Moody’s: Considerations for the Board’s Investment Committee

Balance sheet strength, measured on both an absolute and relative basis, as well as liquidity, significantly drives not-for-profit and public hospitals’ credit quality. Stock market growth over the last several years has been impressive. However, in keeping with historic trends, volatility—temporary market fluctuations or a short-term downturn—will trouble institutional investors in the near term, according to analysts.

 

Major prolonged market downturns that result in sustained investment losses can affect a hospital system’s liquidity and credit quality, relative to other credit factors, noted Moody’s Investors Service analysts in a recent Sector In-Depth publication.

 

However, short-term and temporary market fluctuations will likely have minimal effect on credit quality. The Moody’s analysts wrote that they anticipate “some amount of investment volatility and market swings, such as we have seen in recent months, given the long-term horizon of many hospitals’ portfolios.” (From FAQ: Effect of investment market returns on hospital credit quality, Moody’s Investors Service Sector In-Depth, May 15, 2018)

 

The Sector In-Depth report presented a series of frequently asked questions. They appear below.

 

  • How does market volatility, including investment losses, affect hospital credit quality?

A limited period of market volatility is not likely to affect long-term credit quality. However, longer term investment market declines and a system’s inability to manage liquidity during this period may affect credit quality. Moody’s analysts evaluate a system’s investment allocation on the basis of its liquidity, short-term and long-term goals, risk- versus-reward appetite and diversification, relative to the demands on capital.

 

  • How do not-for-profit and public hospitals typically allocate their investments?

Asset allocation can vary widely based on a system’s size, the amount of investable assets, ownership, risk appetite and cyclicality of capital spending. Most invest in fixed income and equities with a smaller subset who invest in alternatives.

 

  • How liquid are hospitals’ investments?

Hospital portfolios are highly liquid. Over the past five years, monthly liquidity as a percentage of total cash and investments has remained very high at 97 percent in fiscal 2016.

 

  • How do you assess a system’s liquidity relative to its debt burden?

Moody’s compares a system’s liquidity to its debt burden. Greater liquidity indicates a greater ability to meet short-term needs, such as demand debt, and is viewed favorably.

 

  • Why do higher rated systems have less liquid investment strategies?

Many higher rated hospitals have lower liquidity levels because they tend to employ more illiquid investment strategies. A system’s credit quality may be affected if short-term liquidity needs outweigh the amount of available funds.

 

 

(From FAQ: Effect of investment market returns on hospital credit quality, Moody’s Investors Service Sector In-Depth, May 15, 2018.  iProtean thanks Moody’s Investors Service for its permission to excerpt portions of this Sector In-Depth.)

 

 

 

Coming next week: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

 

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Internalizing Enterprise Risk Management

As the healthcare market expands and evolves, the inherent risks also are increasing. These risks include:

  • The shift from volume to value
  • The rise of the consumer and expansion of consumer options
  • New payment models
  • Mobile strategies
  • New entrants
  • An aging population
  • Continued political and regulatory uncertainty

 

Whereas hospitals/systems have traditionally done well at risk identification and assessment, analysts wrote in a new report from the Healthcare Financial Management Association that “The industry has been less proficient at prioritizing and managing risk.” To do better, healthcare providers must invest more in building effective enterprise risk management (ERM) capabilities. (“ERM: Evolving From Risk Assessment to Strategic Risk Management,” HFMA’s Healthcare Finance Strategies, April 25, 2018)

 

“By giving an organization insight into how to take the right risks at the right time, an effective ERM program can help the organization more successfully execute its strategic imperatives,” the analysts wrote.

 

Key Components

 

Regardless of the initial ERM maturity level in the organization, an important starting point for developing the program begins with clearly defining or reviewing the program’s purpose and value proposition for key stakeholders. This exercise will help determine whether the current program is effectively serving the organization and is well positioned to drive the level of change needed while managing risk in a dynamic and complex environment.

 

The organization should create a risk culture and governance in alignment with its strategic planning process and build out risk processes with the support of governance, risk and compliance (GRC) technologies.

 

The five key components of the program include:

 

Building a risk culture.  Identifying, understanding and managing risk should be a priority and responsibility of all members of the management team. Risk topics should be part and parcel of day-to-day operations discussions as well as committee meetings and executive team discussions.

