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Originally Processed With FOIA(s):
FOIA Number:
2021-0094-F
2021-0094-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin:
Cabinet Affairs, White House Office of
Series:
Porter, Richard, Files
Subseries:
OA/ID Number:
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Folder ID Number:
07136-011
Folder Title:
Measuring the Financial Health of Hospitals
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15
16
2
Measuring the
Financial Health
of Hospitals
HEALTHCARE
&
E
Ernst &Whinney / HFMA
FINANCIAL
MANAGEMENT
ASSOCIATION
HEALTHCARE
HFMA®
FINANCIAL
MANAGEMENT
ASSOCIATION
This monograph, "Measuring the Financial Health of Hospitals," reports the findings of a
survey conducted by the Healthcare Financial Management Association (HFMA). The
survey requested financial data from hospitals whose Chief Financial Officers (CFOs) are
HFMA members.
HFMA is an organization of over 26,000 members involved in the financial management of
healthcare providers. HFMA members include professionals employed by hospitals and
long-term care facilities, as well as others employed by public accounting and consulting
firms, insurance companies, government agencies, and other organizations.
As a result of the findings of this survey, HFMA is concerned that the solvency of the nation's
hospitals may be in jeopardy, particularly if Medicare payments are not maintained at
reasonable levels. While some believe that the hospital industry has been too profitable under
Medicare's Prospective Payment System (PPS), HFMA asserts that reports of profitability
in the early years of PPS are misleading and not relevant to current discussions about
Medicare payment rules and rates. These reports do not accurately portray the current and
likely future financial position of hospitals.
HFMA believes that necessary hospital margins, particularly from providing services to
Medicare beneficiaries, have declined sharply. In some cases these margins are negative. We
believe these declines place the industry at unreasonable financial risk. We believe that the
data and findings derived from this survey deserve the attention of hospital trustees and
managers as well as elected representatives and government officials.
THE SURVEY
The survey requested data for a four-year period which were used to compute several
financial measures, including:
Overall profits or losses (margins).
Margin from patient care services.
Margin from services to Medicare patients.
Percentage of uncompensated patient care.
Additionally, the survey sought comments from respondents, including their subjective
assessments of two key indicators of financial health:
Ability (inability) to meet debt service requirements
in the future.
Ability (inability) to replace assets or acquire new
technology.
This survey focused on rates of return expressed as a percentage of net revenue. An overall
assessment of hospital financial strength should also include the measurement of earnings in
relation to hospital assets and equity (fund balance). Other considerations, such as hospitals'
i
ability to adequately finance working capital and debt requirements should also be made.
(Quantitative measures such as liquidity and debt service coverage ratios can help in these
assessments.) Although these factors are relevant to any discussion of the financial position
of our nation's hospitals, this survey was limited in scope to address the key financial measure
most commonly the subject of public discussion, profitability defined in relation to net
revenue. The broader measures of fiscal health are analyzed in HFMA's "Hospital Industry
Financial Reports."
ACKNOWLEDGEMENTS
We express our appreciation to the firm of Ernst & Whinney, which assisted with this year's
survey. Ernst & Whinney provides extensive accounting and consulting services to the
healthcare industry and provided financial support for this project.
We also gratefully acknowledge our CFO members for their time and effort in completing the
survey document. We wish to thank them for allowing us to include their comments in this
document. Without them this publication would not have been possible.
HFMA is pleased to present "Measuring the Financial Health of Hospitals" as a means of
providing you with a greater appreciation of the financial issues facing the healthcare
industry. After reviewing the survey results and analysis, we invite you to provide us with
your comments and ideas.
Healthcare Financial Management Association
1050 17th Street, N.W.
2 Westbrook Corporate Center
Suite 510
Suite 700
Washington D.C. 20036
Westchester, IL 60153
ii
Contents
Executive Summary
1
About This Survey
3
Findings
7
Overall Margin and Margin from Providing Patient Care Services
7
Margin from Serving Medicare Patients
10
Medicare's Share of Revenue and Expense
12
Cost per Case and Medicare Cost and Payment per Case
13
Uncompensated Care as a Percent of Net Patient Revenue
15
Capital Cost as a Percent of Total Cost
16
Appendix A - HFMA's Comments on the Inspector General's Profitablity Data
19
Appendix B - Survey Document
21
Appendix C - Compiled Survey Results
27
Appendix D - Additional Comments from HFMA Members
35
iii
Executive Summary
EXECUTIVE
Legislation or regulations have amended Medicare's PPS system each
SUMMARY
year since its introduction in 1983. These amendments have caused
Medicare's payments to hospitals to be lower than they otherwise would
have been. Medicare payments have not kept pace with the costs of
providing care to Medicare beneficiaries. Employers, state governments,
and other payers have also sought to limit spending for healthcare
services. This restricts hospitals' ability to offset the Medicare shortfall
and to meet their full financial requirements. In addition, the uninsured
and underinsured population continues to grow. Nevertheless, the gen-
eral public still seems to expect unrestricted access to quality health care.
HFMA is concerned that these factors are causing hospital margins to be
inadequate. We are concerned that the long-term solvency and credit-
worthiness of the nation's hospitals may be in jeopardy. HFMA believes
government has an obligation, on behalf of the public good, to expect
efficiency from Medicare providers. However, HFMA maintains that
Medicare payments should adequately meet the financial requirements
of providers who conscientiously manage their costs.
To obtain current information on the financial condition of hospitals,
HFMA surveyed its CFO members. We received and used 532 responses
in the survey compilation. Survey respondents provided financial data
for their hospital's two most recently completed fiscal years and esti-
mated data for the balance of their current fiscal year and next year.
Respondents were also asked to provide comments and opinions on the
financial data and trends they see affecting their institutions. The follow-
ing table presents a summary of key information derived from the survey:
Medicare's Share
Gain (Loss)
Of Total Hospital
Overall
From Medicare
Net
Margin
Services
Costs
Revenue
PPS Year 3
6.0%
3.2%
41%
41%
PPS Year 4
5.4%
(.6)%
41%
40%
PPS Year 5
4.0%
(5.5)%
42%
38%
PPS Year 6
3.3%
(9.0)%
42%
37%
The definition of "PPS Years" is included in the SURVEY METHOD-
OLOGY section of the report.
Hospital margins, as a percent of net revenue, are expected to decline
significantly during the four-year survey period. The above table shows
the extent of this decline. The American Hospital Association panel
survey (a statistically representative sample of hospitals) also shows a
rapid decline in hospital profitability in recent years.
The most significant factor contributing to the decline in overall hospital
margins is the weakening and eventual loss of earnings derived from
serving Medicare patients. This margin from Medicare services declined
1
Executive Summary
significantly during the first two surveyed years, and the responding
CFOs expect this trend to continue. In fact, the average responding
hospital reported a slight loss from providing Medicare services last year
(PPS Year 4). Over 75 percent of responding hospitals anticipate a loss
from these services next year (PPS Year 6). Payments from Medicare
currently account for 38 percent of the total net patient revenue for the
survey respondents. The responding CFOs expressed concern that losses
on such a significant part of a hospital's business could seriously impact
their hospital's future financial viability.
Even though responding hospitals are, on average, experiencing substan-
tial declines in overall margins, they continue to provide hospital
services to indigents and to those with insufficient health insurance
coverage. In fact, for the average responding hospital, uncompensated
care is expected to rise from 5.2 percent to 5.7 percent of net patient
revenues over the four-year survey period.
Many respondents expressed concern about their inability to finance
needed renovations and equipment replacement. Others indicated that a
continuation of the current Medicare policy of paying less than actual
capital costs will prohibit them from keeping pace with new technology.
Many respondents indicated difficulty in obtaining new financing due to
declining "bottom lines." Some expressed concern, even fear, that
quality of patient care will suffer without sufficient margins to provide
adequate cash flow and access to capital sources.
If these trends do not reverse, the long-term financial viability of many
hospitals, particularly those serving a significant share of the nation's
elderly or uninsured, could be jeopardized.
