A Primer on How State Flex Coordinators Can Use the Financial Indicators in CAHMPAS CAHMPAS Team North Carolina Rural Health Research and Policy Analysis Center Cecil G. Sheps Center for Health Services Research 725 Martin Luther King, Jr. Boulevard Chapel Hill, NC 27514 CAH.finance@schsr.unc.edu Funded by: Cooperative Agreement for the National Evaluation of the Rural Hospital Flexibility Program. Technical and Non-Financial Assistance for the Office of Rural Health Policy, HRSA, U.S. DHHS (PHS Grant No. U27RH01080), 9/1/2008-8/31/2013, $1,480,000.

Purpose To highlight the financial indicators in CAHMPAS To describe how Flex Coordinators can use the information to assess the financial performance and condition of CAHs in their state To illustrate how to identify financial strengths and weaknesses for the design of interventions and targeting of Flex funds by Flex Coordinators

Contents 1. Introduction to CAHs 2. Overview of CAHMPAS 3. How to measure CAH financial performance using the Indicators 4. How to compare CAH financial performance using peer groups 5. How to evaluate CAH financial performance using benchmarks How SFCs can use the financial indicators in CAHMPAS: an example 7. Limitations 8. What is next?

1. Introduction to CAHs

Sources of Revenue to CAHs Medicare 73% of inpatient revenue 37% of outpatient revenue Medicaid Commercial payers Self-pay Contributions Grants Local government

Legislation Legislation enacted as part of the Balanced Budget Act (BBA) of 1997 authorized states to establish State Medicare Rural Hospital Flexibility Programs (Flex Program), under which certain facilities participating in Medicare can become Critical Access Hospitals (CAH).

Differences from PPS CAHs receive Cost Based Reimbursement - 99% of “allowable costs” for Medicare beneficiaries That is, NOT the Inpatient Prospective Payment System (IPPS) and Hospital Outpatient Prospective Payment System (OPPS). A common misconception is that CAHs receive 99% of all costs instead of Medicare costs.

Criteria to be a CAH Be located in a state that has established a State Flex Program (as of December 2008, only CT, DE, MD, NJ, and RI did not have such a program); Be located in a rural area or be treated as rural under a special provision that allows qualified hospital providers in urban areas to be treated as rural for purposes of becoming a CAH; Furnish 24-hour emergency care services, using either on-site or on-call staff;

Criteria to be a CAH Provide no more than 25 inpatient acute care beds that can be used for either inpatient or swing bed services. A swing bed can be used to provide either acute or skilled nursing facility care. A CAH may also operate a distinct part rehabilitation or psychiatric unit, each with up to 10 beds; Have an average annual length of stay of 96 hours or less;

Criteria to be a CAH Be located either more than 35 miles from the nearest hospital or CAH or more than 15 miles in areas with mountainous terrain or only secondary roads OR prior to January 1, 2006 were State certified as a “necessary provider” of health care services to residents in the area.

Allowable Costs Payment for inpatient or outpatient CAH services is NOT subject to the following reasonable cost principles: Lesser of cost or charges; and Reasonable compensation equivalent limits. In addition, payment to a CAH for inpatient services is not subject to ceilings on hospital inpatient operating costs or the preadmission payment window provisions applicable to hospitals paid under the Inpatient Prospective Payment System and Outpatient Prospective Payment System.

Medicare Cost Report Financial Indicators in CAHMPAS are derived from data in the Medicare Cost Report, which is publicly available for every hospital receiving Medicare reimbursement Timing, data quality can be an issue The Medicare Cost Report contains wealth of data on key variables such as total gross charges (list price), gross and net revenues, expenses, patient visits, payer mix (how many patients have Medicare, Medicaid)

Medicare Cost Report The report is very long, several hundreds of pages, and may reach into the thousands with supporting documents. The report is divided into worksheets. The website below explains the various worksheets and what data go into each block. http://www.costreportdata.com/worksheet_formats.html  

Interim Rate and Settlement Process A CAH’s initial payment rates are based on the last cost report filed as an acute care hospital Any fluctuation between the interim rates set and paid throughout the year, and the actual costs for the year, is reflected in the end-of-year cost report settlement. If Medicare paid too much, the CAH must repay some money to the program. If Medicare’s estimated payments are less than what the cost report says they should have been, the hospital will receive additional payment from Medicare.

