Hospitals move to cash investments as short term pressures mount

October 27, 2008

OLDWICK, NJ – Under pressure from the troubled economy, hospitals are turning to their investment cash flow as a source of capital, according to a study released today by A.M. Best.

Despite decreased revenue, hospitals and healthcare systems must still support costly health information technology, facility upgrades and maintenance, and the increasing demand for charity care and other types of community services. As a result, they are focusing more attention on managing and rebalancing their investment portfolios, the study said.

Investment income typically has been viewed as an extra source of funding for various expenditures in a hospital's capital budget, supplementing cash generated from operations. As cash collections continue to be pressured, however, investment cash flow has become an important source of capital, the study said.

Between 2004 and 2007, hospitals and healthcare systems in this study - approximately 170 hospitals in 22 states - increasingly allocated a greater proportion of their invested assets to cash and short-term investments, averaging 31.1 percent in 2007, up from 27 percent in 2005.

Meanwhile, fixed income investments declined to 24.9 percent in 2007, down from 32.7 percent in 2004.

Other findings included:

* Although many hospitals have increased cash reserves, others have been seeking higher returns from other investment classes. For instance, the average allocation to mutual funds increased to 14.8% percent in 2007, from 9.4 percent in 2004.

* Since 2004, allocations to real estate investments, while small - comprising less than 1 percent of total invested assets - also have increased modestly.

* Despite greater asset allocations in cash and short-term investments, the median "current ratio" only increased by 10 basis points from 2005 to 2006 and remained flat from 2006 to 2007.

* The "days cash on hand" has also increased from a median of 135.


By Diana Manos, Senior Editor
Source: Healthcare Finance News
-------------- For discussion--------------
What is the problem with using investment cash flow as a source of capital?

SOME NEWS FROM THE PAST: Prosecutors Outline Practices Behind HealthSouth Charges

Excerpts from news article of JONATHAN WEIL | Staff Reporter of THE WALL STREET JOURNAL
March 20, 2003

Forget about Enron-like special-purpose entities or exotic-sounding financial engineering. The accounting fraud to which HealthSouth's former chief financial officer, Weston L. Smith, agreed to plead guilty in an Alabama federal court was as straightforward as accounting fraud gets. Yet, because it was so well hidden, according to prosecutors, outside investors barely stood a chance of detecting it.

Here is how the health-care provider's scheme worked, according to prosecutors. Intent on not missing Wall Street analysts' earnings estimates, HealthSouth Corp. executives made a series of adjustments that manipulated the company's revenue line so revenue and earnings would appear larger than they were.

The executives made the adjustments to certain allowances on HealthSouth's financial statements. The allowances accounted for the difference between what HealthSouth charged a patient and the amount the company could collect from the patient's health insurer. By lowering the allowances improperly, HealthSouth improved its net revenue and bottom-line earnings.

At HealthSouth, for every dollar of illicit revenue that company executives recorded, they also had to make a corresponding entry on the company's balance sheet. And if they plowed it all into one type of asset, the company's auditors at Ernst & Young LLP's Birmingham, Ala., office -- where Mr. Smith had been an auditor during the 1980s -- might detect it. So they spread the improper entries far and wide in tiny pieces across HealthSouth's balance sheet.

According to the government, HealthSouth executives plumped such things as the company's inventory and intangible assets and property, plant and equipment assets. They even overstated the company's cash by $300 million, according to prosecutors. The improper entries, some of which dated to 1997, eventually piled up. HealthSouth's deft handling of its balance sheet made it practically impossible for investors to detect the scheme before it was too late. (HealthSouth has said it is cooperating with the Justice Department's criminal investigation.)

"The predominant evidence is not that the rules don't work," says Sean Coffey, a partner at New York law firm Bernstein Litowitz Berger & Grossman who specializes in pursuing class-action securities-fraud lawsuits. "It's that people continue to break the rules, and the gatekeepers keep letting them get away with it. There were rules that prohibited just about everything this guy did, and he just did it anyway."

The parts of the financial statements that Mr. Smith -- and, allegedly, other HealthSouth executives -- exploited, for the most part, are areas where management has broad discretion to estimate asset values. As long as corporate managers are the ones determining those values, opportunities for abuse will abound. In any given period, small irregularities that look like normal variances often can go undetected.

By mid-2002, according to prosecutors, HealthSouth's total assets were overstated by $1.5 billion. Property, plant and equipment assets were overstated by $1 billion, or more than 50%, and earnings for the first six months of 2002 were inflated by more than $150 million, the Justice Department said.

Nonetheless, Mr. Smith and HealthSouth's chief executive, Richard Scrushy, on two occasions last year swore in public filings that the company's financial statements fairly presented HealthSouth's financial condition and operating results. Those quarterly certifications, which the Sarbanes-Oxley Act began requiring last year, appear to have made it much easier for prosecutors to build their case against Mr. Smith. The SEC filed civil charges against Mr. Scrushy Wednesday, but he hasn't been charged criminally. Prosecutors referred to HealthSouth's CEO and other unnamed HealthSouth senior executives as co-conspirators throughout Wednesday's court filings. Neither Mr. Scrushy nor his lawyer could be reached for comment.

Auditors are supposed to try to catch such chicanery before they sign off on a company's financial statements. But if they only are spot-checking a company's accounts, they may not notice suspiciously ballooning balances, Lehman Brothers accounting analyst Robert Willens says.

Generally, sample testing of accounts is all many accounting firms perform, barring evidence of acute problems that should spur further digging. Ernst & Young says the firm is cooperating with the SEC's requests for documents. It also said HealthSouth's "accounting personnel designed the false journal entries to the income statement and balance sheet accounts in a manner calculated to avoid detection by the outside auditors." An Ernst spokesman declined further comment.

