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 healthcare providers, appreciates this opportunity to offer comments in strong opposition to HB1144/SB714. This legislation proposes to place caps on hospital CEO compensation and the operating margins of certain hospitals through civil monetary penalties. It also purports to call for further transparency of hospital financial assets. 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” or “unnecessary” and should be capped, with the “excess” recouped by the state and redirected to other hospitals. Both assumptions are wrong. Margins are inadequate measures of hospital financial well-being when considered alone, and must be supplemented by additional indicators in order to glean a comprehensive assessment. Margins do not address debt, cash-on-hand, accounts receivable, access to capital, or age of the physical plant, among many other factors. Additionally, 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 case in point is North Adams Regional Hospital (NARH) – it had positive operating margins in its last two years, yet was forced to close completely in March of 2014. In fact, in 2012, NARH had a margin of 7.8%. The operating margin did not indicate the dire financial straits that the hospital was experiencing. If this hospital’s doors were still open, then approval of HB1144/SB714 would further reduce its financial viability and that of other similar community hospitals – the exact opposite of the stated goal of this legislation.
Hospitals share a common mission: to care for their patients, their workforce, and their local communities. Far too many hospitals struggle increasingly to find the resources to fulfill that mission – illustrated by the fact that the latest available full year of financial data, according to the State’s Center for Health Information & Analysis (CHIA), shows that the median operating margin for hospitals in the commonwealth was 1.6%, a 1.2% percentage point decrease from the prior year. HB1144/SB714 would instruct government to arbitrarily limit certain hospital operating margins at a time when each hospital must spend millions of dollars to implement government-mandated electronic medical records, the MassHealth accountable care organization program, and numerous other clinical mandates and care delivery reforms. Simultaneously, HB1144/SB714 would directly impede the ability of hospitals to appropriately update technologies and aging facilities.
Furthermore, the stated goal of HB1144/SB714 is that hospital operating margins must be limited because the state pays hospitals to provide care for those enrolled in public healthcare plans. But what the bill does not acknowledge is that every hospital annually subsidizes those government programs with hundreds of millions of dollars because government only reimburses for a portion of the cost of providing that care. Whether a provider 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. Each year, the state assesses hospitals hundreds of millions of dollars to support the Health Safety Net 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.
The undue focus on operating margins in HB1144/SB714 and its underlying assumption that a hospital with a higher margin is “too” financially healthy and can afford a monetary penalty 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 Massachusetts during economic downturns. In particular, a healthcare sector affected negatively by downgraded bond ratings and restrictions on the ability to obtain financing will have a significant and long-lasting implication for the state economy. Unaffiliated community hospitals will be affected most severely by this bill, legislation that would seriously inhibit the growth and ultimate financial survival of community providers. Healthcare systems that include more than one licensed hospital and other outpatient and primary care provider types are increasingly prevalent in the Massachusetts market. Weakening the stronger performers within these systems (which vary over time) threatens the survival of the other hospitals and could force more closures in the community hospital cohort, thereby adversely affecting the availability and accessibility of quality care to vast regions of the commonwealth. Arbitrary restrictions on hospitals’ annual operating margins, as proposed by HB1144/SB714, may also negatively impact charitable donations to local community programs and advocacy groups that are largely funded by hospitals as part of a community benefits program.
With regard to financial penalties, HB1144/SB714 would impose a fine on hospitals with a payer mix of less than 60% government payer and with an operating margin over eight percent. The additional revenue a hospital receives would be placed into a “Medicaid Reimbursement Enhancement Fund” with no outlined guidance as to which hospitals would be eligible for these funds. The operating margin of a hospital indicates nothing about the financial condition of its respective hospital system. For instance, many hospitals with positive operating margins must subsidize system-level services, such as primary care providers in the community. The end result in these circumstances can often be an overall negative margin for the system, but a positive margin for the hospital. As drafted, HB1144/SB714 would divert revenues from local communities to other regions without accounting for the fact that the hospitals that receive 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.
HB1144/SB714 also proposes to arbitrarily limit hospital executive salaries without any consideration that the state actively reviews and analyzes executive compensation for 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 the organizations, as well as information on investments, charitable donations, and state and federal grants and contracts. A similar report with greater financial information is also submitted to the federal Internal Revenue Service (IRS), the IRS 990 form.
Using this information from the IRS and the AGO, hospital boards – comprised of community leaders and local experts – analyze data 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 HB1144/SB714 does not consider is that hospitals are large, complex organizations that employ thousands of individuals. 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 and insurers. 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 HB1144/SB714 on executive compensation for these non-profit organizations provides no value to the healthcare system.
The so-called “transparency” provision of HB1144/SB714 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, which are submitted to CHIA. Hospitals are also required to submit quarterly financial data as well as hospital case mix and discharge information. In fact, the state already requires the uniform reporting of inpatient and outpatient spending, including direct and indirect costs, despite the duplicative call to do the same written into 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 as compared to 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. Using an off-shore entity is legal and transparent. Self-insured hospitals, and all other businesses, routinely report the transactions to the IRS and this information is available to the public. The funds in these arrangements are used to pay for 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 quality and delivery of clinical services, which allows hospitals to provide better care and lower overall expenses.
More cost-effective management of hospital liability insurance 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 to provide care to all patients regardless of their ability to pay, 24 hours a day, seven days a week. They help to make hospitals economic and public health anchors for the communities that they serve.
We strongly believe that the misleading and confusing nature of this bill is intended to make a political statement rather than actually seeking to improve hospital operations. To summarize, hospital costs are already regulated by Chapter 224 of the Acts of 2012, which now limits statewide annual total healthcare expenditure growth to 3.1% of gross state product. The commonwealth currently has in place numerous financial reporting requirements and executive compensation reviews by two different state agencies. Policymakers and the legislature already have 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 and lead to many unintended consequences for healthcare access.
For these reasons, we believe that HB1144/SB714 is inappropriate and misleading as to the stated intent and we urge the committee to oppose this bill. Thank you for the opportunity to offer testimony on this important matter. If you have any questions or require further information, please contact Michael Sroczynski, MHA’s Senior Vice President of Government Advocacy, at (781) 262-6055 or msroczynski@mhalink.org