2. Overview of the Financial Indicators in CAHMPAS

Purpose of Financial Indicators One of the most important characteristics of a CAH is its financial performance and condition We want to know whether a CAH has the financial capacity to meet its mission Financial indicators are single numbers that: Have easily interpretable financial significance Facilitate comparisons Results sometimes focus on financial strengths and weaknesses

Interpreting Indicators A single indicator value has little meaning: One point in time that may not be representative Can’t tell if it is better or worse than other hospitals Therefore, two techniques are commonly used to help interpret “the numbers”: Trend (time series) analysis Comparative (cross-sectional) analysis Both techniques are used in CAHMPAS

Financial Indicators Help to identify: Do not necessarily provide Questions to ask Issues to address Problems to solve Do not necessarily provide Answers Explanations Solutions

Evolution of CAHMPAS How to measure CAH performance1 Indicator selection principles, data quality and availability, and performance metrics How to compare CAH performance2 Peer groups as a meaningful basis for performance comparisons How to evaluate CAH performance3 Relative (medians) or absolute (benchmarks) 1. Pink GH, Holmes GM, D’Alpe C, McGee P, Strunk. L, Slifkin RT. Financial Indicators for Critical Access Hospitals. Journal of Rural Health 22(3):229-236, Summer 2006 2. Pink GH, Holmes GM, Thompson RE, Slifkin RT. Variations in Financial Performance Among Critical Access Hospitals. Journal of Rural Health 23(4), 299-305, Fall 2007 3. Pink GH, Holmes GM, Slifkin RT, Thompson RE. Developing Financial Benchmarks for Critical Access Hospitals,Health Care Financing Review 30(3), Spring 2009

Objectives of the Financial Indicators in CAHMPAS To select and construct a set of financial performance measures that are relevant to CAHs To provide comparative information that CAH boards and administrators can use to improve financial performance To improve the quality of Medicare Cost Report data reported by CAHs (our goal)

Financial Ratios in CAHMPAS Profitability indicators measure the ability to replace buildings and equipment, meet increases in service demands, and compensate investors Total margin, cash flow margin, return on equity Liquidity indicators measure the ability to pay bills in a timely manner Current ratio, days cash on hand, days in net accounts receivable, days in gross accounts receivable

Financial Ratios in CAHMPAS Capital structure indicators measure different types of capital Equity financing, debt service coverage, long-term debt to capitalization Revenue indicators measure the amount and mix of different sources of revenue Outpatient revenues to total revenues, patient deductions, Medicare inpatient payer mix, Medicare outpatient payer mix, Medicare outpatient cost to charge, Medicare acute inpatient cost per day

Financial Ratios in CAHMPAS Cost indicators measure the amount and mix of different types of costs Salaries to total expenses, average age of plant, Full-time Equivalents (FTEs) per adjusted occupied bed, average salary per FTE Utilization indicators measure the extent to which beds are fully utilized Average daily census swing-SNF beds, average daily census acute beds

3. How to measure CAH financial performance using the indicators Pink GH, Holmes GM, D’Alpe C, McGee P, Strunk. L, Slifkin RT. Financial Indicators for Critical Access Hospitals. Journal of Rural Health 22(3):229-236, Summer 2006.

Profitability: Total Margin Net income Total revenue Definition Measures the percent of total revenues that is profit or loss. A positive value indicates total expenses are less than total revenues (a profit). Very high positive values may indicate higher patient volumes, which drive down the cost per unit of service. A negative value indicates total expenses are greater than total revenues (a loss). Very high negative values may indicate financial difficulty. Interpretation At some point, a very high total margin may prompt questioning by patients about excessive charges. 2016 CAH median 2.74%

Profitability: Cash Flow Margin Definition Net income – (Contributions, investments, and appropriations + Depreciation expense + Interest expense) Net patient revenue + Other income – Contributions, investments, and appropriations Measures the cash inflow per dollar of revenue from providing patient care services. A positive value indicates cash outflows are less than cash inflows. A negative value indicates cash outflows are greater than cash inflows. Interpretation If a CAH has recently made a large capital investment, then the total margin may turn negative because of greater depreciation charges. Cash flow margin backs out depreciation, so it could be positive at the same time as the total margin is negative. 2016 CAH median 6.99%

