06.06.2017

HB602 / SB656, An Act Relative to Hospital Profit, Transparency, and Fairness / An Act Relative to Hospital Profit and Fairness

Joint Committee on Health Care Financing

The Massachusetts Health & Hospital Association (MHA), on behalf of its member hospitals and health systems, physician organizations, and allied health care providers, appreciates this opportunity to offer comments in strong opposition to HB602/SB656. This legislation proposes to place caps on the operating margins of certain hospitals and CEO compensation at all hospitals. It also purports to call for further transparency of hospital financials. The hospital community opposes this proposal both for matters of principle and practical reasons.

Imposing arbitrary caps on operating margins is a misguided effort driven by two key assumptions: that the financial health of a hospital can be assessed using its operating margin alone, and that, after a certain threshold, a higher margin is “undesirable” and “unnecessary” and should be capped, with the ‘excess’ recouped by the state and redirected to other hospitals. Both assumptions are completely wrong. Margins are inadequate measures of hospital financial well-being when considered alone and generally have to be supplemented by additional indicators. Margins do not address debt, cash-on-hand, accounts receivable, access to capital, age of the physical plant, etc. And a hospital’s operating margin may change from quarter to quarter and from year to year. Hospitals that are under financial stress may be able to eke out a positive margin or maintain a healthy operating margin because they are forced to reduce services in order to reduce expenses. A recent case in point is North Adams Regional Hospital – it had to completely close in 2013 even though it had a positive operating margin in its last publicly reported financial statement. In fact, its operating margin in 2012 was 7.83%. The operating margin did not reveal the financial trouble that the hospital was experiencing and if this hospital was still in existence, then approval of HB602 / SB656 would essentially reduce its viability and that of other similar community based hospitals -- the exact opposite of the stated goal of the union promoting this legislation.

Hospitals share a common mission: to care for their patients, their workforce, and their local communities. Far too many hospitals struggle these days to find the resources to fulfill that mission – illustrated by the facts that the latest available full year of financial data shows that median operating margin for hospitals in the commonwealth was 3.4%  while more than half of hospitals had declining operating margins compared to the prior year. HB602 / SB656 would have government arbitrarily limit certain hospital operating margins at a time when each hospital must spend millions of dollars to implement government-mandated electronic medical records, adopt new coding criteria, and numerous other clinical mandates. Simultaneously, HB602 / SB656 would directly impede the ability of hospitals to appropriately update technologies and aging facilities.

Furthermore, the stated goal of HB602 / SB656 is to limit hospital operating margins because the state pays hospitals to provide care for those enrolled in public healthcare programs. But what the bill does not acknowledge is that every hospital subsidizes those government programs with hundreds of millions of dollars each year because government only pays part of the cost of providing that care. Whether a hospital receives 60% of its revenues from government healthcare programs, or 55%, or 45%, every hospital experiences underpayment from state and federal government programs and every hospital pays an assessment to help fund the Health Safety Net Trust Fund (HSN). Every year, the state assesses hospitals hundreds of millions of dollars to support the HSN and its annual shortfall – those assessments also generate federal Medicaid matching dollars that are deposited into the commonwealth’s General Fund and used for non-healthcare purposes.

HB602 / SB6565’s undue focus on operating margins and its underlying assumption that a hospital with a higher margin is “too” financially healthy and can afford to be penalized demonstrates not only an ignorance of finance, but a lack of concern for one of the state’s biggest employment sectors. Healthcare accounts for about one in six jobs in the Commonwealth. This has provided a level of stability in the Commonwealth during economic downturns. In particular, a healthcare industry negatively impacted by downgraded bond ratings and restrictions on the ability to obtain financing will have a significant and long-lasting implication for the Massachusetts economy. Stand-alone community hospitals will be impacted the most severely by this bill -- which will seriously inhibit the growth and ultimate survival of community hospitals. The current structure for healthcare services in the Commonwealth features growing health systems that include more than one licensed hospital. Weakening the stronger performers within these systems (which vary over time) threatens the ability of the other hospitals to survive at all and could force more hospital closures in community settings, thereby adversely affecting the availability and accessibility of quality care to segments of the public. Arbitrary restrictions on hospitals’ annual operating margins, as proposed by HB602 / SB656, may also negatively impact charitable donations to local community programs and advocacy groups that are generally funded by hospitals as part of a community benefits program.

With regard to the financial penalties, HB602 / SB656 would impose a penalty on hospitals whose payer mix is less than 60% government payer with an operating margin over eight (8) percent. The additional revenue that a hospital receives would be placed into a “Medicaid Reimbursement Enhancement Fund” with no information or guidance as to which hospital would be eligible for these funds. The operating margin of a hospital indicates nothing about the financial condition of the hospital system. For instance, many hospitals with positive operating margins must subsidize system-level services, such as primary care physician services in the community. The end result in these circumstances often can be an overall negative margin for the system, but a positive margin for the hospital. As drafted, HB602 / SB6565 would divert revenues from local communities to other regions without accounting for the fact that hospitals which are the recipients of the “transferred” funds may have significantly greater non-operating revenues. This redistribution appears to have little or nothing to do with the stated objective of improving Medicaid reimbursement.

