Voices in Healthcare

The Massachusetts Division of Health Care Finance and Policy (DHCFP), in conjunction with the Division of Insurance (DOI), released a much-anticipated study of the reserves, endowments, and surpluses of Massachusetts hospitals. This study follows a similar examination of health plan reserves published earlier this month. The reports help clarify some of the many differences between insurer surplus - where clear standards exist regarding definitions, appropriate levels, and other regulatory requirements - and the financial performance indicators that comprise hospital surplus and reserves. But it's even more important to understand that hospitals and insurers require reserves and accumulate surpluses for vastly different reasons.

While clearly the focus of the report was to identify and quantify "excess" financial resources: the most impressive element of the Division's report is actually the inadequacy of hospital total surpluses and reserves. For example:

• Only 10 hospitals, based on the parameters selected by DHCFP, were found to have "considerable financial resources." That's a mere 15% of the state's hospitals.
• 45 hospitals (68%) had less than 30 days cash on hand.
• 13 hospitals have a debt service coverage ratio of 1.0 or less, which means that their "income cannot cover their interest and principal obligations on existing debt."
• 10 hospitals had negative net unrestricted assets in 2009.

The methodology used to measure 'financial resources' in the report has also produced some misleading numbers. For example, the DHCFP study cites reserves and surpluses for entire health systems, which includes not just hospitals but also nursing homes, health centers, physician practices, assisted living residences, research organizations, real estate holding companies, rehabilitation and psychiatric hospitals, international medical consulting and education, and so on. The total aggregate "system" net assets figure is $17.2 billion; but $10 billion (58% of that amount) is property, plant and equipment, which cannot properly be considered 'reserves' since they are not liquid assets and are also essential to the actual provision of services provided by hospitals.

Healthcare payment reform  - which Bay State hospitals support as part of a comprehensive overhaul of the healthcare delivery system - will nonetheless increase hospitals' need to maintain and even build upon their existing reserves. The Special Commission on the Health Care Payment System recommended a shift to a global payment model that will lead to a transfer of risk from insurers to providers, including insurance risk and performance risk. In addition, risk is likely to be spread across smaller pools, adding to the level of risk for providers. In order for providers to take on any additional risk, they will need to be given the opportunity and means to build up the necessary reserves.

While the majority of Massachusetts hospitals are non-profit, all hospitals are capital intensive enterprises and must maintain reserves for capital and infrastructure investments/improvements, labor costs and fiscal uncertainties such as continued government underpayment for care. Hospitals must balance their charitable and societal missions with positive financial performance if they are to adequately serve their communities.