2
About This Survey
ABOUT THIS
HFMA undertook this survey in response to some views that the hospital
SURVEY
industry has been too profitable under Medicare's PPS system. Many
HFMA members have expressed their concerns that this viewpoint does
not reflect the current financial situation at their hospitals. We believe
that patient care margins have declined and in many cases are negative.
To test this hypothesis, our survey requested actual and projected
financial information for a four-year period. The key items requested
were:
Total Medicare payments and the components of Medicare
payments (DRGs and outliers, pass-through amounts, bad
debts, and other Medicare payments).
Non-Medicare net patient service revenue.
Nonoperating and other operating revenue.
Amount of uncompensated care.
Costs incurred in providing services to Medicare and
other patients.
Medicare and total acute patient discharges.
This survey has several special attributes:
The historical information included is more recent than that avail-
able from most other data sources. In addition, we requested
projected information for the current and next fiscal years. We
asked the responding financial managers to reflect the impact of
recent Medicare legislation and their hospital's action plans and
budgets in these projected amounts.
The cost of providing care to Medicare patients is based on the
responding hospitals best available cost accounting data, rather
than using the Medicare cost report allocation methodology.
We provided an opportunity for the responding financial managers
to present their views and comments on the trends and to voice their
concerns and frustrations.
HFMA sent the cover letter and survey document (presented in Appen-
dix B) to 3,380 HFMA members who are hospital CFOs. Of that total,
532 provided responses by the processing deadline. Some respondents
did not answer all the questions. Inconsistent or invalid answers were
excluded. Ernst & Whinney compiled the survey responses, as described
in Appendix C.
Using the data provided by the survey respondents, overall profits as well
as gains or losses from patient service activities were measured. Survey
data was also used to isolate the effects of Medicare policy on hospital
profitability. Survey results and HFMA's analysis are included in the
3
About This Survey
FINDINGS section of "Measuring the Financial Health of Hospitals."
We also asked the CFOs responding to the survey to provide their
opinions and comments on the financial trends at their hospital. We asked
for specific comments on whether their credit ratings and ability to
service or obtain new financing had changed. A selection of their
comments are provided in Appendix D and in pertinent sections of this
report.
The survey requested financial data for four hospital fiscal years. This
included actual results for the two most recently completed fiscal years
and projected results for the hospital's current and next fiscal years.
Hospital fiscal years end on various dates. For survey tabulation and
reporting, we have grouped the responding hospitals by "PPS Year."
Medicare PPS changes are generally implemented at the beginning of the
federal government's fiscal year (October 1) or at the beginning of a
hospital's own fiscal year starting during a particular federal fiscal year.
This survey covers the third through sixth federal fiscal year since the
beginning of the PPS system. Consequently, references in this report are
to PPS Years 3 through 6. The following chart describes hospital fiscal
years included in each PPS Year.
Hospital Fiscal Years Beginning:
PPS Year 3
10/1/85 through 9/30/86
PPS Year 4
10/1/86 through 9/30/87
PPS Year 5
10/1/87 through 9/30/88
PPS Year 6
10/1/88 through 9/30/89
Any survey, regardless of methodology, has its attendant biases because
of the nature of the research vehicle. Further, no attempt was made to
verify survey responses. The PPS Years 5 and 6 data reflect projections
made by the survey respondents. There will usually be differences
between projected and actual results, because events and circumstances
frequently do not occur as expected and those differences may be
significant.
This survey was not designed to draw statistically valid conclusions
regarding the financial position of all U.S. hospitals. The majority of
responses received represent hospitals east of the Mississippi (67 percent
of responses versus 54 percent of all hospitals in the U.S.A.), hospitals
over 100 beds (84 percent of responses versus 55 percent of all hospitals),
urban hospitals (64 percent of responses versus 49 percent of all hospi-
tals), and non-teaching hospitals (63 percent of responses versus 76
percent of all hospitals). Results are representative only of those hospi-
tals responding to the survey, however, the results may be indicative of
national trends.
4
About This Survey
Respondents to this survey may be in better financial condition than the
nation's hospitals on the whole. This may be due to the fact that we
received a higher than average response from urban and large (over 100
beds) hospitals. Other studies have shown these hospital groups to have
better than average financial results. The American Hospital Association
panel survey (a statistically representative sample of hospitals) reported
overall margins of 5.2 and 4.8 percent in calendar years 1986 and 1987.
Respondents to this HFMA survey reported overall margins of 6.0 and
5.4 percent for PPS Years 3 and 4.
5
Findings
FINDINGS
This section reports the key findings of the survey compilation and
contains HFMA's observations and discussions of significant trends. A
complete summary of the survey findings (including calculation meth-
odology) is included as Appendix C. Selected comments of the CFO
respondents are included with each item to illustrate industry concerns
and frustrations and to provide additional insight into these trends.
Appendix D includes additional comments from survey respondents to
further illustrate the concerns and opinions of financial leaders of the
hospital industry.
OVERALL MARGIN
Overall Margin
AND MARGIN
25th Percentile
Median
75th Percentile
FROM PROVIDING
PATIENT CARE
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
PPS Year 3
PPS Year 4
PPS Year 5
PPS Year 6
6.0%
5.4%
4.0%
3.3%
The definition of "PPS Years" is included in the SURVEY METHODOLOGY section of this
report. Median values are noted below graph.
Margin from Providing Patient Care Services
25th Percentile
Median
75th Percentile
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
PPS Year 3
PPS Year 4
PPS Year 5
PPS Year 6
1.6%
.8%
(.3)%
(.9)%
The definition of "PPS Years" is included in the SURVEY METHODOLOGY section of this
report. Median values are noted below graph.
Overall hospital margins are declining. Overall margins reflect earnings
from all operating and nonoperating activities ("bottom line"). Nonpa-
tient service revenue, including investment income and activities such as
7
Findings
cafeteria sales, nursing school fees, and fund raising are included in this
measure. The margin from patient care services is limited to earnings
from services provided to patients.
The decline in the margin from providing patient care services reflects
not only constraints on Medicare payments, but also increased discount-
ing from established charges, increasing costs of providing services, and
the shift to outpatient care settings. If this decline continues, the ability
of hospitals to sustain reasonable profit margins becomes increasingly
dependent on earnings from sources other than patient care.
Approximately 66 percent of the survey respondents reported a positive
return from patient care services in PPS Year 3. This is projected to drop
to 49 percent by PPS Year 5. Only 43 percent expect to earn a profit from
patient care services in PPS Year 6. Approximately 90 percent of the
survey respondents reported a positive "bottom line" in PPS Year 3. This
has decreased to 86 percent in PPS Year 5 while only 83 percent expect
to earn an overall profit in PPS Year 6.
Less than 34 percent of respondents expect a positive return from patient
care services in every year of the four-year survey period. Giving
consideration to other operating and nonoperating activities, 72 percent
of respondents expect to have a positive "bottom line" for every year of
the four-year period. However, 73 percent of respondents expect to incur
a drop in returns from patient care services (including years with losses)
during the four-year period, and 73 percent expect lower overall margins
in PPS Year 6 compared to PPS Year 3.
Comments from survey respondents express anxiety that the solvency of
some of the nation's hospitals may, in the near future, be in jeopardy.
Comments from
The hospital's operating margin in 1987 reflected a sharp and significant
HFMA Members:
decline and an operating loss is anticipated for 1988.
Richard D. Keenan
The Valley Hospital
Ridgewood, NJ
***
Our operation is extremely fragile, the loss of a single doctor and/or
industry in the town could accelerate the demise of Reed City Hospital.
Stanley J. Maksimowicz
Reed City Hospital
Reed City, MI
***
8
Findings
[The] hospital can only cut costs to a certain level before quality is
compromised.
Daniel C. Confalone
Allentown Osteopathic Medical Center
Allentown, PA
***
Since most of the fat has been trimmed from our budgets, any additional
cost savings will have to come from elimination of services.
Gary G. Guetzko
St. Joseph Mercy Hospital
Mason City, IA
***
9
Findings
MARGIN FROM
Margin from Serving Medicare Patients
SERVING
25th Percentile
Median
75th Percentile
MEDICARE
PATIENTS
10%
5%
0%
-5%
-10%
-15%
-20%
PPS Year 3
PPS Year 4
PPS Year 5
PPS Year 6
3.2%
(.6)%
(5.5)%
(9.0)%
The definition of "PPS Years" is included in the SURVEY METHODOLOGY section of this
report. Median values are noted below graph.