Profitability: Return on Equity Definition Net income Net assets Measures the net income generated by equity. In a not-for profit entity, equity is the sum of federal, state, and local grants, contributions, and the accumulated earnings of the hospital. A positive value indicates net income was generated by equity. Very high positive values may indicate an opportunity for debt financing. A negative value indicates a net loss was generated by equity. Very high negative values may indicate financial difficulty. Interpretation Net assets is the equity capital of a not-for-profit organization. It is raised in two basic ways: 1) by receiving contributions and grants and 2) by earning an excess of revenues over expenses. 2016 CAH median 5.32%

Profitability: Operating Margin Definition Net patient revenue + other revenue – total operating expense Net patient revenue + other revenue Measures the percent of operating revenues that is profit or loss. A positive value indicates operating expenses are less than operating revenues (an operating profit). Very high positive values may indicate higher patient volumes, which drive down the cost per unit of service. A negative value indicates operating expenses are greater than operating revenues (an operating loss). Very high negative values may indicate financial difficulty. Interpretation At some point, a very high operating margin may prompt questioning by patients about excessive charges. 2016 CAH median 0.93%

Liquidity: Current Ratio Definition Current assets Current liabilities Measures the number of times short-term claims can be paid from assets that are expected to be converted to cash in the short-term. A value greater than 1.0 indicates current assets are greater than current liabilities. Very high values may indicate underinvestment in longer-term assets that usually yield higher returns. A value less than 1.0 indicates current assets are less than current liabilities. Very low values may indicate financial difficulty. Interpretation At some point, a high current ratio may indicate under-investment in longer-term assets that typically yield higher returns. 2016 CAH median 2.48

Liquidity: Days Cash on Hand Cash + temporary investments + investments (Total expenses – Depreciation) / Days in period Definition Measures the number of days an organization could operate if no cash was collected or received. A low value indicates only a few days of cash on hand. Very low values may indicate financial difficulty. A high value indicates many days of cash on hand. Very high values may indicate under-investment in longer-term assets that usually yield higher returns. Days Cash on Hand is calculated at fiscal year end, which does not reflect uneven cash flows throughout the year. Interpretation An organization with only 5 days cash on hand is in serious financial condition and is close to insolvency. Or it could be a system-owned hospital that has its cash swept by the parent. 2016 CAH median 77.7 days

Liquidity: Days in Net Accounts Receivable Net patient accounts receivable (Net patient revenue) / Days in period Definition Measures the number of days that it takes an organization, on average, to collect the money its is owed. A high value indicates many days to collect receivables. Very high values may indicate a need to review collection policies and procedures. A low value indicates only a few days to collect receivables and may indicate a more efficient system for processing accounts receivable, higher Medicare and Medicaid payer mix, offering of long-term care services, or some combination. Interpretation A high DRAC is bad but it may be due to factors beyond control of the organization, such as a change in government payment procedures. 2016 CAH median 51.3 days

Liquidity: Days in Gross Accounts Receivable Gross patient accounts receivable (Gross patient revenue) / Days in period Definition Days in gross accounts receivable compared to days in net accounts receivable measures revenue cycle performance. Days in gross and net accounts receivable that are close in value indicate good revenue cycle performance. Days in gross accounts receivable greater than days in net accounts receivable may indicate that the allowances for doubtful accounts require analysis and possible adjustment. Interpretation A high DRAC is bad but it may be due to factors beyond control of the organization, such as a change in government payment procedures. 2016 CAH median 48.9 days

Capital Structure: Equity Financing Net assets Total assets Definition Measures the percentage of total assets financed by equity. In a not-for profit entity, equity is the sum of federal, state and local grants, contributions, and the accumulated earnings of the hospital. A value greater than 50 percent indicates that more of the assets are financed by equity than by debt. Very high values may indicate opportunities for debt financing. A value less than 50 percent indicates that more of the assets are financed by debt than by equity. Very low values may indicate exposure to financial risk because debt service is a fixed charge. Interpretation At some point, very low equity financing may indicate that an organization is not replacing its assets or acquiring new assets at an appropriate rate. 2016 CAH median 59.8%

