By Karl Stark, The Philadelphia Inquirer, 215 854-5363
This is a companion to "How to cover your local hospital" by Charles Ornstein of the Los Angeles Times. Also of interest: "Hospital stories to do"
THE BIG FIVE FINANCIAL DOCUMENTS TO REVIEW ON YOUR LOCAL NONPROFIT HOSPITAL
IRS Form 990 gives you top executive salaries and the best paid outside contractors. It lists board members and even the total number of employees (on Line 90b).
DRAWBACKS: They tend to be older than the most recent audited financial statements cited below. In addition, the info on 990s sometimes conflict with the numbers on financial statements because of arcane IRS rules and differing interpretations of those rules. So double check these numbers with hospital officials.
HOW TO GET THEM: By law, the hospital must give them to anyone who asks! They are also available online from www.Guidestar.org.
TIP: Call hospital to get the newest one.
KEY PARTS:
Line 12 total revenue
Line 17 expenses
Line 18 excess/deficit (the key profit or loss line for the year)
Line 21 Net assets are the cushion for the following year.
Line 64A: Debt
Line 67 Unrestricted Assets. (If these are declining, then financial strength may be falling too.)
Part VI: Line 89b excess benefit transaction.
Line 90B number of employees (could be full- or part-time employees. Ask!)
Part VII sources of income — f) Care paid by Medicaid & Medicare (This shows the hospital’s reliance on federal programs)
Schedule A — Parts 1&2: highest paid employees and contractors (Great for getting the salaries of some top doctors.)
Part V — Board members, top executive salaries ( There’s a rich tradition of doing stories on these salaries, and it’s very topical.)
Part VI — Related Organizations ( Many nonprofits now have for-profit subsidiaries and they would be listed here!)
The most recent Audited Financial Statement. This is the gold standard for determining a hospital's overall finances. Nonprofit hospitals’ fiscal year usually runs from July 1 to June 30. The financials should be available within three months from the end of the fiscal year. Look to this document to measure the hospital’s financial health. Experts scrutinize at least three items:
- Liquidity – the ability to generate enough cash for the coming year
- Solvency – the ability to generate enough cash longterm and repay debt.
- Profitability – the ability to generate more revenues than expenses and to show the origin and sustainability of those profits.
HOW TO GET THEM: The hospital CEO, CFO or public relations person can supply these, though some will fight you on this.
TIPS:
- Hospitals give these documents to bondholders, banks, government officials and even suppliers on a regular basis. So you should get them if you insist.
- Don’t accept a simplified – and sanitized – version that is often given to the public on glossy paper or included in the annual report. Get the complete document with footnotes, which often contain crucial information on the organization's relationship with its affiliates.
- Then find an academic expert with no conflict to review these documents, which can be intimidating to those not used to financial lingo.
Bond Prospectuses. Nonprofit hospitals have to make available these documents to investors when the organizations sell bonds to modernize their facilities. These documents are supposed to disclose all the risks investors face in getting repaid. They are a goldmine for reporters because they typically discuss a hospital's market position, financial performance and future prospects, among other things. All major litigation has to be disclosed.
HOW TO GET THM:
- from the hospital
- a well-connected bond/stock broker
- Sometimes the Bloomberg terminal, which is available in many public libraries
- The firms involved in selling the bonds.
- The public authorities that issue them.
- The web site www.munios.com offers many recent prospectuses if you sign up at no cost.
- www.dacbond.com also offers prospectuses and even audited financials but many hospitals do not participate.
TIP: This is the best document to get if you are not well-versed in budgets. It can be the single most informative document on a hospital’s finance because it’s more than just numbers. It often shows a hospital’s market share and many key facts, including the important litigation it faces.
DRAWBACKS: They are issues only when the bonds are to be sold so they may be old.
Current Bond Rating Reports. Rating agencies will typically give hospitals' bond ratings reports free to journalists. Ask for the most recent rating report of a hospital’s bonds. Bond ratings evaluate a hospitals’ business and gauge investors' risk for getting repaid. They are mini versions of bond prospectuses but still valuable for financial trends and interesting facts about a hospital, such as who its powerful competitors are. They can give you valuable insight into a hospital's most profitable services and its biggest competitors.
HOW TO GET THEM:
- Moody’s New York, 212-553-0376
- S&P Media Hotline for the Americas, 212-438-6667
- Fitch Rating, NY: Jim Jockle Senior Director, Corporate Communications, 212-908-0547
TIP: The rating agency’s reviewer may give quotes but often says little beyond what they say in their report to preserve their access. An outside academic expert often will say more.
DRAWBACKS: Bond rating reports can be wrong too. They can miss key trends.
Medicare Cost Reports can offer reams of information on hospitals, including expenses by category (drugs, nursing services, and salaries). Medicare is the vast federal health program for the elderly and disabled. Nearly every hospital accepts federal money to treat Medicare patients, and therefore must file Medicare Cost Reports. So this can be a good source for financial information on forprofit hospitals even though they are several years out of date
Among interesting areas for reporters are: Schedule A-8-1, which details the organization's payments to outside businesses owned by hospital leaders; Schedule A-8-2, which summarizes physician payments as a group and whether CMS thinks those payments are reasonable; and Schedule G, which details finances.