The respondents to this survey reported a median profit margin from
services provided to Medicare patients of 3.2 percent for PPS Year 3. This
is a variance of 67 percent from the average "Medicare profit margins"
of 9.6 percent reported by the United States Department of Health and
Human Services (HHS) Office of the Inspector General (IG) for the same
year. We recognize that the IG reported returns from only Medicare in-
patient operating services while this survey measures the margin from all
Medicare patient services. For the respondents to this survey, Medicare
inpatient operating payments (DRG and outlier payments) average 77
percent of total Medicare payments in PPS Year 3. The remaining
Medicare payments are for inpatient pass-through amounts, PPS-exempt
services, outpatient services, and bad debts, all of which are paid on the
basis of Medicare allowable costs.
We find it difficult to believe hospitals would incur such significant
losses on the 23 percent of Medicare services which are paid on the basis
of costs incurred. In short, there is a substantial unreconciled difference
between the IG's reported profits and those reported by the survey
participants. As discussed in detail in Appendix A, the IG's findings
appear inconsistent with operating margins reported by other industry
sources. The most notable industry source is HFMA's Financial Analysis
Service, which includes data from audited financial statements of 1,400
hospitals.
Margins from serving Medicare patients declined significantly from PPS
Year 3 to PPS Year 4, and the CFOs responding to this survey expect this
trend to continue. Recent changes in Medicare payment rules, such as
DRG update factors held significantly below the hospital market basket
measure of inflation, reductions in capital and medical education pay-
ments, changes in DRG weights, etc. have sharply reduced the margin
from providing services to Medicare beneficiaries. In fact, the average
respondent reported a slight loss from these services for PPS Year 4. Over
75 percent of responding hospitals anticipate a loss on the provision of
Medicare services in PPS Year 6.
10
Findings
Payments from Medicare currently account for 38 percent of total net
patient revenue for responding hospitals. Survey respondents expressed
concerns that losses on such a significant portion of a hospital's business
could seriously impact their hospital's future financial viability.
Comments from
By 1989 we will receive $.82 for every dollar we spend on the treatment
HFMA Members:
of Medicare patients. If this trend continues we will be unable to support
the facility in the 1990s.
Ronald K. Sperling, CPA
Mercy Medical Center
Roseburg, OR
***
In 1986, Medicare reimbursed 84.5 percent of their share of costs; by
1989 this reimbursement rate will drop to 78.0 percent of costs.
Lillian A. Hinds
Mary Free Bed Rehab Center
Grand Rapids, MI
***
If Congress continues its plans to reduce reimbursement in this arena, our
ability to continue our present complement of services will be severely
hampered.
William E. Baecker
Clinton Memorial Hospital
Wilmington, OH
***
Medicare utilization in the first three months of FYE 9/30/88 has
increased 10 percent over the previous year with a matching decline in
non-Medicare patients. This abrupt change, coupled with inadequate rate
increases for fourth-year PPS hospitals, results in a tremendous drain on
the financial resources of this facility
Michael D. Ayres, FHFMA
Lourdes Hospital
Paducah, KY
***
11
Findings
MEDICARE'S
Medicare's Share of Revenue and Expense
SHARE OF
Medicare Share of Net Patient Revenue (R)
Medicare Share of Patient Expense (E)
REVENUE AND
EXPENSE
44%
42%
40%
38%
36%
34%
32%
30%
PPS Year 3
PPS Year 4
PPS Year 5
PPS Year 6
40.8% (R)
39.5% (R)
38.1% (R)
37.4% (R)
41.0% (E)
40.8% (E)
41.6% (E)
42.1% (E)
The definition of "PPS Years" is included in the SURVEY METHODOLOGY section of this
report. Median values are noted below graph.
The previous chart shows the decline in earnings from serving Medicare
patients. To determine the causes of this decline we examined the trends
in Medicare payments and costs. The first analysis focused on the trend
in Medicare payments expressed as a percentage of total net patient
revenues. We compared these percentages to Medicare costs expressed
as a percentage of total patient expenses (above). The second analysis
compared the trends in Medicare payments per case to Medicare costs
per case (presented in the following section of this report).
We observe that Medicare's share of total patient expenses is growing,
but its share of net patient revenue is falling. If this trend continues,
hospitals will have to rely on other payers to subsidize the differences
between the payments made by Medicare and the costs of providing
services to its beneficiaries.
Comments from
Our charges continue to increase to compensate for lower reimbursement
HFMA Members:
by governmental payers. Commercial and self-pay patients are continu-
ing to absorb and subsidize the public patient's care.
Will L. Bishop, CPA
Community Hospital Monterey Peninsula
Monterey, CA
*
The non-Medicare patient is shouldering more and more of the cost of
hospital operations, even though the Medicare patient continues to
consume greater resources. Actually I view charges in a hospital now as
a tax since the government pays so little of their share, yet requires the
most in the manner of billing, UR, reports, PRO, etc.
James S. Rowson, FHFMA, CPA
Harrison Memorial Hospital
Bremerton, WA
12
Findings
COST PER CASE
Cost per Case
AND MEDICARE
COST AND
Cost Per Case -All Patients (A)
Cost per Case - Medicare Patients (M)
PAYMENT PER
$5,000
CASE
$4,875
$4,750
$4,625
$4,500
$4,375
$4,250
$4,125
$4,000
$3,875
$3,750
PPS Year 3
PPS Year 4
PPS Year 5
PPS Year 6
$3,753 (A)
$4,188 (A)
$4,543 (A)
$4,729 (A)
$4,014 (M)
$4,348 (M)
$4,587 (M)
$4,961 (M)
The definition of "PPS Years" is included in the SURVEY METHODOLOGY section of this
report. Median values are noted below graph.
Medicare Cost and Payment per Case
Medicare Inpatient Payment per Case (P)
Medicare Inpatient Cost per Case (C)
$4,900
$4,800
$4,700
$4,600
$4,500
$4,400
$4,300
$4,200
$4,100
$4,000
PPS Year 3
PPS Year 4
PPS Year 5
PPS Year 6
$4,135 (P)
$4,394 (P)
$4,393 (P)
$4,510 (P)
$4,014 (C)
$4,348 (C)
$4,587 (C)
$4,961 (C)
The definition of "PPS Years" is included in the SURVEY METHODOLOGY section of this
report. Median values are noted below graph.
Total hospital as well as Medicare cost per case show an increase during
the survey period. This increase reflects the impact of both rising
operating costs and decreasing hospital admissions. The survey respon-
dents expect to experience a 1.5 percent decrease in total admissions and
a 1.4 percent decrease in Medicare admissions between PPS Year 3 and
PPS Year 5.
A number of factors contribute to the rising costs per case. In addition to
general inflation, the shift of many less serious cases to an outpatient
setting leaves the more seriously ill and presumably more costly cases as
inpatients. Although new technology and treatments bring many benefits
to patient care outcomes, they may also result in increased costs per case.
13
Findings
In short, Medicare costs per case are increasing at a faster rate than
Medicare payments per case. This contributes significantly to the de-
clines in margins from serving Medicare patients, discussed earlier in
this report.
The CFOs responding to this survey believe their institutions have
conscientiously managed their costs, and are worried that further reduc-
tions in cost cannot be made without having an adverse impact on quality
of care.
Comments from
Medicare cases are becoming more severe and, therefore, expensive.
HFMA Members:
Also, cost per case is increasing in spite of reduced total cost because total
cases have declined faster
Jerry A. Mashburn, FHFMA, CPA
Mercy Hospital
Miami, FL
***
Patient service expense is increasing very rapidly, especially due to
increased salary expense. Nursing salaries and those of other personnel
are increasing due to staffing shortages.