Capital Structure: Debt Service Coverage Net income + Depreciation + Interest expense Notes and loans payable (short term) * (365/DIP) + Interest expense where DIP means days in period Definition Measures the cash inflow per dollar of principal payments and interest expense. A positive value greater than 1.0 indicates cash flow greater than current fixed charge payments. Very high positive values may indicate an opportunity for debt financing. A positive value less than 1.0 or a negative value indicates cash flow less than current fixed charge payments. Very low values may signal a need to reassess debt policies. Refinancing may be an option if interest rates are lower in the current period than when the original debt financing occurred. Interpretation Debt service coverage cannot be calculated for an organization with no debt. 2016 CAH median 3.35 times

Capital Structure: Long-Term Debt to Capitalization Long-term debt + Net assets Definition Measures the percentage of total capital that is debt. A value greater than 50 percent indicates that a majority of capital is debt. Very high values may indicate exposure to financial risk because debt service is a fixed charge. A value less than 50 percent indicates that the majority of capital is equity. Very low values may indicate opportunities for debt financing. Interpretation Same answer as equity financing ratio. 2016 CAH median 27.2%

Revenue: Outpatient Revenues to Total Revenues Total outpatient revenue Total patient revenue Definition Measures the percentage of total revenues that is for outpatient services (including, for example, Rural Health Clinics, free-standing clinics, and home health clinics). A value greater than 50 percent indicates that the majority of total patient revenues is for outpatient services. A value less than 50 percent indicates that the majority of total patient revenues is for inpatient services. Interpretation 2016 CAH median 77.7%

Revenue: Patient Deductions Contractual allowances + Discounts Gross total patient revenue Definition Measures the allowances and discounts per dollar of total patient revenue. A high value indicates higher average discounts and/or allowances. Higher values may result from higher volume of services provided, higher rate structures, or higher penetration of managed care contracts. A low value indicates lower average discounts and/or allowances. Lower values may result from lower volume of services provided, lower rate structures, or less penetration of managed care contracts. Interpretation 2016 CAH median 43.5%

Revenue: Medicare Inpatient Payer Mix Definition Medicare inpatient days Total inpatient days – Nursery bed days – NF Swing bed days Measures the percentage of total inpatient days that is provided to Medicare patients. A value greater than 50 percent indicates that the majority of inpatient days is for Medicare patients. Very high values may indicate lack of financial diversification due to high dependence on Medicare reimbursement. A value less than 50 percent indicates that the majority of inpatient days is for Medicaid, privately insured, and other patients. Interpretation 2016 CAH median 72.7%

Revenue: Hospital Medicare Outpatient Payer Mix Hospital Outpatient Medicare charges Hospital total outpatient charges Definition Measures the percentage of total outpatient charges that is for Medicare patients. A value greater than 50 percent indicates that the majority of outpatient charges is for Medicare patients. Very high values may indicate lack of financial diversification due to high dependence on Medicare reimbursement. A value less than 50 percent indicates that the majority of outpatient charges is for Medicaid, privately insured, and other patients. Interpretation 2016 CAH median 37.1%

Revenue: Hospital Medicare Outpatient Cost to Charge Definition Hospital Medicare Outpatient Costs Hospital Medicare Outpatient Charges Measures the outpatient Medicare costs per dollar of outpatient Medicare charges. A value less than 0.5 indicates that Medicare outpatient costs are less than one half of Medicare outpatient charges. Very low values may indicate patient volume is relatively high, gross charges are relatively high, costs are relatively low, or some combination of these factors. A value greater than 0.5 indicates that Medicare outpatient costs are greater than one half of Medicare outpatient charges. Very high values may indicate low volume, an inadequate rate structure, an opportunity to review operating costs, or some combination. Interpretation 2016 CAH median 0.45

Revenue: Medicare Acute Inpatient Cost per Day Definition Medicare acute inpatient cost (Medicare Inpatient Days (excl. HMO)) Measures the average daily cost of a Medicare acute inpatient. Skilled nursing facility days are excluded. A high value indicates a higher cost per day (and thus a higher amount of Medicare revenue per day). A low value indicates a low cost and amount of Medicare revenue per day. Medicare Acute Inpatient Cost per Day is influenced by facility occupancy rates, utilization of services, and the ability to manage costs. Interpretation 2016 CAH median $2,592

