Cash management in health care systems

Cash is one of the most precious assets held by health systems. This article presents results of discussions on cash management and investment policies at a dozen major not-for-profit health systems. Health system data indicate that cash holdings have increased dramatically since 1993, mostly due to investment earnings. Discussions with chief financial officers of these health systems reveal that cash holdings are significant, that decisions about cash balances are strategic, and that most systems aim to increase cash balances to levels that permit access to capital markets on more favorable terms.     

Does Governance Matter? Board Configuration and Performance in Not-for-Profit Hospitals

As performance accountabilities, external oversight, and market competition among not-for-profit (NFP) hospitals have grown, governing boards have been given a more central leadership role. This article examines these boards' effectiveness, particularly how their configuration influenced a range of performance outcomes in NFP community hospitals. Results indicate that hospitals governed by boards using a corporate governance model, versus hospitals governed by philanthropic-style boards, were likely to be more efficient and have more admissions and a larger share of the local market. Occupancy and cash flow were generally unrelated to hospitals' governing board configuration. However, effects of governance configuration were more pronounced in freestanding and public NFP hospitals compared with system-affiliated and private NFP hospitals, respectively.     

Competition presents opportunity for not-for-profit systems

Though they face similar challenges in adapting to a competitive environment, investor-owned and not-for-profit (NFP) health care systems react differently. The investor-owned strategy reflects a philosophy that regards patient care and economics with equal concern, while NFPs' management decisions are rooted in a tradition of community service. For-profit chains are perceived as more efficient than NFP chains because they respond to marketplace demand. Studies, however, show that while operating expenses are about the same, for-profits charge more per admission. On the other hand, NFP systems, by allowing affiliates to participate in service expansion decisions, are able to maintain lean corporate staffs and thereby minimize administrative and fiscal costs. The NFP organizational structure enforces economic discipline in a way that for-profit chains--where corporate staff alone make service decisions--cannot achieve. The major difference, of course, between for-profits and NFPs is in philosophy, not in management techniques. NFPs should communicate to the public their commitment to serve all patients and remind consumers that their charges are comparable with for-profits'. Developing a capitation plan would provide NFP systems another opportunity to emphasize their service orientation. An effective capitation plan is a means to influence the marketplace toward chain affiliates, since subscribers under the terms of the plan use contract hospitals and physicians. In addition to sufficient capital, such a venture requires expert management. NFP systems will have to offer incentives such as executive stock ownership plans to attract and keep top talent. In the future, management and governing boards must base strategic plans on the public's needs, attitudes, and economic status, not on myths about the competition.     

Networks and the Fiscal Performance of Rural Hospitals in Oklahoma: Are They Associated?

This paper uses regression analysis to explore the relation of network membership to the financial performance of rural hospitals in Oklahoma during fiscal year 1995. After adjusting for the scope of service, as measured by the number of facilities or services offered by the hospital, indicators of fiscal status are (1) the cash receipts derived from net patient revenue; (2) the cash disbursements related to operating costs, net of interest and depreciation expense, labor costs and nonlabor costs; and (3) net cash flow, defined as the difference between cash receipts and disbursements. Controlling for the effects of the hospital's structural attributes, operating characteristics and market conditions, the results indicate that members of a network reported lower net operating costs, labor costs and nonlabor expenses per service than nonmembers. Hence, the analysis seems to suggest that the membership of rural hospitals in a network is associated with lower cash disbursements and an improved net cash flow, outcomes that may preserve their fiscal viability and the access of the population at risk to service.     

No hospital immune from business office thievery

Hospital finance executives who think it's impossible for employees to steal cash from a well-run business office should think again. Internal auditors say that even with the most secure checks and balances, some hospitals still could fall victim to crafty employees who find ways to beat the system and draw cash or checks from the facility for their personal use.     

A Market, Operation, and Mission Assessment of Large Rural For-Profit Hospitals With Positive Cash Flow

CONTEXT: National benchmark data for 2002 indicate that large rural for-profit hospitals have a median cash flow margin of 19.5% compared to 9.2% for their nonprofit counterparts. PURPOSE: This study aims to gain insight regarding the driving factors behind the high cash flow performance of large rural for-profit hospitals. METHODS: Using 3 annual periods of Centers for Medicare and Medicaid cost report data with the last fiscal year ending between September 30, 2002, and August 30, 2003, the study found a cash flow margin of 21.5% for the large rural for-profit hospitals. All these facilities were owned by hospital management companies. To assess their underlying market, operational, and mission factors, these hospitals were compared to a similar comparison group of large rural nonprofit hospitals that are system owned and have positive cash flows. FINDINGS: Using logistic regression analysis, the study found lower operating expense per adjusted discharge and salary expense as a percentage of total operating expense among large rural for-profit, system-owned hospitals with positive cash flows relative to nonprofits with similar traits. CONCLUSION: Overall, the findings of this study reflect how these for-profit hospitals, which are owned by hospital management companies, focus on controlling their labor costs as well as operating costs per discharge in order to achieve a greater positive cash flow position.     