Hilmon P. Waters
National Orthopedic and Rehabilitation Hospital
Fairfax, VA
***
14
Findings
UNCOMPENSATED
Percent
Annual Change
3-Year Change
CARE AS PERCENT
PPS Year 3
5.2
OF NET PATIENT
REVENUE
PPS Year 4
5.6
7.7% increase
PPS Year 5
5.6
No Change
PPS Year 6
5.7
1.8% increase
9.6% increase
Services to the uninsured and underinsured (generally designated as
"charity care") and the costs of bad debts on patient services are a
financial burden to the nation's hospitals. As overall margins decrease,
hospitals find it difficult to find the resources to provide such services.
Survey respondents indicate they expect a modest increase in the
proportion of uncompensated patient care services. Comments from
members emphasize the financing of these services is an increasingly
difficult burden. HFMA's task force on charity care concluded it is
essential that all payers share equitably in this financial obligation.
Comments from
The bad debt/charity volumes are the most serious financial problems
HFMA Members:
that a healthcare facility must deal with. All other payer sources are
continually reducing healthcare dollar payments, leaving a smaller
financial base each year to draw from to cover an expanding uncompen-
sated care population.
Thomas F. Wells
Baptist Medical Center
Montgomery, AL
***
As an urban inner city hospital, our most immediate concern is the
unreimbursed cost of indigent care patients and Medicaid patients.
John E. Rynard, FHFMA, CPA
Bethany Medical Center
Kansas City, KS
***
Nobody wants to acknowledge that there is a problem in caring for the
medically indigent.
Patrick Rawl, CPA
Queen of Angels Medical Center
Los Angeles, CA
***
Footnote:
Survey results do not evidence a trend to adopt the recommendation of HFMA's Principles
and Practices Board that uncompensated services should be reported as an expense rather
than as a revenue deduction. About 3.5 percent of respondents currently follow this
practice.
15
Findings
CAPITAL COST
Capital Cost as a Percent of Total Cost
AS A PERCENT OF
TOTAL COST
25th Percentile
Median
75th Percentile
12%
10%
8%
6%
4%
2%
0%
PPS Year 3
PPS Year 4
PPS Year 5
PPS Year 6
7.8%
7.9%
8.1%
8.1%
The definition of "PPS Years" is included in the SURVEY METHODOLOGY section of this
report. Median values are noted below graph.
As hospitals make efforts to reduce all possible variable costs, fixed
capital costs (depreciation and interest) grow as a percentage of overall
cost. Survey respondents expect capital, as a percentage of total cost, to
grow from 7.8 to 8.1 percent during the four-year survey period. The
survey data also illustrates the wide variety of circumstances of individ-
ual hospitals. In PPS Year 6, 25 percent of responding hospitals will have
6 percent or less of total cost devoted to capital. Another 25 percent will
have capital costs exceeding 11 percent of total cost.
Similarly, there is wide variation in the components of capital costs. For
the average responding hospital, equipment costs comprise 43 to 44
percent of capital costs in each of the four years surveyed. One-fourth of
responding hospitals, however, indicated equipment costs account for
more than 58 percent of their total capital costs. Another quarter of the
respondents indicated equipment accounts for less than 30 percent of
total capital costs. These trends dramatize the need for an equitable
Medicare capital methodology that recognizes differences among hospi-
tals.
Survey respondents expressed serious concerns that their hospitals will
be unable to finance needed renovations or equipment if their financial
position continues to deteriorate.
Comments from
The continued cutbacks in capital reimbursement are a serious threat to
HFMA Members:
hospital survival. The hospital facility is over 60 years old and many
items will soon need repair or replacement. Cutting back reimbursement
for capital additions or improvement may delay these additions or repairs
and eventually patient care could be affected.
Paul A. Beaudoin
Notre Dame Hospital
Central Falls, RI
16
Findings
Due to the negative bottom line it is going to be increasingly difficult
for Saint Eugene to find the funds to replace equipment and keep pace
with technology.
F.J. Children, Jr.
St. Eugene Community Hospital
Dillon, SC
***
Hospital management is more reluctant to spend capital dollars due to the
present uncertainty and the inability to budget capital cash flows. We
cannot defer these expenditures indefinitely.
Gary G. Guetzko
St. Joseph Mercy Hospital
Mason City, IA
***
Total capital needs [are] continuing to climb dramatically coupled with
Medicare's capital payment reduction. This scenario will make it in-
creasingly difficult for institutions to maintain quality of care in use of
new technologies.
Larry Kidd
Regional Medical Center
Boise, ID
***
We must keep our plants up to date, or health care institutions will follow
the path of the steel industry.
Rudolph T. Klemens
The Uniontown Hospital
Uniontown, PA
***
17
Appendix A
HFMA'S
The "Margin From Serving Medicare Patients" presented in "Measuring
COMMENTS ON
the Financial Health of Hospitals" shows that survey respondents expe-
THE INSPECTOR
rienced significantly lower margins than those reported by the HHS
GENERAL'S
Inspector General (IG). Moreover, our respondents indicate they expect
PROFITABILITY
even lower gains (or losses) in the future. The IG reported average
DATA
"Medicare profits" on inpatient operating services of 9.6 percent in PPS
Year 3. Survey respondents reported total margins from serving Medi-
care patients of 3.2 percent for the same period. (The IG reported average
profits of 14.2 percent in PPS Year 1 and 15.3 percent in PPS Year 2.) The
IG's results appear inconsistent, not only with this survey, but with other
industry data, and appear to overstate actual hospital margins from
providing Medicare services. For this reason, and the factors described
below, we do not believe the IG reports, by themselves, should be used
as a basis for making decisions about Medicare payment rates.
1. The methodology used by the IG inflates the "Medicare profit
percent" by including only a portion of Medicare payments and
expenses. Medicare costs and payments for capital-related, direct
medical education, bad debts, and cost-reimbursed items were ex-
cluded from the IG's calculation. If these items were included, lower
profit margins would have been calculated.
2. The IG's study used Medicare cost reports as a basis to determine
"Medicare profits" or the excess of Medicare payments over costs
incurred in providing Medicare services. However, the costs re-
ported in the Medicare cost report do not fairly describe the total
costs a hospital incurs in providing services to Medicare beneficiar-
ies. Examples of shortcomings in Medicare's definition of the costs
of serving Medicare patients include:
Inadequate formulas for allocating malpractice,
bad debt, and home office costs;
Failure to pay a fair return on invested capital;
Failure to pay a proportionate share of the costs of
serving indigent patients;
Failure to consider higher costs of serving elderly
patients; and
Failure to revise cost reports to include costs
determined to be allowable by federal courts.
One particular example illustrates how the Medicare cost report
methodology can distort the IG's calculations. Medicare cost report
instructions required that non-Medicare maternity services ("labor
room days") be used to dilute the calculation of the average daily cost
of Medicare services. Many hospitals disagreed with this calculation
method and appealed to federal courts for relief. During 1987,
Medicare acceded to federal court decisions in favor of hospitals and
made retroactive restitution for all years prior to PPS to hospitals
19
Appendix A
who had appealed this issue. However, the cost reports for PPS Year
3, which were the basis of the IG's most recent calculations, included
this improper calculation of Medicare costs.
3. The IG report does not project the impact of existing rules and
payment rates on future profitability. Reductions in the PPS update
factors and other changes in Medicare payment methodology, en-
acted in years subsequent to those analyzed in the IG's report, have
already reduced hospital returns. The responses to HFMA's survey
considered the impact of the most current Medicare rules and
payment rates on hospital financial conditions.
In an effort to determine the impact of PPS on hospitals' financial
performance in the years since the IG's report, the Wisconsin
Hospital Association commissioned Ernst & Whinney to study the
impact of PPS on Wisconsin hospitals for the first five years of PPS.
Following the IG's methodology, results for Wisconsin hospitals
were found to parallel the IG's findings for the first three years of
PPS. However, following this same methodology, and applying all
legislative and regulatory changes to the PPS system which are
currently in effect, this study showed that Wisconsin hospitals were
projected, on average, to incur a 5 percent loss on providing services
to Medicare beneficiaries in PPS Year 5. When this study revised the
IG's methodology to include all Medicare costs and payments (per
item 1) to Wisconsin hospitals, the projected average losses were
even greater.