Cost: Salaries to Net Patient Revenue Salary expense Net patient revenue Definition Measures the percentage of net patient revenue that is for salaries. Very high values may indicate labor intensive organizations, employment of medical staff, or old plant and equipment. A value less than 50 percent indicates that the majority of net patient revenue is for supplies, equipment, and other expenses. Very low values may indicate capital-intensive organizations or new plant and equipment. Interpretation 2016 CAH median 44.9%

Cost: Average Age of Plant Accumulated depreciation Depreciation expense * (365 / Days in Period) Definition Measures the average accounting age in years of the buildings and equipment of an organization. It may differ from the average chronological age because of depreciation practices. Higher values indicate greater amounts of older assets. Very high values may indicate a need for fixed asset replacement. Lower values indicate greater amounts of newer assets. Very low values may indicate a new building or recent replacement of fixed assets. Interpretation 2016 CAH median 10.5 years

Cost: FTEs per Adjusted Occupied Bed Definition Number of FTEs Adjusted occupied beds** Measures the number of full time employees per each occupied acute care bed. A high value indicates many employees per bed. Very high values may indicate low volume and a potential opportunity to evaluate staff productivity. A low value indicates a few employees per bed. Very low values may indicate high volume or a high level of staff productivity. Interpretation 2016 CAH median 5.6 FTEs ** (Inpatient days – NF Swing days – Nursery days) * (Total patient revenue / (Total inpatient revenue – Inpatient NF revenue – Other LTC Revenue)) / Days in period

Cost: Average Salary per FTE Salary Expense Number of FTEs Definition Measures the price and mix of labor. A high value indicates that a hospital pays above average wages / salaries and / or employs relatively more high skill occupations and / or experienced staff. A low value indicates a hospital pays below average wages / salaries and / or employs relatively fewer high skill occupations and / or experienced staff. Interpretation 2016 CAH median $56,197

Utilization: Average Daily Census Swing-SNF Beds Inpatient swing bed SNF days Days in period Definition Measures the average number of swing beds occupied per day. A high value indicates high use of swing-SNF beds. A low value indicates low use of swing-SNF beds. Average Daily Census Swing-SNF Beds is influenced by the number of swing-SNF beds available. Interpretation 2016 CAH median 1.53

Utilization: Average Daily Census Acute Beds Definition Inpatient acute care bed days Days in period Interpretation Measures the average number of acute care beds occupied per day. A high value indicates high use of acute care beds. A low value indicates low use of acute care beds. Average Daily Census Acute Beds will be influenced by the number of acute care beds available. 2016 CAH median 2.70

4. How to compare CAH financial performance using peer groups Pink GH, Holmes GM, Thompson RE, Slifkin RT. Variations in Financial Performance Among Critical Access Hospitals. Journal of Rural Health 23(4), 299-305, Fall 2007

First Issue of the CAH Financial Indicators Report In Summer 2004, hospital-specific reports were sent to 853 administrators An evaluation form was included Many respondents requested comparison of their performance to similar CAHs

Selection of CAH Peer Groups Suggestions from respondents Literature review to identify important peer groups in other studies Advice of Technical Advisory Group Potential peer groups evaluated using statistical analysis Limited to ones that can be pulled from Medicare Cost Report (or similar) Selected peer groups: Important influences on indicator values Could be validly defined from Cost Reports

Creation of CAH Peer Groups From Medicare Cost Report data, we identified factors important to CAH financial performance: Had <$10 million, $10-20 million, or >$20 million in net patient revenue Provided long-term care Was owned by a government entity Operated a Rural Health Clinic

Number of Indicators that Varied for Each Factor Financial performance and condition varied significantly among the peer groups: # of Indicators Net patient revenue 16 / 20 Provided long-term care 10 / 20 Owned by government Operated a Rural Health Clinic 7 / 20

Creation of CAH Peer Groups All combinations of the four factors were used to create 24 (=3*2*2*2) peer groups Every CAH was assigned to one of the 24 peer groups Indicator medians were calculated for each peer group

Second Issue of the CAH Financial Indicators Report In Summer 2005, hospital-specific reports were sent to 1,029 administrators Peer group, state, and national medians Summary graph of performance relative to peer group An evaluation form was included and most respondents affirmed the selected peer groups Many wanted peer group comparisons for CAHs in their state

Variation by Peer Groups Generally, hospitals with: more revenue, no long term care, no rural clinic, and not government owned Do “better”

Net Patient Revenues Larger CAHs were more profitable and could carry more debt, possibly because: More diagnostic and outpatient services Higher charges, lower costs, or both Lower proportion of Medicare patients Higher patient volume generates higher total revenue and lower fixed costs per patient Other reasons?