Efficiency, new equity capital enable systems to compete

Because of limited cash, sponsors of some community and religious hospitals have sought to sell or lease their institutions to a not-for-profit (NFP) system or to a for-profit system. A number of national alliances address the capital formation problem of NFP institutions. Until now they have been almost exclusively concerned with acquiring less costly debt. Without new equity capital, market influence is difficult to obtain. Even well-managed voluntary systems face a serious threat from well-capitalized investor-owned systems. Increased competition among hospitals and physicians will force future advantages to those who have capital. It will also restrict funding of certain programs and services by voluntary enterprises. In anticipation of this, various forms of partnerships have developed with investor-owned systems. To regain the initiative as the premier sponsors of health care, religious and other voluntary systems must go beyond merely competing in their markets to acquiring weaker institutions. They also must revitalize private giving and excel in efficiency to offset threats from ambulatory, day-care operations and from high-technology hospitals. Structural changes in the industry can be predicted, including the following: The trend toward integration for production, financing, and marketing will continue. Public market equity capital will be increasingly used to finance medical practice. Hospitals that sell their equity values will establish service foundations. National alliances will continue, but strictly local systems will maintain operation. Investor-owned systems will move increasingly into high-technology tertiary care.     

美国非营利性医疗机构资金投入和退出的研究

我国当前对营利性和非营利性医疗机构的政策规定尚有许多有待完善之处。以美国为例,在介绍其非营利性医疗机构发展状况的基础上,重点研究了非营利性医疗机构在资金的投入和退出方面的规定和做法,对我国下一步非营利性医疗机构的发展政策提出了建议。     

Public employment and political pressure: the case of French hospitals

This paper uses an unusual administrative dataset covering the universe of French hospitals to consider hospital employment: this is consistently higher in public hospitals than in not-for-profit (NFP) or private hospitals, even controlling for a number of measures of hospital output. NFP hospitals serve as a benchmark, being very similar to public hospitals, but without political influence on their hiring. Public-hospital employment is positively correlated with the local unemployment rate, whereas no such relationship is found in other hospitals. This is consistent with public hospitals providing employment in depressed areas. We appeal to the Political Science literature and calculate local political allegiance, using expert evaluations on various parties’ political positions and local election results. The relationship between public-hospital employment and local unemployment is stronger the more left-wing the local municipality. This latter result holds especially when electoral races are tight, consistent with a concern for re-election.     

What does free cash flow tell us about hospital efficiency? A stochastic frontier analysis of cost inefficiency in California hospitals

Hospitals are facing substantial financial and economic pressure as a result of health plan payment restructuring, unfunded mandates, and other factors. This article analyzes the relationship between free cash flow (FCF) and hospital efficiency given these financial challenges. Data from 270 California hospitals were used to estimate a stochastic frontier model of hospital cost efficiency that explicitly takes into account outpatient heterogeneity. The findings indicate that hospital FCF is significantly linked to firm efficiency/inefficiency. The results indicate that higher positive cash flows are related to lower cost inefficiency, but higher negative cash flows are related to higher cost inefficiency. Thus, cash flows not only impact the ability of hospitals to meet current liabilities, they are also related to the ability of the hospitals to use resources effectively.     

The financial performance of selected investor-owned and not-for-profit system hospitals before and after Medicare prospective payment.

This article analyzes determinants of cost and profitability, including the influence of Medicare prospective payment (PPS), between 1983 and 1985 for nearly 300 hospitals belonging to investor-owned (IO) and not-for-profit (NFP) systems. Using approaches that assure comparability of financial data, and including case mix, quality, competition, and regulation measures, the findings indicate that (1) in both years, competitive environment, case mix, age of facility, and scope of diversified services were important determinants of average cost, while a process measure of quality was insignificant and the independent effect of ownership type was insignificant for cost; (2) effects of HMO competition and hospital strategy were stronger in 1985 than in 1983; (3) operating margins for all types of hospitals showed increases, with a somewhat greater improvement for NFP system members; and (4) significantly greater declines in volume of care occurred for IO system members. Implications for future research are discussed.     

The use of cash flow to analyze financial distress in California hospitals

Previous studies of financial distress have utilized operating margins to measure this outcome. This study examines financial distress from the standpoint of cash flow, which is defined as net income plus depreciation adjusted for accruals. Defining financially distressed hospitals as ones with negative cash flows, the findings of the study show that these hospitals possess a lower occupancy rate, exhibit a slower collection of receivables, and have higher amounts of debt. However, the findings show that it is harder to predict financial distress defined in terms of cash flow than in profitability.     

