An Act relative to transparency of hospital margins &
ensuring hospital efficiency

Joint Committee on Financial Services

The Massachusetts Health & Hospital Association (MHA), on behalf of our member hospitals, health systems, physician organizations and allied healthcare providers, appreciates the opportunity to offer comments in strong opposition to HB942, “An Act relative to transparency of hospital margins & ensuring hospital efficiency.”

MHA consistently supports meaningful transparency for both insurers and healthcare providers, but we are strongly opposed to HB942 for several reasons. Section 1 of this bill would require a public hearing within 60 days any time an acute care hospital reports to the Center for Health Information and Analysis (CHIA) an operating margin that exceeds 5%. Such hospitals must submit testimony on overall financial condition, the need to sustain an operating margin that exceeds 5%, and efforts to advance cost containment and healthcare quality improvement. The bill also requires CHIA to report payer-specific margins. Section 2 of the bill would require CHIA to, after consulting with various state and private agencies, establish a uniform methodology for calculating various cost categories, cost trends, and operating margins for all commercial and public payer business.

Massachusetts hospitals already are subject to an unprecedented level of examination, reporting, and oversight. Numerous state reporting requirements include annual cost reports, quarterly financial filing requirements, annual audited financial statements, Medicare 2552 Cost Reports, charge books, and acute hospital case mix and charge data. In fact, all categories of hospital inpatient and outpatient cost reporting listed in Section 2 of this bill already are provided to (or can be derived via calculations by) CHIA through either the Annual 403 cost report or the Supplemental Cost report. In addition to these reporting requirements, the state publishes detailed hospital profile reports and various other annual reports on hospital reimbursement, health system performance, and total healthcare expenditure trends.

Separate from CHIA, the Health Policy Commission (HPC) is charged with reporting on cost trends and underlying factors, as well as performing cost and market impact reviews of material changes in provider operations. The HPC also conducts annual healthcare cost trends hearings during which providers submit extensive written and verbal testimony on their operations, strategy, and financial performance. The hearings provide a very thorough – and very public – examination into the drivers of healthcare costs in the commonwealth’s healthcare system as well as actions and challenges that providers face in lowering the cost-growth trajectory. In addition, CHIA is required to provide the HPC with a list of healthcare entities with “excessive cost growth” and the HPC has indicated that some of these entities may be required to file performance improvement plans.

Another duplicative requirement in this bill is the reporting of teaching and research expenses by academic medical centers (AMCs). The 2018 CHIA Hospital Cost Report captured AMC research revenue and expenses, along with other comprehensive information, including direct expenses for nursing school, intern and resident salaries and fringe benefits, other intern and resident program costs, and paramedical education program costs. Additionally, in the IRS 990 report, which is publicly available, hospital-specific expenses related to education and research are reported as health professions education. This includes community benefit expenses on medical students, interns, residents, fellows, nurses, and other allied health profession students; continuing health professions education; and other student costs. Federal agencies such as the National Institutes of Health, the Centers for Disease Control and Prevention, the National Science Foundation, and the Agency for Healthcare Research and Quality all provide publicly available information on the dollar amount of federal research funding per project, and many of our teaching hospitals are listed as federal research funding recipients.

There is no lack or shortage of information on hospital finances in the commonwealth. MHA and our member hospitals are very concerned about creating additional costs for state regulators and healthcare providers through duplicative and unnecessary reporting. Bills such as HB942 offer no improved value and would only layer on redundant reporting burdens and increase administrative complexity and costs, while distracting from the much more important business of transforming the care delivery system to meet the goals of Chapter 224.

The unwarranted focus on hospital margins in the bill is based on a false assumption 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 needs to be justified in a public hearing. Both assumptions are wrong. A hospital needs an adequate operating margin to remain a going concern, and by any national standard, an operating margin of more than 3% is necessary for a hospital to be considered “healthy.” Hospitals continually perform budgetary juggling acts that include keeping pace with advances in medical technology, maintaining and replacing aging equipment and facilities, and responding to information technology requirements. Without a healthy margin, hospitals are less likely to have the resources to maintain their property, plant and equipment, which can fall into disrepair and obsolescence. Importantly, many hospitals, especially those in less densely populated areas of the state, financially support physician practices that may be operating in the red.

Since margins alone are an inadequate measure of hospital financial well-being, they generally have to be supplemented by additional indicators. A painful reminder of this fact is the former North Adams Regional Hospital which, per CHIA, had an operating margin of 7.83% at the end of 2012 but shut down operations a year later. Margins are just one measure at a specific point in time and using just margins to assess hospital financial health is analogous to using a blood pressure reading to conclude that a patient is healthy. According to 2018 data from CHIA, 24% of Massachusetts hospitals are operating in the red and more than half have margins of less than 3%. Margins and other indicators of financial health — e.g. measures of liquidity, debt service coverage, debt to equity — are bound to worsen in the future with uncertainly surrounding the Affordable Care Act, a significant Medicaid underpayment gap, and declining revenues from other payers. There may be serious financial challenges ahead for Massachusetts hospitals, yet the language used in HB942 implies that a hospital having an operating margin greater than 5% is a problem that needs to be explained. This bill not only fails to recognize that a hospital could have a healthy margin while failing other tests of financial health, but is also blind to the fact that having such a large percentage of the state’s hospitals in poor financial health should be a significant concern for policymakers.

Lastly, this bill would require CHIA to report payer-specific margins. This would involve the allocation of hospital costs among payers, a formula that is inherently imprecise and therefore produces distorted results that will not reflect hospitals’ actual margins by payer. Such flawed information would provide no benefit to the public or policymakers and would simply offer the insurance industry additional measures of obfuscation. It is very likely that insurers will use this flawed data to strong-arm hospitals during contract negotiations. In Massachusetts, where just three insurers operate the vast majority of the commercial market and one insurer controls 42% of the market, it could place many hospitals, particularly community and disproportionate share hospitals, in even greater financial peril. Most importantly, inaccuracies in the calculation of payer-specific margins could adversely affect the development of public policies that are reliant upon such information. At a minimum, such inaccuracies could improperly and unfairly handicap hospital contract negotiations with insurers and negatively affect the stability of the healthcare delivery system.

MHA does not object to a reasonable level of regulation and reporting, but at a certain level, it can be both unjustified and counterproductive. HB942 achieves such an objectionable level. For all of these highlighted reasons, MHA urges the committee to reject HB942.

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