 

“Organizational risks should be defined more broadly than simply as events that result in challenges and issues that must be avoided. It is important that all stakeholders within the hospital or health system understand both the risks and opportunities presented, and the uncertainties that need to be balanced to make an informed decision on whether to pursue the opportunity.” (“ERM: Evolving From Risk Assessment to Strategic Risk Management,” HFMA’s Healthcare Finance Strategies, April 25, 2018)

 

Formalizing risk governance. The board, senior management and functional management should have specific roles within the risk-management process and recognize their active roles within the risk-governance process. They should be accountable for their participation in the process, and guides and protocols should be created to clearly define when and how issues of risk are to be escalated.

 

Aligning ERM with strategic planning. To achieve greater alignment to the organization’s strategic planning process, organizational leaders should leverage the results of the risk assessment to promote a discussion around the implications of the risk profile. These conversations ultimately should lead to integration of the ERM processes within key functions such as planning, mergers and acquisitions, and program management for strategic initiatives.

 

Standardizing the risk management process. A standardized risk management process relies on data analysis to define the qualitative and quantitative impact of risk on an organization’s ability to accomplish its strategic initiatives and execute its day-to-day business decisions. Organizational leaders should review all risk scenarios to understand the implications of changing business models, industry events and trends and the interrelatedness and combined impact of risk. Using this information, as well as risk appetite, risk management professionals can incorporate the changes over time and drive further resource allocation discussions.

 

Leveraging GRC technology to capture and coordinate risk management activities. As the risk environment evolves, enhanced and more sophisticated tools help to support an advancing risk management process and improve coordination of core risk management activities. These tools provide greater access to shared data and information across the organization and improve resiliency. (“ERM: Evolving From Risk Assessment to Strategic Risk Management,” HFMA’s Healthcare Finance Strategies, April 25, 2018)

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

Coming soon: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman.

 

 

For a complete list of iProtean courses, click here.

 

 

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Corporate Interest in the Delivery of Care

Now that the iProtean Symposium has concluded and we have a rich source of new material from our experts for the upcoming courses, we will from time to time feature select abstracts from our experts’ interviews. Subscribers will see new courses such as Health Care: We Have a Problem; Doing More with Less; Due Diligence on Deals; Alternative Sources of Revenue; Physicians and Value/Risk-Based Reimbursement; Involving Finance in Strategic Planning; Physician Burnout. Our experts include Dan Grauman, Marian Jennings, Nate Kaufman, Anne McGeorge and Brian Wong, M.D.

 

Today’s feature is from Dan Grauman and his thoughts on the recent interest by corporations in taking on healthcare.

 

Interviewer: Why is corporate America seemingly interested in taking on healthcare? Whether it be Amazon, Wall Street or Berkshire Hathaway or CVS/AETNA?

 

Health care continues get a lot of attention on a national scale by corporate America. Primarily this is because how significant a percentage of our economy goes to healthcare—nearly 20 percent. This includes hospitals, physicians, health insurers, pharmaceutical companies, medical device manufacturers, etc.

 

So when you have an industry that big and there’s disruption and change, all of which characterize our industry, there’s also opportunity. At the same time, large employers for years have been concerned about the cost of healthcare, the cost of the premiums that they have to bear for their work forces. So these large employers are paying attention as purchasers of healthcare services; they want to influence the delivery system and make sure it’s providing care in the most efficient way possible. They want to pressure the insurers and the pharmaceutical companies that are in the middle, if you will, and at the same time corporate American thinks it can do it better if it gets involved in a more meaningful way.

 

The new disruptive technology-driven companies are very sophisticated in terms of supply chain and other business processes and they look at their core competency and expertise and ask, “What if we translate and deliver this and apply it to healthcare delivery? Perhaps we can help this industry do better and at the same time help ourselves.

 

Interviewer: Will they better manage care and cost than the traditional players: hospitals, physicians and insurers?

 

There has been a long-term debate and discussion about whether anyone could help hospitals and physicians practice medicine in a better and more efficient way. Are the physicians, who have so much control about what care is rendered and how it’s delivered, the only ones who could really change the delivery of care?