'Profit' variability in for-profit and not-for-profit hospitals

This paper proposes two tests of the hypothesis that not-for-profit hospitals (NFPs) behave differently than for-profit hospitals. The profit variability test states that the profits of an NFP will be less variable over time than profits of a for-profit hospital if the NFP maximizes utility subject to a profit constraint. The second test examines whether NFP profits respond less to change in exogenous factors, such as Medicare reimbursement rates, than profits of for-profit hospitals. Both tests, performed on panel data from 1983 to 1988, support the hypothesis that NFPs behave differently than for-profit hospitals.     

A review of state legislation and a state legislator survey related to not-for-profit hospital tax exemption and health care for the indigent

This study examines recent states' legislation related to the not-for-profit (NFP) hospital tax exemption and care to the uninsured and underinsured, and compares these legislative provisions to a past survey of state legislators' opinions about appropriate criteria for the NFP hospital tax exemption. To be tax-exempt, hospitals need to provide services that benefit the community. The problem lies in the ambiguous nature of the community benefits standard and the type of information required for compliance with the standard. As a consequence, NFP hospital tax-exemption challenges have occurred across the nation, resulting most recently in a federal class action lawsuit against NFP hospitals across several states. Empirical research has examined whether the NFP hospital tax exemption is justified based on the amount of community benefits and charitable care provided, without examining the type of policy alternatives that might be proposed by legislators who are responsible to change and create tax-exemption regulations. This article surveys state legislators and examines state legislation. The survey reveals that legislators from states with tax-exempt challenge activity focus more narrowly on the provision of charitable care and that state legislators consider quantitative information to be as important as qualitative information for the tax-exemption decision. Essentially, the survey predicts that state legislation would focus primarily on charitable care policy and indigent care guidelines, which is confirmed by the review of recent state legislation; however, there is still much variation in tax-exemption legislation between states. More standardization is needed to address the needs of indigent patients equitably.     

Derivative financial instruments and nonprofit health care providers

This article examines the extent of derivative financial instrument use among US nonprofit health systems and the impact of these financial instruments on their cash flows, reported operating results, and financial risks. Our examination is conducted through a case study of New Jersey hospitals and health systems. We review the existing literature on interest rate derivative instruments and US hospitals and health systems. This literature describes the design of these derivative financial instruments and the theoretical benefits of their use by large health care provider organizations. Our contribution to the literature is to provide an empirical evaluation of derivative financial instruments usage among a geographically limited sample of US nonprofit health systems. We reviewed the audited financial statements of the 49 community hospitals and multi-hospital health systems operating in the state of New Jersey. We found that 8 percent of New Jersey's nonprofit health providers utilized interest rate derivatives with an aggregate principle value of $229 million. These derivative users combine interest rate swaps and caps to lower the effective interest costs of their long-term debt while limiting their exposure to future interest rate increases. In addition, while derivative assets and liabilities have an immaterial balance sheet impact, derivative related gains and losses are a material component of their reported operating results. We also found that derivative usage among these four health systems was responsible for generating positive cash flows in the range of 1 percent to 2 percent of their total 2001 cash flows from operations. As a result of our admittedly limited samples we conclude that interest rate swaps and caps are effective risk management tools. However, we also found that while these derivative financial instruments are useful hedges against the risks of issuing long-term financing instruments, they also expose derivative users to credit, contract termination and interest rate volatility risks. In conclusion, we find that these financial instruments can also generate negative as well as positive cash flows and have both a positive and negative impact on reported operating results.     

Community benefits and health reform: creating new links for public health and not-for-profit hospitals

The Patient Protection and Affordable Care Act (PPACA) put new requirements on not-for-profit (NFP) hospitals to document provision of community benefits, to justify their tax-exempt status. Specific PPACA provisions include requirements that NFP hospitals conduct or participate in a community health needs assessment and work to address the needs identified. Consideration is given to these particular PPACA mandates and to Internal Revenue Service (IRS) actions to implement them. The background of concerns that have been expressed about whether the NFP hospitals' tax exemption should be continued and a brief history of that exemption is noted. Not-for-profit hospitals have resources that the federal government is requiring them to bring to public health improvement, during a time when the public health agencies at the federal and state level continue to experience reductions in funding. Linking of the NFP hospitals' compliance activities with the public health agency community health planning activities will help fulfill its PPACA requirements and the regulatory reporting requirements for the IRS.     