"It sounds like they were creating assets that didn't exist," Mr. Willens says. "And they were smart enough to realize that, as long as the increases weren't dramatic, the auditors were not going to deviate from the sampling approach that they typically take."


Source: The Wall Street Journal
-------------- For discussion--------------
Could you explain, in simple words, how HealthSouth "increased" Net Revenues? Use an example based on any of the different methods of payments we learnt in class.

H352- 12 N.J. hospitals paying doctors to save them money

MOUNT LAUREL, N.J. (AP) — A dozen New Jersey hospitals are paying doctors as an incentive to save the hospitals money.

The principle is known as gainsharing, and it's generally prohibited under federal law. But the Centers for Medicare and Medicaid Services are allowing tests of the practice, which doctors' groups and hospitals alike say could help their finances and improve patient care.

The program is intended to address a conflict in the Medicare payment system that also exists in some private insurance plans: Hospitals are paid a lump sum based on each patient's diagnosis while doctors are paid for each service they provide.

As a result, an extra day's stay for the patient might mean more money for the doctor while it costs the hospital significantly. At Our Lady of Lourdes Medical Center in Camden, N.J., for instance, an average day's stay costs about $2,500.

Sean Hopkins, a senior vice president of the New Jersey Hospitals Association, says half of the state's hospitals are losing money each year. And Medicare, the government's insurance program for senior citizens and the disabled, reimburses hospitals in the state only 89% of the costs to care for them, he said.

The incentives to doctors for saving the hospital money could be as much as $300 for a surgery patient and $100 for other admitted patients. Statewide, more than 500 doctors have enrolled in the voluntary program.

Dr. Alan Pope, a vice president at Camden's Lourdes, said the incentives won't increase doctors' pay significantly. But he said they might be enough to get more doctors involved in the hospitals' efforts to improve care and reduce costs by cutting down on complications that can keep patients in the hospital longer.

He said that the hospital has been putting into place practices designed to reduce those problems. For instance, it has updated procedures for dealing with patients on ventilators or respirators to prevent pneumonia from developing.

"This gainsharing program will incentivize the physicians to be part of the teams and lead the teams," he said.

The study, which is to last three years, will monitor how many patients are readmitted to the hospitals 30 and 90 days after they're discharged.

John Pilotte, director of payment policy demonstrations at the Centers for Medicare and Medicaid Services, said the readmission numbers should be down.

He said the New Jersey test is the biggest for the concept so far, though similar programs began last year at Beth Israel Medical Center in New York City and Charleston Area Medical Center in West Virginia.

The American Medical Association supports experimenting with gainsharing and other new methods to pay doctors.

The Hospitals Association's Hopkins said that if the experiment works, it could eventually be a method to check health care costs across the board, not just for Medicare patients.

"This is one of our efforts to try to be part of the solution," Hopkins said. "We understand that health care costs are growing."

August 19, 2009
Source: USA Today. Copyright 2009 The Associated Press. All rights reserved.

-------------- For discussion--------------
We talked about incentives among the three parties: patient, provider and payor. But indeed, within the second party (the provider) there are also asymmetries of information between doctors and hospitals that may affect cost. Do you think this is also possible under capitation?

H352- Partnership Calls on President to Attack Budget-Busting Crisis of Chronic Disease

WASHINGTON – In advance of the President's address to the nation last night, Ken Thorpe , Ph.D., Executive Director of the Partnership to Fight Chronic Disease called on the Obama Administration to address the tremendous cost of chronic illness as they determine the programmatic and spending priorities of the nation in the year ahead.

"High rates of chronic disease cause individual health costs to soar, undercut U.S. competitiveness and burden taxpayers," said Thorpe, in a letter to the President that he sent with the support of the PFCD's more than 120 national partners.

"As our country faces the worst economic downturn in a generation, effectively preventing and managing chronic disease is no longer simply an ideal - it is a national imperative."

Chronic diseases, such as diabetes, heart disease, and cancer, are extraordinarily costly in terms of the impact on Americans' health, their wallets and the U.S. economy, according to the PFCD.

• They are responsible for seven out of 10 deaths and affect more than 130 million Americans.
• They represent 75 percent of the $2.2 trillion spent on health care in the U.S. in 2007 - and are the primary driver of rising costs. In taxpayer-funded programs such as Medicare and Medicaid, the proportions are even higher: 96% and 83%, respectively.
• The annual economic impact on the U.S. of the seven most common chronic diseases is estimated to be $1.3 trillion, which could balloon to nearly $6 trillion by 2050.

This crisis is especially concerning in light of the recently released government data which shows that health spending will consume $2.5 trillion or 17.6 percent of GDP in 2009, making it critical to immediately address this key cost driver in the health care system.

"With investments in prevention and disease management, we can improve not only our nation's health but our safety, quality of life, and economic security today and for future generations," said Thorpe.

"That's why we need the President's leadership on this issue, and ask that he work with our organization and other like-minded groups to advance comprehensive health reform to address this crisis."

Thorpe noted that the funding for wellness and prevention programs in the stimulus package recently passed by Congress is a step in the right direction.

"These improvements are a significant down payment in the way we approach improving health and health care in America," writes Thorpe in his letter to the President. "But more can and should be done. To address the epidemic of chronic illness, we will need comprehensive health reform that will help to realign incentives in health care to encourage and promote improvements in health and wellness."

February 25, 2009
Source: Healthcare Finance News
 
-------------- For discussion--------------
How are chronic diseases and aging related? Is aging driven the high cost related to chronic diseases?