advanced Mission & Strategy course, now appears in your library. It features speakers on cyber-security and the Medicare Access and CHIP Reauthorization Act of 2015—complex topics that stymie many of us! Martin Liutermoza, Global Head of Information Security at Nasdaq, discusses IT security and risk management as well preparing for and mitigating cyber attacks. Seth Edwards talks about MACRA and MIPS versus the Advanced Alternative Payment model.

 

 

For a complete list of iProtean courses, click here. www.iprotean.com/index.php/iprotean/onlineCourses/Available_courses

 

 

For more information about iProtean, click here.

Hospitals Experience Short-Term Operating Margin Decline after M&A

The finances of acquired hospitals generally suffer for two years after mergers and acquisitions (M&A), according to a recent report from HFMA and the Deloitte Center for Health Solutions.

 

M&A activity has increased significantly in the past decade, driven by the pursuit of economies of scale and the potential for reducing the cost of care. The HFMA/Deloitte study examined more than 750 merger transactions between 2008 and 2014 to assess how M&A affects a hospital’s performance.

 

After factoring in market and hospital characteristics, the research revealed that acquired hospitals, on average, experienced a post-transaction decrease in operating expenses but an even larger decline in operating revenue, resulting in a decline in operating margins. However, the negative trends in hospital margins leveled off two years after the transaction, according to the research.

 

“Many of the hospital finance executives who were interviewed and involved in acquiring or merging hospitals admitted that they underestimated how cultural, competitive, and market differences of acquired organizations could limit the ability to realize post-transaction value,” the authors noted.

 

“There was a group of hospitals that performed better because they were much more intentional,” said the director of healthcare finance policy, strategy and development, for HFMA.

 

Based on executives’ survey responses and interviews, researchers identified eight strategies and business practices related to integration planning and execution that correlated with the achievement of higher margins.

 

Study analysts noted, “When a health system receives an M&A request for proposal, executives should develop a strategic rationale and rigorously test the transaction’s hypothesized value drivers.” And “A key factor in an acquired hospital’s likelihood of meeting quality-improvement and savings goals was leadership.”

 

A list of the eight strategies, including strategic vision and leadership, appears below:

 

  • Develop a strong strategic vision for pursuing the transaction
  • Have explicit financial and non- financial goals
  • Hold leadership accountable, often at the vice- president level, for integration effort;
  • Identify cultural differences between the organizations
  • Make clear and upfront decisions on executive and mid-management leadership
  • Align clinical and functional leadership early in the process
  • Follow best practices for integrating the acquired or merged organization into the parent organization
  • Implement project management best practices, with tracked targets and milestones, from day one of transaction close until two years after

 

(Source: (“Short-Term Financial Hit for Hospitals Post-M&A: Report,” HFMA Weekly News, October 12, 2017. To read the full report, contact clockee@iprotean.com for a copy.)

 

 

Strategic Issues for Boards, iProtean’s latest advanced Mission & Strategy course, now appears in your library. It features speakers on cyber-security and the Medicare Access and CHIP Reauthorization Act of 2015—complex topics that stymie many of us! Martin Liutermoza, Global Head of Information Security at Nasdaq, discusses IT security and risk management as well preparing for and mitigating cyber attacks. Seth Edwards talks about MACRA and MIPS versus the Advanced Alternative Payment model.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

Different Financing, Different Risks Between Hospitals and Insurers

Hospital systems and health insurers have very different financing structures. Hospital boards and executive management will want to consider the fundamental differences when considering whether to combine both organizations within the same larger health system.

 

Briefly, the health system has these fundamental financial structure characteristics:

  • Significant physical plant investment
  • Fewer growth opportunities
  • Higher margins, lower return on capital and lower revenue and margin per employee

 

Health insurers financial structure characteristics include:

  • Required to maintain a level of liquid capital linked to their total premium
  • Limitations on investment
  • Can more easily expand into new geographies
  • Higher revenues and total margins per employee

 

The financing differences between health insurers and hospital systems follow the function of each organization. In general, insurers can provide their services without the need for a significant capital investment. Insurers maintain less physical capital than hospital systems but are required to maintain sufficient liquid capital to protect policyholders when an insurer experiences financial weakness. (“Health Insurance and Hospital System Financing at a Glance,” Healthcare Matters, hfm Early Edition, October 5, 2017)

 

Hospitals operate highly complex facilities with substantial physical plant investment and a significant number of employees. Although this complexity and investment contributes to higher margins, it also lowers the return on capital and reduces revenue and margin per employee.