Net Patient Revenues Larger CAHs also had: Higher Medicare revenue per day (greater patient acuity, ICU/specialty service, higher wages in larger communities?) Lower salaries to total expenses (more equipment, higher drug costs?) Newer average age of plant (greater debt capacity?)

Provided Long-Term Care CAHs that provided long-term care were less profitable, possibly because: Higher proportion of Medicaid patients Medicare Cost Report accounting methods Lower patient volume Other reasons?

Provided Long-Term Care CAHs that provided long-term care also had: Lower days revenue in accounts receivable (long-term care bills submitted prior to service?) Lower outpatient revenue to total revenue (long-term care revenue is in the denominator) Higher salaries to total expenses (high touch / low tech nature of long-term care?)

Owned by Government CAHs that were owned by government were less profitable but more liquid, possibly because: Higher charges, lower costs, or both Lower patient volume Other reasons? CAHs that were owned by government also had: Higher current ratio (lower use of debt) Older average age of plant (lower use of debt?)

Operated a Rural Health Clinic CAHs that operated a Rural Health Clinic were less profitable, possibly because: Lower proportion of inpatients with commercial insurance Lower patient volume Other reasons? CAHs that operated a Rural Health Clinic also had: Higher salaries to total expenses (physician compensation in numerator?)

Implications for SFCs CAHs are not all the same - significant differences in financial performance and condition exist among CAH peer groups May be misleading or unfair to compare the financial performance of a smaller CAH to a larger CAH, a CAH that does not provide LTC to a CAH that provides LTC, and so on

5. How to evaluate CAH financial performance using benchmarks Pink GH, Holmes GM, Slifkin RT, Thompson RE. Developing Financial Benchmarks for Critical Access Hospitals. Health Care Financing Review 30(3), Spring 2009.

CAH-Specific Benchmarks Benchmarks (standards, or goals, for the financial indicators that hospitals can evaluate against) can be useful tools for administrators Otherwise might think they’re doing “pretty well ” No good financial benchmarks for CAHs existed; we wanted benchmarks Established by a large sample of informed practitioners versus academic black box or arbitrary rankings Focus on absolute versus relative performance Provide CAHs with ongoing management tool 64

Benchmark Questionnaire Feedback from CAH administrators led to creation and validation of benchmarks for 5 indicators: Cash flow margin Days cash on hand Debt service coverage Long-term debt to capitalization Medicare outpatient cost to charge Second study added benchmarks for remaining profitability, liquidity (except days in gross A/R), and capital structure. 65

Application of the Benchmarks Benchmarks allow a review of a more limited set of ratios, making it easier to evaluate “overall” performance by examining key performance indicators (KPIs) Also allow questions like: How many hospitals performed above benchmark? Were hospitals that performed better than benchmark able to maintain this performance over time?

Implications for SFCs Financial management of a CAH is not easy. Many hospitals performed better than benchmark on one indicator in one year, but: Fewer hospitals performed better than benchmark on one indicator in two or three years. Very few hospitals performed better than benchmark on all five indicators in every year. Developing Financial Benchmarks for Critical Access Hospitals GH Pink, GM Holmes, RT Slifkin, and RE Thompson Health Care Financing Review 30(3), Spring 2009

6. How SFCs can use the Financial Indicators in CAHMPAS: An example 68 68

Their Hospital - Profitability - Liquidity - Capital structure Let’s look at indicator values for Their Hospital What do you think about the financial performance and condition of Their Hospital? - Profitability - Liquidity - Capital structure

Profitability Indicators

Profitability – Indicator Findings Profitability declined and then increased. Could be an extraordinary one-time expense. Better than cash flow margin benchmark in most recent year Worse than peer group and state Negative total margin but positive cash flow margin can occur because cash flow margin includes depreciation and interest expense in numerator Conclusion: profitability is a concern.