HB602 / SB656 also proposes to arbitrarily limit hospital executive salaries without any consideration that the state is already reviewing and analyzing executive compensation within all non-profit organizations. Currently, executive salaries for nonprofit organizations are publicly filed with the Massachusetts Attorney General’s office (AGO). These filings include information related to the compensation levels for the top five paid employees at their organizations, as well as information on investments, charitable donations, and state/federal grants and contracts. A similar report (the IRS 990 form) with greater financial information is also submitted to the federal Internal Revenue Service.

Using this information from the IRS and the AGO, hospital boards, comprised of community leaders and local experts, analyze the information to determine appropriate compensation levels. In particular, hospitals typically use an independent panel drawn from the hospital’s board of trustees to evaluate and develop executive compensation practices using national standards and guidance. These standards include benchmarking salaries from similar organizations, conferring with independent consultants, reviewing national- and state-level financial filings, and then processing proposals with the entire board. Recruiting, retaining and rewarding the most able leaders are core functions of the hospital board’s obligation to the public it serves.

What HB602 / SB656 does not consider is that hospitals are large, complex organizations that employ thousands of individuals. In order to attract and retain qualified leadership, local hospital boards must have the unfettered ability to set compensation levels that are competitive to similarly-sized complex organizations. Hospital boards need to compete to keep talented leaders with the skills required to deal with community concerns, government regulations, and complicated payment relationships with doctors. Hospital CEOs face unique challenges, and their compensation reflects the unique skill set, education and experience required to meet the demands of the position. Many hospital CEOs also manage an array of services beyond the hospital, including physician groups, home health organizations, and primary care clinics. Imposing arbitrary caps through HB602 / SB656 on executive compensation for these non-profit organizations provides no value to the healthcare system.

The so-called “transparency” provision of HB602 / SB656 is yet another red herring. Massachusetts hospitals do not object to reasonable examination, transparency and oversight. The commonwealth already has in place numerous financial reporting requirements, including annual filings of cost reports, audited financials and charge books that are filed with CHIA. Hospitals are also required to submit quarterly financial data as well as hospital case mix and discharge data. In fact, the state already requires the uniform reporting of inpatient and outpatient costs, including direct and indirect costs, despite the duplicative call to do the same found in this bill.

As for the so-called “off-shoring” issue, the proponents of this legislation clearly miss the mark. Many hospitals in Massachusetts and across the country are self-insured for medical malpractice and general liability insurance. Self-insurance is a long-standing, fiscally sound and cost effective practice for hospitals compared with the purchase of commercial coverage. In fact, 94% of American companies with more than 5,000 employees are self-insured.

Some hospitals do establish an off-shore entity for self-insurance purposes, and these entities are traditionally held in the Cayman Islands or Bermuda. Utilizing an off-shore entity is legal and transparent to the U.S. government. Self-insured hospitals, and all other businesses, routinely report the transactions to the Internal Revenue Service (IRS) and this information is available to the public. The funds that are used to pay for these liabilities are not used for any other purpose than business risk-management. The goal of these arrangements is more effective integration of risk management and clinical services delivery and quality, which allows the hospitals to provide better care and to lower overall expenses.

More cost effective management of hospital liability insurance costs produces savings that benefit patients and all hospital employees. The evidence that the self-insurance practices of hospitals are based on sound public policy and common business practices is indisputable. The savings produced by hospitals in this area help provide care to all patients regardless of their ability to pay, 24/7. And they help make hospitals economic and public health anchors within the communities they serve.

We strongly believe that the misleading and confusing nature of this bill is intended to make a political statement instead of improving hospital operations. To summarize, hospital costs are already affected by Chapter 224 of the Acts of 2012, which now limits statewide Total Healthcare Expenditure (THE) growth to 3.1%. The commonwealth already has in place numerous financial reporting requirements and executive compensation reviews by two different state agencies. Policymakers and the legislature have already considered and rejected capping hospital margins and CEO compensation during the debate on Chapter 224. Lawmakers and other healthcare leaders correctly understood that such caps would be poor public policy.

For these reasons, we believe that HB602 / SB656 is inappropriate and misleading as to the stated intent and urge the committee to oppose this bill.
 

Thank you for the opportunity to offer comments on this important matter. If you have any questions or require further information, please contact MHA's Vice President of Government Advocacy, Michael Sroczynski, at (781) 262-6055 or msroczynski@mhalink.org.