 

The traditional model has been for health insurers, by threatening to deny payment for certain types of care, to try to influence care. It hasn’t worked very well and one of the well-known facts is that there are significant variations across the country in how medicine is practiced. There may be some valid reasons for some of those differences, but some of the differences are so stark that it doesn’t really make sense.

 

But the fact is that if you look at the way a particular disease or healthcare problem is handled in one market versus another across the country, you see significant variations. And the argument goes that if corporate America—the Amazons and Berkshire Hathaways and Googles—could reduce those variations and get more consistency about how medicine is practiced, then care and cost would be more favorable.

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

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HHS Head Plans to Get Aggressive with Value-Based Payments

The head of the U.S. Health and Human Services (HHS) said recently that the department will aggressively push to implement value-based payment, extending beyond ACOs and bundled payment initiatives.

 

“ . . . we want to look at bold measures that will fundamentally reorient how Medicare and Medicaid pay for care and create a true competitive playing field where value is rewarded handsomely,” said HHS Secretary Alex Azar II at a recent meeting of hospital executives. (“Azar: Time to Move Value-Based Payment Beyond ACOs, Bundles,” HFMA Weekly, March 7, 2018)

 

He said he plans to use the Center for Medicare and Medicaid Innovation and MACRA to experiment with new payment models.

 

Keys to Transformation

 

Azar outlined four “engines of transformation.” The first, as noted above, involves revamping federal value-based payment programs.

 

The second engine of transformation involves reducing government rules and regulations that inhibit integration and collaboration. Examples of regulations include:

  • Medicare and Medicaid price-reporting rules
  • FDA communication policies that hinder innovative pharmaceutical company and payer collaboration
  • Anti-fraud protections that impede useful coordination and integration of services

 

Another engine of transformation involves giving consumers greater control over health information through interoperable and accessible health IT, giving patients control of their records in a useful format and giving them the means to bring their records to a new provider.

 

Finally, he wants to encourage transparency from providers and payers. Azar said he would begin by encouraging the healthcare industry to find solutions and would “lay out more powerful incentives if it doesn’t.”

 

Consumer Focus

 

The key theme uniting the Secretary’s four priorities was that value will be determined by “a marketplace of many players” and not by “arbitrary authorities or central planners.” (“Azar: Time to Move Value-Based Payment Beyond ACOs, Bundles,” HFMA Weekly, March 7, 2018)

 

He wants a consumer-centric approach and argues that this will make transformation easier, but not painless. The reorientation toward consumers will potentially require “uncomfortable” federal intervention because facilitating a competitive, value-based marketplace “is going to be disruptive to existing actors, he said.” (“Azar: Time to Move Value-Based Payment Beyond ACOs, Bundles,” HFMA Weekly, March 7, 2018)

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

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Hospitals Threatened by Insurers’ Growth Strategies

“Hospitals will face greater competition, risk of volume declines and margin erosion as the nation’s largest commercial health insurers aggressively pursue growth strategies that are aimed at lowering healthcare spending,” according to Moody’s Investors Service.

 

Insurers’ strategies include:

 

  • Acquisition of physician groups
  • Acquisition of non-acute care services
  • Tougher contract negotiations
  • Greater restrictions on member benefits

 

Moody’s analysts note that to some degree, insurers have engaged in these strategies in the past. But as the pace and magnitude increase, these initiatives will be increasingly disruptive to not-for-profit hospitals’ credit quality.

 

Moody’s provided the following detail:

 

  • Hospitals will be vulnerable to direct competition as insurers purchase providers. Over the last several months, health insurers have announced three significant deals that seek to purchase healthcare service providers. These transactions will result in shifting more care away from higher cost hospital settings. Two examples:
    • In the largest of the three deals, CVS Health plans to merge with Aetna Inc. Hospitals will face the risk that Aetna members will get their primary care services from CVS’s retail health clinics instead of hospital outpatient settings.
    • Optum, a division of UnitedHealth Group Incorporated and an active acquirer of physician groups, announced that it plans to buy DaVita Inc.’s medical group division. Optum’s moves will raise uncertainty for hospitals in markets where it owns physicians.