Managed care, vertical integration strategies and hospital performance

Objective. The purpose of this study is to examine the association of managed care with hospital vertical integration strategies, as well as to observe the relationships of different types of vertical integration with hospital efficiency and financial performance. Data and methods. The sample consists of 363 California short-term acute care hospitals in 1994. Linear structure equation modeling is used to test six hypotheses derived from the strategic adaptation model. Several organizational and market factors are controlled statistically. Principal findings. Results suggest that managed care is a driving force for hospital vertical integration. In terms of performance, hospitals that are integrated with physician groups and provide outpatient services (backward integration) have better operating margins, returns on assets, and net cash flows (p<0.01). These hospitals are not, however, likely to show greater productivity. Forward integration with a long-term-care facility, on the other hand, is positively and significantly related to hospital productivity (p<0.001). Forward integration is negatively related to financial performance (p<0.05), however, opposite to the direction hypothesized. Conclusions. Health executives should be responsive to the growth of managed care in their local market and should probably consider providing more backward integrated services rather than forward integrated services in order to improve the hospital's financial performance in today's competitive health care market.     

Effects of payment incentives, hospital ownership and competition on hospitalization decisions for ambulatory surgical procedures

OBJECTIVE: To test the hypotheses that (1) for-profit (FP) and not-for-profit (NFP) hospitals are less likely than public hospitals to admit cases reimbursed by prospective payment favoring ambulatory over inpatient care; (2) admission odds of public, FP and NFP hospitals will converge under increasing hospital competition. METHODS: Retrospective, population-based, cross-sectional study covering 29,699 cases of unilateral, femoral/inguinal hernia operation (major surgical procedure) and 60,626 cases of cataract surgery (local surgical procedure), from Taiwan's National Health Insurance database was used. Diagnosis-wise logistic regression analysis were done to examine associations between admission propensities of FP versus public and NFP hospitals (large teaching hospitals with > or = 250 beds versus district hospitals with < 250 beds) under high and low competition, adjusted for clinical complications, and patient as well as physician demographics. RESULTS: Large public teaching hospitals are significantly more likely than FP district hospitals to admit hernia patients (ORs = 1.9 and 2.6, respectively, under high and low competition), and cataract surgery patients (ORs = 5.0 and 5.4, respectively, under high and low competition). The corresponding odds ratios for public district hospitals (relative to FP district hospitals) are 1.2 and 3.9 for hernia and 4.9 and 2.7 for cataract surgery. Odds ratios show convergence of admission odds across hospital ownership under high competition relative to low competition for hernia (OR range for different hospital types under high competition, 1.0-1.9; and under low competition, 1.0-3.9). Cataract cases show high divergence of admission odds between public and FP/NFP hospitals regardless of competition level (OR range for different hospital types under high competition, 0.3-5.0; and under low competition, 0.3-5.4). CONCLUSION: Overall, our data support the study hypotheses. Differences in the relevance of inpatient care for hernia and cataract surgery may account for the lack of admission convergence of public hospitals and FPs under high competition among cataract surgery group.     

Patterns of financing for the largest hospital systems in the United States

The ten large systems reviewed in this column have greater degrees of financial leverage than do most freestanding hospitals. Larger firms typically have both greater capital access and lower costs of financing. Both voluntary and IO systems make extensive use of variable rate financing, but the percentage of variable rate financing is slightly higher for voluntary systems. This difference may be attributable to larger yield curve spreads for tax-exempt versus taxable securities. Interest rate swaps were used by 70 percent of the systems, but the actual amount swapped was relatively minor. This may change in the future as financial officers become more comfortable and familiar with interest rate swap arrangements. When compared to IO systems, voluntary systems have extensive levels of cash relative to their debt positions. Cash balances are more critical in the bond-rating process for voluntary hospitals, and the ability to raise new equity is much more limited in the voluntary sector. Very little capital leasing was used in any of the systems.     

To outsource or not to outsource: Examining the effects of outsourcing IT functions on financial performance in hospitals

BACKGROUND: Outsourcing of information technology (IT) functions is a popular strategy with both potential benefits and risks for hospitals. Anecdotal evidence, based on case studies, suggests that outsourcing may be associated with significant cost savings. However, no generalizable evidence exists to support such assertions. PURPOSE: This study examines whether outsourcing IT functions is related to improved financial performance in hospitals. METHODOLOGY: Primary survey data on IT outsourcing behavior were combined with secondary data on hospital financial performance. Regression analyses examined the relationship between outsourcing and various measures of financial performance while controlling for bed size, average patient acuity, geographic location, and overall IT adoption. FINDINGS: Complete data from a total of 83 Florida hospitals were available for analyses. Findings suggest that the decision to outsource IT functions is not related to any of the hospital financial performance measures that were examined. Specifically, outsourcing of IT functions did not correlate with net inpatient revenue, net patient revenue, hospital expenses, total expenses, cash flow ratio, operating margin, or total margin. PRACTICE IMPLICATIONS: In most cases, IT outsourcing is not necessarily a cost-lowering strategy, but instead, a cost-neutral manner in which to accomplish an organizational strategy.