4. The IG's reports of high margins on Medicare are inconsistent with
other industry data. HFMA's Financial Analysis Service, which
includes data compiled from audited financial reports of approxi-
mately 1,400 hospitals, shows overall profits (measured as the
Excess of Revenue Over Expenses divided by Total Net Revenues)
in 1984, 1985 and 1986 of 4.5, 4.4, and 4.2 percent, respectively.
These years encompass PPS Year 1 through 3. Medicare currently
comprises about 38 percent of total net revenue, according to this
HFMA survey. A significant loss on the non-Medicare activities
comprising the remaining 62 percent of net revenue must have been
incurred to result in the high Medicare profit margins reported by the
IG. This result is highly unlikely and thus the IG's reported "profit
margins" appear inconsistent with other data.
20
Appendix B
SURVEY
DOCUMENT
HEALTHCARE
1050 17TH STREET. NW
HFMA
FINANCIAL
SUITE
MANAGEMENT
WASHINGTON DC 20036
ASSOCIATION
TELEPHONE 202/296/2920
RONALD R KOVENER
FHFMA CAE
VICE PRESIDENT
December 5, 1987
Dear Chief Financial Officer:
IMPORTANT — RESPONSE BY JANUARY 22 REQUIRED
You have an opportunity to correct misunderstandings about the
financial condition of the healthcare industry. Last year, HFMA
conducted its first survey of current financial information. The
report from last year's survey, released in March, and HFMA's
Hospital Industry Financial Report: 1982-1986, released in
October, have gone a long way toward refuting governmental
reports of high hospital profits. The information has been recog-
nized by the Prospective Payment Assessment Commission,
members of Congress, the media, and others. In these days of
intense budget pressure, we believe this information has helped
present the true current financial condition of hospitals.
We are anxious to avoid duplicative requests for information and
have determined that no other survey of all hospitals includes
these essential and unique features of this HFMA survey:
1. Information is current and reflects your decisions about how
to respond to fiscal pressures. We do not substitute our as-
sumptions about the future for your action plans;
2. Medicare cost is based on your cost accounting systems
rather than using the Medicare cost report formulas which
understate the cost of serving Medicare beneficiaries for
many providers; and
3. Opportunities are provided for your views to be included in
the report. This personalizes the industry's concerns and
frustrations.
We ask you to cooperate with surveys conducted by others and to
respond promptly to this request. A variety of input is essential
to achieve equitable payment rates by the government and others.
21
Appendix B
December 5, 1987
Page 2
HFMA expresses its sincere appreciation to Ernst & Whinney for its
financial and technical assistance with this survey.
The information you provide in response to this request will be con-
sidered strictly confidential. We will not release data about individ-
ual organizations. Only aggregate data that does not disclose
information about an individual respondent will be released. Please
respond completely, accurately, and promptly to the attached
survey! Thank you for speaking out on behalf of the healthcare
industry.
Sincerely,
R. R. Kovener, FHFMA
Vice President
RRK/mp
CF012-5.LT 33
22
Appendix B
HEALTHCARE FINANCIAL MANAGEMENT ASSOCIATION
SURVEY OF CURRENT HOSPITAL FINANCIAL INFORMATION
Respond by January 22
Mailing label here
Correct inaccuracies on mailing label.
Leave it affixed to form, please.
A
B
C
D
Year Prior
Most Recent
Current
Next
*
To Column B
Closed Year
Fiscal Year
Fiscal Year
Year-end date
1
MEDICARE PAYMENTS
Total for DRGs &
outliers
2 $
$
$
$
Cap, nurse anesth,
med ed passthrough
3 $
$
$
$
Total Medicare
inpatient payments
4 $
$
$
$
Medicare
bad debts
5 $
$
$
$
Other Medicare
payments
6 $
$
$
$
PATIENT REVENUE:
NON-MEDICARE
7 $
$
$
$
PAT SERVICE EXPENSE
Medicare
inpatient
8 $
$
$
$
Other
Medicare
9 $
$
$
$
Non-Medicare
10
$
$
$
$
Total patient
service expense
11 $
$
$
$
OTHER OPER/NONOPER
REVENUE, NET
12
$
$
$
$
EXCESS OF REVENUE
OVER(UNDER) EXPENSE
13
$
$
$
$
OTHER INFORMATION
Amount of charity
and bad debts
14
$
$
$
$
Where shown
15
Components of
passthrough:
Capital
16 $
$
$
$
Nurse anesthetist
17
$
$
$
$
Medical education
18
$
$
$
$
Plant-related
capital expense
19
$
$
$
$
Equipment-related
capital expense
20 $
$
$
$
Medicare inpatient
acute discharges
21
Total inpatient
acute discharges
22
Medicare case-mix
index
23
*Definitions and explanatory notes are attached.
TURN FORM OVER PLEASE
SCFI1.FRM-33a
23
Appendix B
COMPLETE OTHER SIDE OF FORM FIRST
Name of person to contact if there is a question about this survey.
Name
Phone (
)
-
Briefly comment on the trend in at least one of the items of information reported on the other
side of this form. This will help analysts understand the trends.
Also please answer the following questions and explain with specific examples if possible.
a.
Has your credit rating changed or do you expect it to change?
(explain)
b.
Has your ability to service your debt changed or do you expect it to change?
(explain)
C.
Has your ability to obtain new financing changed or do you expect it to change?
(explain)
d. Has there been, or do you expect there to be, a change in your ability to replace assets or
acquire new technology?
(explain)
With your permission, we may quote a portion of your comment with attribution.
Permission to quote is granted
RETURN THIS FORM BY JANUARY 22 TO:
Healthcare Financial Management Association
1050 17th Street, N.W., Suite 510
Washington, D.C. 20036
SCFI2.FRM 33a
24
Appendix B
Healthcare Financial Management Association
Survey of Current Hospital Financial Information
Definitions and Explanatory notes
Hospital name - If the hospital designated by the address label has more than one
Medicare provider number, the information on this survey should relate to the acute care
services' provider. Payments/revenue and expenses related to affiliated providers that do
not provide acute care services and for exempt hospitals and excluded units should be
included on lines 6, 10, and 12.
Amounts in Column A and B should be actual annual amounts and should be the same as
(or can be reconciled to) the Medicare worksheet locations specified. For the current and
next fiscal year (Columns C and D), amounts should be for a full year and come from
management reports and budgets. If formal estimates or budgets are not available, a
knowledgeable estimate by the chief financial officer is acceptable. Medicare worksheet
locations are specified to help define the information requested.
Projections for the current year and next year should consider Federal budget pressure,
pressures from other payers, and the impact of competition. Keep in mind that Medicare is
scheduled to pay less than actual capital cost. Medicare rates are expected to increase
much less than the increase in the market basket. Proposals to sharply curtail medical
education payments are expected.
The trend of financial information over the 4-year survey period is very important. The
relationship of payments/revenue, expense, and volume data is also very important.
Payments/revenue should be net of all deductions. These amounts do not relate to charges
but are the amounts someone has an obligation to pay. Significant relationships are
described.
1
Show hospital fiscal year-end date. The columns should be chronologic with the oldest
year in Column A and the most future year in Column D.
2
Amount you received or expect to receive in DRG payments, including outliers. This
should be the amount shown on Medicare Cost Report, Form HCFA 2552-85,
Worksheet E, Part A, lines 1A plus 1Bb.
3
Amount you received or expect to receive in inpatient capital payments, nonphysician
anesthetist payments, and medical education payments. This should be the amount
shown on Medicare Cost Report, Form HCFA 2552-85, Worksheet D, Part I, Columns
1, 2, and 3, line 101 plus Worksheet D, Part II, Column 8, total of lines 37-59.
4
Total of lines 2 and 3. This amount relates to expenses shown on line 8 and volume
information shown on line 21.
5
Amount you received or expect in Medicare payments for deductible and coinsurance
bad debts. This should be the amount shown on Medicare Cost Report, Form HCFA
2552-85, Worksheet E, Part A, line 13.
6
Medicare payment for outpatient services, ambulatory surgery, excluded units, and any
other payments not included on lines 2, 3, and 5. The total of lines 4, 5, and 6 should
equal the amounts shown on Medicare Cost Report, Form HCFA 2552-85, Worksheet
E, Parts A and B, line 9 plus revenue from Medicare cost reports for excluded units on
Worksheet E-3, Parts I and II, lines 4 and 8.