 

  • As Optum and health insurers attempt to move to value-based payment models that emphasize quality over quantity of care, hospitals will see even less volume. By owning physicians, Optum—working with its health insurance affiliate, UnitedHealthcare (UHC) and a number of other health plans—will be able to take greater control of premiums and expenses, including those related to hospital care. Hospitals would lose more business if Optum’s medical groups and its contracted health plans accelerate the shifting of patients out of the more expensive hospital setting. As a result, hospitals’ revenue and income would also be at further risk as insurers seek to add value by reducing healthcare spending.

 

  • Hospital revenues and margins will come under additional pressure as insurers are increasingly able to better flex negotiating power. When negotiating contracts, insurers will benefit from increased scale. At the same time, hospitals are becoming increasingly reliant on commercial payments to cover operating costs as governmental payers reduce rates. As insurers impose more restrictions on the types of care for which they will provide coverage, hospitals will be vulnerable to rising bad debt levels and fewer emergency room visits.

 

(From: “Not-for-profit and public healthcare – US: Hospitals face new threat from health insurers’ disruptive growth strategies,” Moody’s US Public Finance Weekly Credit Outlook, February 22, 2018)

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

For a complete list of iProtean courses, click here.

 

 

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Health Lawyers Release Top 10 List

The American Health Lawyers Association released its list of the top 10 healthcare issues for 2018. Not surprisingly, healthcare reform and the status and future of the Affordable Care Act (ACA) came in first. Emergency preparedness, telemedicine and digital health and the opioid epidemic also made the list. The full list appears below, followed by a bit more on the number one issue.

 

  1. Healthcare Reform and the ACA
  2. Fraud and Abuse
  3. Ransomware
  4. Payment Reform Model Trends
  5. Medicaid Outlook for 2018
  6. Hospital Mergers, Acquisitions, and Affiliation Transactions
  7. Drug Cost/Pricing
  8. The Opioid Epidemic
  9. Telemedicine and Digital Health
  10. Emergency Preparedness

 

Healthcare Reform and the ACA

 

The ACA remains the law, but its future is uncertain. Repeal and replace didn’t pass in Congress, but the Tax Cut and Jobs Act repeals the “central pillar” of the ACA—the individual mandate.

 

Some analysts caution that this will seriously threaten the stability of the individual and small group health insurance markets, including the health exchanges.

 

The Congressional Budget Office (CBO) estimated that between 4 and 13 million individuals would lose insurance coverage and that premiums in the individual and small group insurance markets would rise about 10% as a result of this provision. Others note that the penalty for failure to have health insurance was never large enough to significantly influence enrollment decisions, so its elimination will not dramatically alter insurance markets. There has been some discussion of Congress revisiting health reform as early as this year.

 

Outlook for 2018

 

The authors noted that the Administration has said it expects the ACA to “implode” on its own, even without legislative action. “For now, though, it seems that ongoing uncertainty over the ACA’s fate has not proven too disruptive to health insurance markets. Though major national insurance companies have continued to withdraw their offerings from the exchanges, in 2018, there are no ‘bare counties’ without health plans participating in the exchanges. Early enrollment was better than expected, but ultimately enrollment numbers fell below 2017 levels, likely due to an abbreviated enrollment period, consumer confusion and significant marketing cuts.

 

“In 2018, issuers will make projections about the effects of the repeal of the individual mandate on enrollment numbers and the risk profile of insureds and will continue tracking exchange enrollment numbers, the shifting regulatory landscape for the exchanges and the likelihood of further legislative changes (whether stabilizing or destabilizing) in deciding on their 2019 health exchange participation and premium rates. Individuals, particularly those without employer-sponsored coverage, will decide whether to take up or retain coverage without the individual mandate. Providers likewise will monitor the impact of the repeal of the individual mandate, other health reform initiatives, and issuer responses on the uninsured rate, Medicaid coverage and reimbursement, and patients’ cost-sharing obligations.” (AHLA Connections, January/February 2018)

 

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

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M&A: Study Shows Slower Financial Improvement for Acquired Hospitals

Hospitals and health systems, looking for economies of scale and the potential for reducing the cost of care, have increasingly taken the merger and acquisition (M&A) route. In partnership with the Deloitte Center for Health Solutions, HFMA conducted a study of more than 750 merger transactions between 2008 and 2014 to examine how M&A affects a hospital’s performance.

 

The research showed that acquired hospitals, on average, experienced a post-transaction decline in operating margins, revenue and expenses that typically lasted two years.