But as with 990s, beware of conflicts between Cost Report’s Schedule G and financial statements. Several experts have criticized Schedule G for falling behind the times. Many experts consider financial statements as generally more reliable. In late 2005, the government was upgrading cost reports so look for these documents to become more valuable in the future.
CMS has an online summary of what's in the Medicare cost report.
HOW TO GET THEM
- Get cost reports from Medicare officials by calling the local or national office of the Centers for Medicare and Medicaid Services or by calling the Medicare “fiscal intermediary” for your area.
- The CMS Web site has selected public use files of cost reports detailing such data as lengths of stay, case mix index and healthcare worker commuting data.
- State welfare officials also can help with Medicaid cost reports, which are similar to their Medicare counterparts but detail hospital spending on Medicaid, the federal health program for the poor.
- TIP: Some reporters, including Chris Adams of the McClatchy Washington Bureau, say they have found additional information on hospitals in Medicaid cost reports at the state level.
OTHER SOURCES: Several private firms publish proprietary reports gathered from cost reports and have been willing to share portions with journalists. They include:
- Solucient's "Top 100 Hospitals," "Profiles of U.S. Hospitals" and other publications featuring comparative financial and clinical data
- American Hospital Directory: free inpatient and outpatient utilization data, patient origins, financial and operational measures
- Cleverley & Associates: "State of the Hospital Industry" report that incudes a "community value index" for individual hospitals
DRAWBACKS: Cost Reports are not for the faint of heart. They are voluminous (up to 200 pages) and often complicated.
FOR PROFIT HOSPITALS’ FINANCIALS
- At least 20 states gather financial information on hospitals. Find the proper agency by calling the state department of health, and requesting financial information. The state may be the best source for for-profit hospitals’ financial health.
- SEC Records. These are a for-profit hospital's quarterly (10Q) and annual (10K) business filings to the Securities and Exchange Commission (SEC). They contain a wealth of information on the whole company and sometimes its parts. Available online via the SEC's Edgar database.
DRAWBACKS: It will be difficult to get information on individual hospitals. - Medicare Cost Reports cover for-profit hospitals and give you financial results on individual facilities. You can access them through a service, such as www.AHD.com (see below) or acquire and analyze the computer data yourself.
DRAWBACKS: These reports can be two years out of date. Relying on the data work of others should be acknowledged in the story.
NOTE: Never write about one of these documents without checking with the hospital. These documents are made with different standards and may come to slightly different conclusions.
SOME KEY FINANCE QUESTIONS TO ASK
What are Operating Gains or Losses over several years? Look at several years, not one year, as a truer gauge of what’s occurring. Compare these results to the state or regional average (compiled by the state or less ideally the local hospital association). TIP: Don’t include investment income. Investors like to look at “operating performance” as the clearest gauge of a hospital’s health, because sometimes a hospital will make a lot of money with investments, which can mask poor operating performance.
How much Unrestricted Cash is on hand? Ideally, you’d like to have 120 to 180 days worth of unrestricted cash sitting in the bank. It’s a funny number to publish or broadcast because it sounds like accountant-speak. But cash is king. It’s a key indicator of financial health. A small amount of cash means that the hospital won’t survive long if a downturn in business occurs.
How much Debt does a hospital have? If there’s too much, it constrains what the hospital can do to invest in new equipment and prepare for the future. You’d like to have debt no more than 50 percent of total net assets (net assets = assets – liabilities). Again, this should be in the audits, or will be noted by the rating agencies. The hospital also should disclose this if you ask for it specifically.
Check the “Accounts Payable” line. These are bills owed to vendors. This is digging deep but a sharp spike can indicate trouble. Basically if your hospital is not paying its bills, many local businesses could be getting stiffed or are waiting for their money. If you suspect this is happening, you might check if any vendors have sued the hospital or stopped extending credit.
“Accounts receivable” can be another sore spot. These are payments billed but not received. If it’s increasing, this measure could indicate that insurers and uninsured patients are not paying their bills, starving the hospital for cash.
Check on trends in costs for bad debts and charity care. Charity care is service for which the hospital never expects to get paid. Bad debt is unpaid medical bills. Are charity care and bad debt soaring? They bear watching because the number of uninsured patients is rising nationally. Charity care is historically part of hospitals' nonprofit mission.
What about malpractices costs? These have been soaring in recent years in many parts of the country. Many nonprofit hospitals are self insuring and creating their own insurance companies based in the Cayman Islands, Canada or sometimes Vermont. Check several years’ worth of records to see how the hospital’s malpractice premiums are faring. For some hospitals, the surge in malpractice insurance has pushed them into the red.
How much is the hospital paying for “Day Nurses?” Hospitals that can’t hire enough nurses resort to hiring “day nurses” at very high rates. The practice can create quality problems because new nurses may not know a hospital very well.
How much does the hospital give back to the community? This is a key question before Congress. U.S. Sen. Charles Grassley, R-Iowa, is holding hearings on whether federal laws on charity, community benefit and excessive executive compensation need to be strengthened.
Effect on Patients. Don’t forget to ask how the financial situation is affecting patients. What services are being cut? What equipment needs does the hospital have that aren’t being met? How’s the wait in the ER? A lot of nursing openings may also indicate fiscal troubles.
BEST SINGLE DOCUMENT TO LEARN MORE ABOUT HOSPITAL FINANCES: A Community Leader’s Guide To Hospital Finance, overseen by Harvard public health professor Nancy Kane