7
Total payments/revenue, net of deductions (see introduction) from non-Medicare
services, including outpatient services. This amount relates to expenses shown on line
10. Total patient service payments/revenue on lines 4-7 relates to expenses shown on
line 11 and volume information shown on line 22.
8-11 Use the best available cost accounting system* to identify total operating expenses that
relate to Medicare and non-Medicare payments/revenue. Capital-related expense,
education costs, and home office cost should be included. Expense on line 8 should
relate to revenue on line 4 and volume information on line 21, expense on line 9 should
relate to revenue on line 6, and expense on line 10 should relate to revenue on line 7.
25
Appendix B
Definitions and explanatory notes/page 2
If the amounts on lines 8, 9, and 10 cannot be determined reasonably accurately,
leave these lines blank. Line is the total of lines 8, 9, and 10. Line 11 relates to
revenue shown on lines 4-7 and volume information shown on line 22.
*No single line item on the Medicare Cost Report identified Medicare inpatient service
expense. Even if it did, many of Medicare's cost identification rules are subject to
dispute - such as malpractice insurance. Therefore, we are asking you to tell us the
best data you have available. Your response will be compared to the calculation which
is made by the Health and Human Services Inspector General (IG) as one measure of
the reliability of the IG's report. Therefore, your estimate is very important, but should
only be provided if you have a reasonably reliable system for determining the
amounts.
12 Income, net of expenses, from public eating facilities, parking garages, investments,
and other nonpatient service activities.
13 The total of lines 4-7 plus 12, less line 11 should be the "bottom line" amount on the
organization's general purpose financial report.
14 This amount is the amount of charity and bad debts included in or netted in the survey
amounts.
15 Indicate whether charity and bad debts are shown in your financial reports as a
deduction from revenue (enter "deduction") or an expense (enter "expense"). This is
the place to show whether you have changed or plan to change the way this item is
reported.
Note The total of lines 16-18 relates to, but is not equal to line 3. Line 3 relates to
inpatient only. Lines 16-18 are the total passthrough amounts.
16 Amount of passthrough for capital-related cost. This should be the amount shown on
Medicare Cost Report, Form HCFA 2552-85, Worksheet D, Part I, Column I, line 101
plus Worksheet D, Part II, Column 1, line 101.
17 Amount of passthrough for nonphysician anesthetist cost. This should be the amount
shown on Medicare Cost Report, Form HCFA 2552-85, Worksheet D, Part I, Column
2, line 101 plus Worksheet D, Part II, Column 2, line 101.
18 Amount of passthrough for medical education cost. This should be the amount shown
on Medicare Cost Report, Form HCFA 2552-85, Worksheet D, Part I, Column 3, line
101 plus Worksheet D, Part II, Column 3, line 101.
19 This includes depreciation, interest and other capital-related expense as as shown on
Medicare Cost Report, Form HCFA 2552-85, Worksheet B, Column 1, line 1. This
amount is also part of expenses included on lines 8-11.
20 This includes depreciation, interest and other capital-related expense as shown on
Medicare Cost Report, Form HCFA 2552-85, Worksheet B, Column 2, line 2. This
amount is also part of expenses included on lines 8-11.
21 This is the number shown on Medicare Cost Report, Form HCFA 2552-85, Worksheet
S-3, Column 13, line 8. It should relate to payments/revenue shown on line 4 and
expense shown on line 8.
22 This is the total of all acute care discharges which is probably shown on Medicare
Cost Report, Form HCFA 2552-85, Worksheet S-3, Column 16, line 8. It should relate
to payments/revenue shown on lines 4-7 and expenses shown on line 11.
23 Each hospital's case-mix index is published in the Federal Register. The FY'86 index
was published September 1, 1987.
We hope the above explanations are clear. If you have a question about the information
requested, call HFMA's Washington office at 202-296-2920.
26
Appendix C
COMPILED
This appendix shows the formulas used to compute the survey results
SURVEY RESULTS
reported and discussed throughout "Managing the Financial Health of
Hospitals." The survey data elements used in the computation of each
item are referenced to the line numbers (L) on the survey document
(Appendix B). The compiled results of each item are shown. The median
is defined as the midpoint of all results arranged in ascending order.
Overall Margin:
Excess of Revenue Over Expenses (L13)
Net Revenue (L4 + L5 + L6 + L7)
Median Values
PPS Year 3
6.0%
PPS Year 4
5.4%
PPS Year 5
4.0%
PPS Year 6
3.3%
Margin from Providing Patient Care Services:
Net Revenue minus Total Patient Service Expenses
(L4 + L5 + L6 + L7 - L11)
Net Revenue (L4 + L5 + L6 + L7)
Median Values
PPS Year 3
1.6%
PPS Year 4
.8%
PPS Year 5
(.3)%
PPS Year 6
(.9)%
27
Appendix C
Margin from Serving Medicare Patients:
Total Medicare Payments minus Medicare Patient Service Expense
(L4 + L5 + L6) - (L8 + L9)
Total Medicare Payments (L4 + L5 + L6)
Median Values
PPS Year 3
3.2%
PPS Year 4
(.6)%
PPS Year 5
(5.5)%
PPS Year 6
(9.0)%
Medicare's Share of Net Patient Revenue:
Medicare Payments (L4 + L5 + L6)
Net Patient Revenue (L4 + L5 + L6 + L7)
Median Values
PPS Year 3
40.8%
PPS Year 4
39.5%
PPS Year 5
38.1%
PPS Year 6
37.4%
Medicare's Share of Patient Expense:
Medicare Patient Service Expense (L8 + L9)
Total Patient Service Expense (L11)
Median Values
PPS Year 3
41.0%
PPS Year 4
40.8%
PPS Year 5
41.6%
PPS Year 6
42.1%
28
Appendix C
Census Trends - - All Patients:
Total Inpatient Acute Discharges - PPS 5 (L22, Col. C)
Total Inpatient Acute Discharges - PPS 3 (L22, Col. A)
Median Response
Change from PPS Year 3
to PPS Year 5
1.5% decrease
Census Trends Medicare Patients:
Total Medicare Inpatient Acute Discharges PPS 5 (L21, Col. C)
Total Medicare Inpatient Acute Discharges - PPS 3 (L21, Col. A)
Median Response
Change from PPS Year 3
to PPS Year 5
1.4% decrease
Total Cost per Case:
Total Payment Service Expenses (L11)
Total Inpatient Acute Discharges (L22)
Median Values
PPS Year 3
$3,753
PPS Year 4
$4,188
PPS Year 5
$4,543
PPS Year 6
$4,729
Medicare Cost per Case:
Medicare Inpatient Expense (L8)
Medicare Inpatient Acute Discharges (L21)
Median Values
PPS Year 3
$4,014
PPS Year 4
$4,348
PPS Year 5
$4,587
PPS Year 6
$4,961
29
Appendix C
Medicare Inpatient Payments per Case:
Total Medicare Inpatient Payments (L4)
Medicare Inpatient Acute Discharges (L21)
Median Values
PPS Year 3
$4,135
PPS Year 4
$4,394
PPS Year 5
$4,393
PPS Year 6
$4,510
Percent Reporting a Positive Margin - Overall:
Of those responses to the Overall Margin (described above), percentage
with a result greater than zero.
Results
PPS Year 3
89.9%
PPS Year 4
86.4%
PPS Year 5
85.5%
PPS Year 6
82.5%
Percent Reporting a Positive Margin -
from Patient Care Services:
Of those responses to the Margin from Providing Patient Care Services
(described above), percentage with a result greater than zero.