 

There was no evidence that quality measures changed at acquired hospitals. However, immediate investments and additional staffing were sometimes required to improve quality at an acquired hospital, which can impact financial performance.

 

Taking an in-depth look at mergers that achieved more favorable results than others, researchers identified eight strategies and business practices related to integration planning and execution that correlated with achievement of higher margins. Survey respondents noted that M&A was more likely to succeed when leaders:

 

  • Developed a strong strategic vision for pursuing the transaction
  • Had explicit financial and non-financial goals
  • Held leadership accountable, often at the vice- president level, for integration efforts
  • Identified cultural differences between the organizations
  • Made clear and upfront decisions on executive and mid-management leadership
  • Aligned clinical and functional leadership early in the process
  • Followed best practices for integrating the acquired or merged organization into the parent organization
  • Implemented project management best practices, with tracked targets and milestones, from day one of transaction close until two years after

 

Compared with survey peers who participated in M&A transactions that did not achieve both cost and quality goals, the vast majority of executives involved in high-value transactions said the transactions included a defined operating model that had:

 

  • A strategic vision for the combined entity
  • Identified and validated areas for value capture
  • A strategy to realize revenue growth and cost-reduction opportunities
  • An understanding of key enablers

 

“Executives from organizations looking to be acquired should consider evaluating their internal culture long before a solicitation is sent to potential acquirers. They also should manage the timing of the solicitation process carefully and avoid informal, detailed M&A conversations with executives from health systems where they have relationships. Such conversations risk getting ahead of the board and community. For example, if one of these key stakeholders does not recognize the need to become a part of a larger health system, it could complicate the process.” (Hospital M&A: When done well, M&A can achieve valuable outcomes, Deloitte Center for Health Solutions and HFMA, 2017)

 

The study researchers interviewed executives who noted that conversations prior to reaching an agreement to merge or acquire should focus on difficult issues that tend to be avoided during pre-transaction discussions, due to concerns that they might derail the transaction. Potentially sensitive subjects include:

 

  • Determining the powers the acquired facility’s board will retain if it remains in place
  • Defining the roles that executives in each organization will play in the combined organization
  • Articulating decision-making authority at each level of the organization so that key projects aren’t negatively affected
  • Identifying high-level strategies for redistributing/rationalizing key service lines that could shift volume to or from the acquired facility

 

(Sources: “Research: Hospital Mergers & Acquisitions,” HFMA Weekly, January 5, 2018 and Hospital M&A: When done well, M&A can achieve valuable outcomes, Deloitte Center for Health Solutions and HFMA, 2017.)

 

For a link to the Deloitte/HFMA research, click here:

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

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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.

 

 

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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

 

 

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Board Assessment for Hospitals & Systems: A Necessary Tool for Performance Improvement

(Originally published in Nasdaq’s MarketInsite, July 18, 2017, and written on behalf of iProtean by Karma Bass, Principal, Via Healthcare Consulting)

 

“I don’t care about having a high-performing board.” It’s hard to imagine any CEO or board leader uttering these words in today’s rapidly changing healthcare industry. The stakes are just too high. Yet, by their failure to engage in regular board assessment, many hospital and health system leaders may inadvertently be conveying that message and putting the continued viability of their mission in jeopardy.

 

Think about it: ‘high-performing’ implies performance that’s been measured and proven to be outstanding. You can’t have a high-performing board if you aren’t measuring performance in some manner. For hospital and health system boards, however, measuring performance is tricky, for several reasons. First, and perhaps most daunting, there’s the issue of appropriateness. Should a board comprised of community volunteers really be graded on its performance? Second, there’s the issue of evaluation. Who should assess the board’s performance? Lastly, there’s the issue of metrics. By which measures will or should the board be evaluated?

 

First, let’s consider the issue of appropriateness. It’s true that most U.S. hospitals and health systems are not-for-profit organizations with boards comprised of community members who provide their service as unpaid volunteers. But while board members may be volunteers, healthcare is simply too complex and important an industry to be governed by amateurs. So, yes, it is appropriate. A board’s performance should be regularly assessed in order to exploit areas of strength and identify areas where improvements can and should be made. As I travel around the country working with hospital and system boards, I find that most board leaders are eager to know how they are performing and how they could get better. As noted by Byron Loflin, CEO for the Center for Board Excellence (CBE), “Thoughtful and hardworking board members have commented to me that mediocrity is never a solution.”

