HB824, An Act Relative to the Public Reporting of Hospital Margins

Joint Committee on Financial Services

The Massachusetts Hospital Association (MHA), on behalf of its member hospitals and health systems, appreciates the opportunity to offer comments in strong opposition to HB824, “An Act Relative to the Public Reporting of Hospital Margins.”

MHA strongly supports meaningful transparency for both insurers and health care providers. Unfortunately, HB824 misses the mark for multiple reasons. Section 1 of this bill would require a public hearing to be held within 60 days any time such an acute care hospital reports to CHIA an operating margin that exceeds 5%. Such hospital would then be required to submit testimony on its overall financial condition, the need to sustain an operating margin that exceeds 5% and on its efforts to advance cost containment. Section 2 of the bill would require CHIA to establish a uniform methodology for calculating various cost categories, cost trends and operating margins for all commercial and public payer business.

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

In addition to CHIA, the Health Policy Commission is currently charged with reporting on cost trends and underlying factors and with performing cost and market impact reviews of material changes in provider operations. The HPC also conducts annual health care cost trends hearings during which providers provide extensive written and verbal testimony on myriad details of their operations, strategy and financial performance. The hearings provide a very thorough—and very public--examination into the drivers of health care costs in the Commonwealth’s health care system and actions and challenges that providers face in lowering the cost growth trajectory. It should therefore be clear that there is no lack or shortage of information on hospital finances in the commonwealth. MHA and our member hospitals are very concerned about adding additional burdens and costs on the state and providers through the duplicative and unnecessary reporting sought by HB824. Legislation such as this offers no additional value and would only layer on redundant reporting burdens, and increase administrative complexity and costs, while distracting from the much more important business of transforming the care delivery system to meet the goals of Chapter 224.

The inordinate amount of focus on hospital margins found in HB824 is based on a false assumption that the financial health of a hospital can be assessed using its operating margin alone, and that after a certain threshold, a higher margin is “undesirable” and “unnecessary” and needs to be justified in a public hearing. Both assumptions are completely wrong. A hospital needs an adequate operating margin to remain a going concern— by any national standard, an operating margin of 3–5 percent is needed for a hospital to be considered “healthy.” Hospitals continue to perform budgetary juggling acts that include keeping pace with advances in medical technology, maintaining and replacing aging equipment and facilities, and responding to information technology requirements. Without a healthy margin, hospitals are likely to not have the resources necessary to maintain their property, plant and equipment—which can fall into disrepair and obsolescence.

Margins are inadequate measures of hospital financial well-being when considered alone and generally have to be supplemented by additional indicators. As a painful reminder of this fact, North Adams Regional Hospital, per CHIA, had an operating margin of 7.83% in year end 2012, and shut down operations a year later. This helps illustrate the fact that margins are but one indicator of financial health—they reflect one measure at a specific point in time—and using just margins to assess hospital financial health is analogous to using a blood pressure reading to conclude that a patient is healthy. For instance, a hospital may have a 3% margin for one or more quarters, and then sink to a negative margin for an extended period, or a hospital may have a 5% margin and have a balance sheet that indicates it is in serious financial trouble. We note in this context that based on the FY2014 financials released by CHIA, more than 20% of Massachusetts hospitals are operating in the red and over half have margins less than 3%. Margins and other indicators of financial health—e.g. measures of liquidity, debt service coverage, debt to equity—are bound to worsen in the future with deepening cuts in hospital payments from Medicare ($11.3 billion over 15 years), a significant Medicaid underpayment gap, and declining revenues from other payers. All these will mean serious financial challenges for Massachusetts hospitals, yet the language used in HB824 implies that a hospital with an operating margin greater than 5% is a ‘problem’ that needs to be explained. This not only fails to recognize that a hospital could have a healthy margin while failing other tests of financial health, it also is blind to the fact that having such a large percentage of the state’s hospitals in poor financial health should be a significant concern for policymakers.

The bill also would require hospitals to report payer specific margins—which would involve allocation of hospital costs among payers, a formula that is inherently imprecise and therefore produces distorted results which will not reflect hospitals’ actual margins by payer. Such flawed information would provide no benefit to the public or policymakers and would simply offer the insurance industry additional measures of obfuscation. Most importantly, inaccuracies in the calculation of payer specific margins could adversely affect the development of public policies that are reliant upon such information. At a minimum, such inaccuracies could improperly and unfairly handicap hospital contract negotiations with insurers with repercussions for the stability of the health care delivery systems. It is very likely that insurers would use this flawed data to strong-arm hospitals. In Massachusetts where just four insurers control 80% of the market and one insurer controls 60% of the market, it could place many hospitals, particularly community and disproportionate share hospitals, in even greater financial peril.

Transparency is healthy for any system. The Massachusetts hospitals community is already perhaps the most transparent system in the nation. We do not object to a reasonable level of regulation and reporting, but any proposal seeking to increase the requirements already in place in Massachusetts must be based in reason and provide meaningful perspective – otherwise it should be judged unjustified and counterproductive. The process sought by HB824 achieves such an objectionable level. For all of these highlighted reasons, MHA urges the committee to reject HB824.

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