Results
PPS Year 3
65.7%
PPS Year 4
57.8%
PPS Year 5
49.3%
PPS Year 6
42.5%
30
Appendix C
Percent Reporting a Positive Margin in All Surveyed Years:
Results
Percentage of responses
with a positive Margin
from Providing Patient
Care Services in each
survey year
33.7%
Percentage of responses
with a positive Overall
Margin in each survey
year
72.1%
Percentage of responses
with a lower Margin from
Providing Patient Care
Services in PPS Year 6
compared to PPS Year 3
73.1%
Percentage of responses
with a lower Overall
Margin in PPS Year 6
compared to PPS Year 3
73.3%
Uncompensated Care as a Percent of Net Patient Revenue:
Charity and Bad Debt Expense (L14)
Net Patient Revenue (L4 + L5 + L6 +L7)
Median Values
PPS Year 3
5.2%
PPS Year 4
5.6%
PPS Year 5
5.6%
PPS Year 6
5.7%
31
Appendix C
Percent Reporting Bad Debts as an Expense:
Percentage of total respondents completing line 15 who indicated that
bad debts were included with patient service expenses, rather than netted
against patient service revenues.
Results
PPS Year 3
3.5%
PPS Year 4
3.6%
PPS Year 5
3.5%
PPS Year 6
3.2%
Components of Medicare Payments:
DRG and Outlier Payments (L2) or Pass-through Payments (L3)
or Bad Debts (L5) or Other Medicare Payments (L6)
Total Medicare Payments (L2 + L3 + L5 + L6)
Mean Result - Percent of Total
DRG &
Outliers
Pass-thrus
Bad Debt
Other
PPS Year 3
76.4%
11.9%
.4%
11.3%
PPS Year 4
74.7%
12.2%
.5%
12.6%
PPS Year 5
73.9%
11.9%
.5%
13.6%
PPS Year 6
73.4%
11.7%
.5%
14.4%
Components of Pass-through Payments:
Capital (L16) or Nurse Anesthetist (L17) or Direct Medical
Education (L18) Pass-through Amounts
Total Pass-through Payments (L16 + L17 + L18)
Mean Result - Percent of Total
Capital
Nurse Anesth.
Med. Ed.
PPS Year 3
80.8%
4.8%
14.4%
PPS Year 4
81.0%
5.0%
14.0%
PPS Year 5
81.5%
5.0%
13.5%
PPS Year 6
81.1%
5.2%
13.7%
32
Appendix C
Capital Cost as a Percent of Total Cost:
Plant-related Capital Expense (L19) plus Equipment -
related Capital Expense (L20)
Total Patient Service Expense (L11)
Median Values
PPS Year 3
7.8%
PPS Year 4
7.9%
PPS Year 5
8.1%
PPS Year 6
8.1%
Plant-related Capital Costs as a Percent of Total Capital Costs:
Plant-related Capital Expense (L19)
Total Capital Expense (L19 + L20)
Median Values
PPS Year 3
57.0%
PPS Year 4
56.1%
PPS Year 5
56.7%
PPS Year 6
55.6%
33
Appendix D
ADDITIONAL Overall Margin/Margin from Providing Patient Care Services:
COMMENTS FROM
HFMA MEMBERS:
The trend in our facility is toward longer LOS, more cost outliers, fewer
"other" revenue sources, and increased nursing shortages which require
a reduction in services, or an increase in salary expense for overtime,
extra pay, bonuses, and incentives.
Ronald E. Tatum
Community Memorial Hospital
South Hill, VA
***
Cost reduction efforts were successful in fiscal years 1986 and 1987, and
expansion into new areas of services proved profitable. However, in
fiscal 1988 we are experiencing an acute shortage of nurses and are
having to implement salary incentive plans to attract and keep nurses. We
are also using many more registry nurses than in the past. We expect this
trend to continue into FY 1988.
Joan G. Wilson, CPA
St. Mary Medical Center
Long Beach, CA
***
The cost of new technological drugs, [e.g.,] non-ionic contrast dyes,
T.P.A. and others, ever-increasing amounts of charity provided for
indigent and AIDS patients will virtually reduce our bottom line to break
even, if there is no relief from the government.
Russell A. Arent
Memorial Hospital of Sarasota
Sarasota, FL
***
Payment levels which fail to sustain operating margins will result in
increased lender scrutiny and financial costs. This concern is magnified
by the inability to recoup capital outlays in a manner consistent with that
available to most other industries.
Ronald C. Lobb
Holy Cross Hospital
Detroit, MI
***
A very alarming situation.
Duane W. Francis
Mid-Columbia Medical Center
The Dalles, OR
35
Appendix D
More patients are being treated on an ambulatory basis, thus "sicker"
patients are being admitted. This trend will continue and will probably
mean greater losses for the hospital as rates and DRG weights remain
unchanged or decrease.
Carol Renninger
Canton-Potsdam Hospital
Potsdam, NY
***
Margin from Serving Medicare Patients:
Costs continue to increase due to the labor intensive nature of the industry
as well as ever increasing expenses for insurance, blood processing, and
technologies which increase at a double-digit pace despite continued cuts
in payments from Medicare and Medicaid.
Richard I. Bennett, CPA
Presbyterian Medical Center
Philadelphia, PA
***
The Medicare length of stay has increased adding approximately $1
million dollars of additional inpatient cost to the hospital. Of course
additional reimbursement from Medicare for this is zero.
William Stolzfus, FHFMA
Evangelical Community Hospital
Lewisburg, PA
***
On Medicare patients, the level of ancillary services needed, due to the
severity of illness, does not match the increased payment level on
assigned DRGs.
Soon W. Lee, FHFMA, CPA
The Bryn Mawr Hospital
Bryn Mawr, PA
***
I wish I could find one positive trend in our figures, but I can't. We will
continue to sacrifice as Washington tries to manage spending reductions.
Randall C. Fay
Pershing Memorial Hospital
Brookfield, MO
***
36
Appendix D
Medicare is not reimbursing fairly for inpatient services. Reimburse-
ment is being manipulated on the individual DRG level and through
budgetary adjustments.
Errol A. Mitchell
Normal Regional Hospital
Normal, OK
***
Fortunately, Medicare is only 22% of our business.
Phillip A. Caron, FHFMA, CMPA
Harris Methodist HEB
Bedford, TX
***
I am tired of hospitals having to pay the price for the government refusing
to pay for the services which it promises to constituents. Either funds
should be appropriated to cover the cost or reduce benefits and at least let
hospitals claim the cost of service as charity care.
Joseph D. Nemeth, CPA
Mercy Hospital of Janesville
Janesville, WI
***
Medicare's Share of Revenue and Expense:
Long term, one simply cannot be paid less than full financial require-
ments and expect to maintain, let alone expand, to meet the requirements
of changing demographics, case mix, and technology.
Robert L. Newton, FHFMA, CMPA
Moses H. Cone Memorial Hospital
Greensboro, NC
***
Our hospital's [consumer] is quickly becoming an older, sicker patient.
Dennis H. Allen, FHFMA, CMPA
Mayo Regional Hospital
Dover-Foxcroft, ME
***
37
Appendix D
[Medicare] will continue to require more coding, billing, and other
information including uniform reporting which will increase our admin-
istrative expense and will not reimburse us for it.
Virgil D. Guthrie
Community Hospital
Mccook, NE
***
FY 1987 expenses were low due to labor cutbacks and lack of pension
funding. However, FY 1988 & 1989 will include pension expense and
abnormal increase in malpractice and other operating expenses.
Andrew Mazon
Roane General Hospital
Spencer, WV
***
Aging population, increase of technology (capital costs), Medicare
paying less and less of its share, all the money going to the urban facilities
(unjustly and unfairly).
James K. Long, CPA
Community Memorial Hospital
Hettinger, ND
***
New ASC [Ambulatory Surgery Center] rates will reduce Part B reim-
bursement by about 6% in 1988.
John F. Lowe
Olympic Memorial Hospital
Port Angeles, WA
***
Many Medicare patient surgery cases are going to the outpatient cate-
gory.
Melvin D. Robinson, CPA
Saint Mary Hospital
Manhattan, KS
***
38
Appendix D
Uncompensated Care as Percent of Net Revenues:
We expect a significant increase of write-offs due to:
(1)
An increase in the number of people without any health
insurance as a result of substantial increases in private
health insurance premiums
(2)
Cuts in the Medicaid program will increase the number of
patients who are uninsured
(3)
Poor outlook for the economy
(4)
AIDS
Robert L. Congrove
Stormont Vail Hospital
Topeka, KS
***
Even more alarming is the shift toward charity and bad debts.