Profitability – Potential Explanations Gross charges are relatively lower (less volume, lower rates, poorer payer mix, Medicaid? Allowances are relatively higher (more competition?) Costs are relatively higher (wage rates, bad debt, charity care, inefficiency, or new debt?) Non-operating income is relatively lower (lower investments, less state or county support, lower charitable revenue?) Revenue, cost, and utilization indicators may provide additional insights

Profitability – SFC Actions Consultation, education, networks, facilitation, policy to help hospitals: Increase revenues (better data capture, fewer referrals, fewer denials, new services, new markets, more physicians?) Control expenses (wage rates, staffing patterns, group purchasing, 340B, equipment management, information technology?) Improve negotiation policy with third party payers Increase investment returns Reduce charity care and bad debt

Liquidity Indicators

Liquidity – Indicator Findings Conflicting results. Current ratio declined over the past three years, but still better than industry. Days cash on hand declined but worse than industry Days revenue in accounts receivable increasing and worse than industry. If credit policy has not changed, third party payers are taking longer to pay

Liquidity – Potential Explanations Current ratio and days cash on hand assets are relatively lower (greater draw on cash or smaller inventory?) Current liabilities are relatively higher (longer payment periods or new debt?) Operating costs are relatively higher (inefficiency or new debt?) Days revenue in accounts receivable Change in payer mix, increasing length of stay, clerical staffing problems, a nursing strike, change in Medicaid policies, higher denial rate, etc. Revenue, cost, and utilization indicators may provide additional insights

Liquidity – SFC Actions Consultation, education, networks, facilitation, policy to help hospitals: Identify reasons for the decline in cash and improve cash management strategies Improve payables management to maintain good relations with suppliers Implement changes to the revenue cycle for faster collection, lower collection expenses and fewer denials

Capital Structure Analysis – Indicator Findings

Capital Structure – Indicator Findings Conflicting results. Equity financing increased over the past three years and better than industry. Long-term debt to capitalization declined and better than industry. Debt service coverage declined and worse than industry

Capital Structure – Potential Explanations Hospital may have retired debt in year 3 Large principal repayments temporarily reduce debt service coverage Revenue, cost, and utilization indicators may provide additional insights

Capital Structure – SFC Actions Consultation, education, networks, facilitation, policy to help hospitals: Assess their ability to carry additional long-term debt and other types of capital Educate hospitals about the many sources of capital available to CAHs Facilitate contact between CAHs and suppliers of capital

Implications for SFCs Higher (lower) indicator values are not always good. Most indicators have a middle range of “good” values and extremes are “bad” values Each CAH has some indicators that look “good” and some that look “bad” relative to other CAHs, which may make overall financial position difficult to determine

Implications for SFCs Indicator values are ratios that are not scaled. Both of the hospitals below have total margins of 1 percent: For these reasons, significant judgment is required when analyzing financial and operating performance Hospital Net income Total revenue A $30,000 $3,000,000 B $300,000 $30,000,000

SFC Rules of Thumb Compare relative financial performance of a CAH: First to benchmark (when available) Second to peer group median Third to state median Fourth to U.S. median Assign greater weight to recent indicator values

SFC Rules of Thumb Investigate indicator values that are: Far above or below peer group, state, and U.S. medians Trending in the wrong direction Highly erratic (data quality?) Understand the indicators as a group of measures

Conclusion “Firms that have high profits, lots of cash, little debt, and new plants have great financial strength. Firms with losses, little cash, lots of debt, and old physical facilities will not be in business long.” (Cleverley and Cameron)

7. The limitations 87

Data Limitations Timeliness of data (although recent numbers can be produced using the Calculator from our website) Explanations for differential performance are not identified CAH mission, service mix and operating environment are not considered 88

Examples of Data Quality Concerns Zero total revenues Negative Net assets Negative current assets or current liabilities Negative days cash on hand Zero total expenses Negative net patient accounts receivable Zero inpatient days Zero outpatient charges 89

CAHMPAS Financial Team University of North Carolina at Chapel Hill Kristin L. Reiter, PhD G. Mark Holmes, PhD George H. Pink, PhD Technical Advisor Roger Thompson, Seim, Johnson, Sestak & Quist LLP To contact us: CAH.finance@schsr.unc.edu