 

Risk Profiles

 

Health insurers and hospital systems also have substantially different risk profiles. For example, insurers face short-term financial risk when:

  • Premiums don’t cover higher-than-expected use of healthcare services
  • There is additional uncertainty associated with important provider contracts

 

But hospital systems’ risk includes:

  • Changes in provider payment from key payers
  • Malpractice risk
  • Lower-than-expected utilization of provider assets

 

To hedge against this risk hospital systems and insurers may consider combining the two organizations. “With such a combination, the collective impact of the factors that contribute to risk—higher or lower utilization and changes in payments—are mitigated across the broader organization.” (“Health Insurance and Hospital System Financing at a Glance,” Healthcare Matters, hfm Early Edition, October 5, 2017)

 

 

 

Strategic Issues for Boards, iProtean’s latest advanced Mission & Strategy course, now appears in your library. It features speakers on cyber-security and the Medicare Access and CHIP Reauthorization Act of 2015—complex topics that stymie many of us! Martin Liutermoza, Global Head of Information Security at Nasdaq, discusses IT security and risk management as well preparing for and mitigating cyber attacks. Seth Edwards talks about MACRA and MIPS versus the Advanced Alternative Payment model.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

Moody’s Expects Drug Costs Will Continue to Challenge Hospitals

Hospital inpatient drug costs have been rising and this will continue, but at a moderate pace due to public scrutiny of pharmaceutical companies’ drug pricing practices. Moody’s noted in a recent article that even at a slower rate of growth, “we expect rising drug costs will continue to challenge hospitals’ financial flexibility.” (“Not-for-profit and public healthcare, pharmaceuticals,” Weekly Credit Outlook, Moody’s Investors Service, September 28, 2017)

 

Federal proposals to lower Medicare 340B payments (a discount drug program) for outpatient drugs, such as for cancer treatment, if finalized, would further reduce hospitals’ margins, according to the article.

 

Some of the key points in the article include:

 

  • In recent years, pharmaceutical costs have outpaced hospital revenue growth, contributing to weaker operating margins. Significant price increases have been a key component of rising drug costs.

 

  • Hospitals will still be subject to margin pressure, albeit less so than in recent years.

 

  • The slowdown is due in part to a deliberate reduction in the pace and amount of price increases for branded drugs.

 

  • Additional generic competition will also reduce pricing for generic drugs.

 

  • Moody’s does not expect select extraordinary price increases witnessed over the past few years to be replicated.

 

  • On the outpatient side, a new federal proposal, if finalized, would reduce Medicare payments that participating hospitals receive from 340B, a discount drug program. CMS is proposing a 30 percent reduction.

 

  • On its own, this would not result in a meaningful change in credit quality for most 304B hospitals, but would present yet another headwind. However, some hospitals benefit from significant cost savings and income under the program, and a finalized proposal would present a material challenge.

 

  • The impact of proposed 340B changes on pharmaceutical manufacturers is relatively limited. The reimbursement reduction is to providers, not manufacturers.

 

(“Not-for-profit and public healthcare, pharmaceuticals,” Weekly Credit Outlook, Moody’s Investors Service, September 28, 2017)

 

Strategic Issues for Boards, iProtean’s latest advanced Mission & Strategy course, now appears in your library. It features speakers on cyber-security and the Medicare Access and CHIP Reauthorization Act of 2015—complex topics that stymie many of us! Martin Liutermoza, Global Head of Information Security at Nasdaq, discusses IT security and risk management as well preparing for and mitigating cyber attacks. Seth Edwards talks about MACRA and MIPS versus the Advanced Alternative Payment model.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.