James R. McKinney
Mercy Medical Center
Durango, CO
***
Heavy emphasis by our hospital to contain uncompensated care levels.
James E. Onorato
Newport Hospital
Newport, RI
***
Outpatient bad debts have risen as volume has become directed to this
area, especially surgical volume.
Brian G. Baily
Franklin Square Hospital Center
Baltimore, MD
***
Capital Cost as a Percent of Total Cost:
Medicare sequestration will "double dip" on the capital sequestration
imposed by Congress.
Carroll F. Craft, CPA
St. John Medical Center
Tulsa, OK
***
39
Appendix D
At issue is our continued ability to provide for capital needs while facing
increasing demands for salaries for professional staff, reduced third-
party payments, and increasing charity care.
Christopher F. Weinheimer
Medical Center Hospital of Vermont
Burlington, VT
***
We have been depleting acquisition and expansion funds for operational
needs.
Andrew Mazon
Roane General Hospital
Spencer, WV
***
Due to the proposed Medicare costs in the area of capital pass-thru, I feel
that the hospital will probably cut back in the area of plant equipment
purchases
Pat Boyd
Georgia Baptist Medical Center
Atlanta, Georgia
***
The Medicare program is cost shifting to non-Medicare patients its share
of new and old asset cost.
Carroll F. Craft, CPA
St. John Medical Center
Tulsa, OK
***
I expect an explosion of new technology, especially in the area of cardiac
care, imaging, and possibly therapeutic drugs. Furthermore, this technol-
ogy will evolve requiring cash reserves (if any) and debt capacity may
not meet these requirements.
Vaughn C. Gower, FHFMA
Lehigh Valley Hospital Center
Allentown, PA
***
40
Appendix D
Lack of proper reimbursement by Medicare for capital makes many new
asset purchases uneconomic.
Anne Martindale, CPA
Northern California Health Center
San Francisco, CA
***
We expect large increases in capital expenditures resulting from the
replacement of high tech equipment having a shorter useful life.
Thomas A. Elliott, CPA
St. Vincent Health Center
Erie, PA
***
ADDITIONAL
Hospital Cash Flow:
COMMENTS ON KEY
INDICATORS OF
Cash flow is one of the most serious issues facing our hospital. The loss
FINANCIAL
of PIP and settlement delays may begin to effect our ability to service our
debt.
Paul A. Beaudoin
Notre Dame Hospital
Central Falls, RI
***
We have moved payables back to near 60 days and as of December 31,
it looks as if there may be further delays due to cash flow shortages.
Andrew Mazon
Roane General Hospital
Spencer, WV
***
Pressures for PRO, malpractice suits, etc. have caused an increase in
utilization in the ancillary departments. As a result, contractual allow-
ances and bad debts have increased significantly, causing a drain on cash
flow.
Nick D. Elkins, CPA
Carroll General Hospital
Berryville, AR
***
41
Appendix D
Due to our decreased cash flow, we have been forced to slow down
payments to our creditors.
F.J. Children, Jr.
St. Eugene Community Hospital
Dillon, SC
***
[The hospital] has had to acquire a line of credit in order to pay monthly
vendor invoices.
Pat Boyd
Georgia Baptist Medical Center
Atlanta, GA
***
The hospital suffers from a cash flow shortage.
Thomas E. Poccia
United Hospital
Port Chester, NY
***
Hospital Credit Ratings:
Rating reduced by Standard & Poors from A+ to A following a year in
which a small bottom line was earned.
Christopher F. Weinheimer
Medical Center Hospital of Vermont
Burlington, VT
***
We've been told by underwriters that if we wanted to refinance our
existing debt, the new debt would likely receive a BBB+ rating instead
of an A- rating due to less net income and declining admissions.
Craig W. Sheagren, CPA
McDonough Dist. Hospital
Macomb, IL
***
42
Appendix D
[Credit rating] just received was definitely impacted by the decline in
admissions and profitability directly related to Medicare changes.
Richard M. Reynolds, FHFMA
Midmichigan Healthcare Systems Inc.
Midland, MI
***
If we had [to have a credit] rating we would have no ability to borrow.
Affiliate is keeping us operating.
Charles L. Schippers
Seaside General Hospital
Seaside, OR
***
We are utilizing the credit rating of our corporate owners.
James E. Thoen, CPA
St. Joseph's Hospital of Chewelah
Chewelah, WA
***
The rating agencies are becoming more cautious and restrictive in
evaluating the credit risk of healthcare institutions.
Thomas F. Wells
Baptist Medical Center
Montgomery, AL
***
The Ability to Service Debt or Obtain New Financing:
Recently, the hospital leased a new telephone system. The leasing
company approved it, but only after a more in-depth study of our
financial situation.
Gordon W. Salm, CPA
Central Community Hospital
Clifton, IL
***
43
Appendix D
We were required to secure a letter of credit prior to borrowing from a
pooled bond fund.
Daniel C. Confalone
Allentown Osteopathic Medical Center
Allentown, PA
***
Shrinking bottom lines and the questions of how much debt financing can
be adequately handled may place some new technology at risk.
Michael Vaci
Northwestern Memorial Hospital
Chicago, IL
***
Capital pass-thru payments continue to be reduced. This impacts our
ability to repay debt which was secured under the premise that reim-
bursement for capital costs would be based on costs.
Timothy J. Pollard
St. Joseph's Medical Center
Brainard, MN
***
If Medicare reimbursement continues to be arbitrarily reduced, then it
will be very difficult for the hospital to make meaningful financial
forecasts of their ability to repay bondholders.
Gene Roberts, CPA
Reid Memorial Hospital
Richmond, IN
***
The future plans of the Congress to balance the budget on the back of
hospitals re: capital pass-through reductions and DRG rate reductions,
will make it more difficult [to service our debt].
Phillip D. Johnson
Little Co. of Mary Hospital
Evergreen Park, IL
***
44
Appendix D
We are very concerned that the major reductions in pass-thru capital
reimbursement will have long-term detrimental effects on the hospital's
ability to meet its obligations.
Mark J. Blass, FHFMA
Melrose-Wakefield Hospital
Melrose, MA
***
The ability to service debt has become increasingly more difficult.
J. Stevens Eavenson, CPA
Holmes Regional Medical Center
Melbourne, FL
***
Decreased operating margins raises the cost of borrowings.
Emil C. Janko, FHFMA
Holzer Medical Center
Gallipolis, OH
***
I expect our ability to obtain financing to change due to our financial
indicators. Although we should be able to obtain financing, it will
undoubtedly be at a higher cost.
William H. Wojcik
Memorial Hospital of Easton
Easton, MD
***
Higher rate required due to the uncertainties.
George J. Brisson, FHFMA
Hubbard Regional Hospital
Webster, MA
***
Our ability to finance the current and expanding needs of our hospital
requires us to pursue alternative financial methods (i.e., leased equip-
ment as opposed to purchased equipment).
Darrell C. Shonkwiler
South Florida Baptist Hospital
Plant City, Fl
***
45
Appendix D
Since we have been operating at a loss, [financing] sources have eroded
drastically.
Mitchell T. Thomas, FHFMA, CPA
Hollywood Presby Medical Center
Los Angeles, CA
***
We have had some difficulty in obtaining new financing due to decreased
cash flow, and unstable bottom lines.
Edward D. Luke
Jesse Holman Jones Hospital
Springfield, TN
***
We would like to refinance, but loss prohibits it.
Craig M. Rosi
Ballard Community Hospital
Seattle, WA
***
With insufficient funds on hand and the inability to borrow, we are simply
limping along and applying Band-Aids along the way.
Stanley J. Maksimowicz
Reed City Hospital
Reed City, MI
***
Hospital anticipates difficulty in financing new construction and renova-
tion projects previously approved.
James R. Dykeman
St. Joseph's Hospital
Nashua, NH
***
If this hospital were not part of a larger corporation it would not obtain
credit.
Ronald L. Hulscher
St. Joseph Hospital
Aberdeen, WA
***
46
HEALTHCARE
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