 

Next, there’s the question of who should assess the board’s performance. Since ultimately the task of improving the board’s performance (should it be warranted) will fall to the board members themselves, most organizations begin by having the board assess itself. This makes sense, also, because improving board performance is often an exercise in change management.

 

Step one of Dr. John Kotter’s well-regarded eight-step process from his book, Leading Change (Harvard Business School Press, 1996, updated 2012), for change management is “Create Urgency,” described as “help the team see the need for change…” It’s much easier to convince a group of people of the need for change if they themselves have identified the reasons for it. Also, because boards are usually volunteers, it’s more palatable to ask them to assess their own performance and identify areas for improvement. If our goal is to have the board be continually improving its performance, it makes sense to have them identify the areas for improvement, while drawing on outside expertise for guidance. As Loflin advises, “Board assessment or evaluations should be conducted by a third-party whose focus is corporate governance excellence.”

 

Back to the trickiness of assessing board performance. The last issue was the question of metrics. How do you choose which measures to use in evaluating a board’s performance – high or otherwise? Many fine organizations around the country specialize in promulgating ‘best’ practices for board performance and while many are helpful, all fall short of being universally relevant. The fact of the matter is that excellence in board performance remains more an art than a science.

 

Many boards and leadership use this as a reason to throw their hands up. “If I can’t know what the absolutely, in-all-cases, best board practices are to measure my board against, why should I bother measuring their performance at all?” I reject this defeatist notion and would suggest that each board should begin where it is. Start by identifying the major ‘buckets’ of board work, and ask board members how they believe they’re performing against them.

 

Regardless of a board’s current state, it is important for the board to hold itself to a set of rigorous standards. Some board practices and some boards’ performance are better than others; and it may take some work to determine which best practices it makes sense for your board to follow and which metrics you should use to assess performance. While the details may differ, what all high performing boards have in common is they make a substantial contribution to their hospital’s success.

 

According to Gordon Clark, president and CEO of iProtean, hospital or health system boards’ work generally falls into these four areas: Finance Oversight, Quality Oversight, Mission/Strategy, and Governance. iProtean’s approach to assessment begins with a survey that asks each board member to rate his or knowledge and comfort level with specific board oversight responsibilities within these key areas. The idea is to go beyond asking “how well” the board as a whole is performing in a given area (too often an overly subjective unit of measure) and instead identify where individual board members need more knowledge in order to be effective contributors. Taken in aggregate, the results also show where the board’s strengths and blind spots are. Knowing where the gaps are in board members’ understanding will help guide a robust education plan. It can also assist in developing an action plan for board improvement through which board members will be motivated to participate.

 

It (hopefully) goes without saying that having a ‘high-performing’ board – however one chooses to measure and define it – is more of a journey than a destination. The boards that are truly ‘high-performing’ credibly and constructively challenge their own performance. They are always seeking ways to enhance their effectiveness, gain mission alignment with management and improve their ability to govern. It starts and ends, if you will, with the assessment.

 

Nasdaq’s Board and Leadership Solutions have a unique collaboration with iProtean, an e-learning company that provides online governance education and information to hospital directors. Bringing over 50 years of combined experience in healthcare governance information and education, the iProtean leadership team understands the specific needs of hospital and health system board members. The company is committed to helping directors make a meaningful difference in their communities.

 

 

Nasdaq Corporate Solutions helps organizations manage and master the two-way flow of information with their audiences. Around the globe, market leaders rely upon our unmatched suite of advanced technology, analytics and consultative services to maximize the value of their work—from investor relations and corporate governance to public relations and communications.

 

 

 

Check your library for the advanced Finance Course, Financial Risks & Strategic Implications of APMs, featuring Marian Jennings and Seth Edwards. In this course, Marian and Seth discuss the financial risks of ACOs and bundled payments, the strategic risks of not participating in an alternative payment model, clear trends and the characteristics of organizations that have successfully implemented one or more alternative payment models.

 

Coming soon: Strategic Issues for Boards featuring speakers on cyber-security and the Medicare Access and CHIP Reauthorization Act of 2015.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.