Deciphering cost reports helps paint picture of hospital’s financial health

By Yamil Berard
Fort Worth Star-Telegram

When the Fort Worth Star-Telegram decided to examine our county hospital, my job was to analyze their financials to explain how a facility with a mission of treating the poor had managed to become so wealthy.

The taxpayer-financed system was racking up fat surpluses every year and banking them, so its investment pool had swelled to about $400 million. We discovered that from an early analysis of financial records. Why, then, was the hospital claiming that it was struggling with high uncompensated care costs? If that was so, where was the money coming from that poured into the investment pool? Was the money being used to help the uninsured?

To get a handle on the hospital's overall financial health, I asked for the hospital's audited financial statements for the past four years. Usually, these are done by a large firm – such as Deloitte & Touche, for example. These records are public information at our county hospital and are typically public at nonprofit hospitals. Also, financial data is reported on a regular basis, or is supposed to be reported regularly, to the board of managers for the hospital.

One piece of that puzzle required me to understand the pricing strategies of the hospital, as compared to other hospitals in our area and counterparts around the state. I knew from talking with experts that federal reimbursements for indigent patients were linked to hospital charges, so I was interested in whether there was evidence that the hospital had hiked prices to increase federal funding. I also wanted to see whether price hikes affected some patients, such as the uninsured, more than others.

Understanding pricing strategies

To start, I called various organizations, such as Healthcare Cost and Utilization Project, that have charge information and was told they were not required to release it. A Texas law excluded it from the public record. HCUP does collect data from other states and shares it publicly. I also called the state for related information and was told, basically, that I would have to pay thousands of dollars to access the hospital's data on what it charges.

I plowed forward and spent time speaking to people who access this type of information all the time for studies and reports. These experts were conducting statewide studies, for example, that used unique data to compare prices paid by uninsured patients with prices paid by commercial and Medicare patients. If anyone knew the puzzle of pricing patterns, it was these folks.

Dr. Glenn Melnick is the director for Health Policy and Management at the University of Southern California and an authority on hospital pricing strategies, health economics and finance. He reviewed and answered my questions by e-mail from Thailand, where he was doing research. I learned, by speaking with Melnick and others, about why a hospital's costs could be so different from its charges, about how concentrating price hikes on certain hospital services could "game" the reimbursement system and how certain comparisons of hospital charges could be misleading.

Ron Campbell, a former hospital administrator and local certified public accountant, helped skim through all the cost reports and explained the location of the data (where to find information about investments, cost-charge ratio, etc.).

Other experts who helped explain the system included Terri Coughlin at the Urban Institute and Barb Wynne at RAND Corp. Some people spoke on the record and others spoke off the record but their guidance was instrumental to the stories we published.

We found these experts by researching policy papers and other data – then contacted those who wrote the studies and papers. Wynne, for example, worked for Centers for Medicare & Medicaid Services for many years and is an expert on the Prospective Payment System for Medicare. Coughlin has written numerous articles on "gaming the system" or the way states have pumped up their Medicaid reimbursements with funny financing and other games. (In our stories, we looked at Medicaid and Medicare.) I spoke to these individuals to learn what methods they used in their studies to try to duplicate some of their efforts locally, if at all possible. They provided guidance on what information to ask for; what was important, what was not, etc.

As those experts mapped out the pitfalls for me, they advised me to use Medicare cost reports for my analysis of cost-to-charge ratios. I became very friendly with costreportdata.com ”‘ for two weeks straight I lived on the site.

Breaking down cost reports

I'm not a health care reporter. As a member of the Star-Telegram investigative team, I work on a broad range of topics, often involving financial analyses. So my first step was to familiarize myself with important sheets on the cost reports – key schedules that provided information I was looking for.

To get cost reports, you can go through something like costreportdata.com, however, the cost reports can be obtained for free from the fiscal intermediary for each hospital – you just need to find out who that is and request the information under open records or FOIA, depending on where you are.

Cost reports outline the way the government reimburses a hospital for caring for the poor, the disabled and the elderly. These reports provide a snapshot of the size of a hospital's investments, how it charges for lab tests, how much its facilities are worth, after depreciation; how many beds are available at the hospital and what is their occupancy rate.

I created a "cheat sheet" that would tell me where to find information about investments, in-patient days, and various reimbursements – and a host of other important financial data about the hospital. This cheat sheet allowed me to pull important information from cost reports at the blink of an eye and without having to request more information – which would take days to obtain – directly from the hospital.

Worksheet C Part 1 became my friend. On it, a hospital reports its total cost and total charges for various hospital services. With just a quick division computation I could determine the cost-charge ratio.

A cost-charge ratio shows the relationship between costs and charges at a hospital – the smaller the ratio, the more a hospital is charging for its services. So if a ratio is 1.00, the hospital's charges equal its costs and the hospital isn't making any profit – a patient is paying $1 for a service (patient is being charged) and it costs the hospital $1 to provide the service – the hospital's profit is zero. But if the ratio is .20, the hospital is making a larger profit – the patient is paying $1 for the service while the hospital's cost is 20 cents and the profit is 80 cents. This is a very simplified version of cost-to-charge; there are other factors such as overhead costs. I used Excel to do the math so I could be certain all the information was accurate.

For other pieces of the puzzle, I looked at other portions of the Medicare reports for information that might show other ways the hospital had increased federal reimbursements.

For example, the settlement work sheets – known as Worksheet E Part A – will tell you how much the hospital received in "outlier" payments from Medicare – extra money for costly cases in which patients spent unusual amounts of time in the hospital or had some highly specialized care. By looking at that amount, I could figure out whether the hospital's outlier payments were, as a percentage, higher on average than other hospitals.

How much did the hospital get for outpatient care in Graduate Medical Education? The information was available on Worksheet E Part B. Want to know occupancy rates, over time, at a hospital? Was a hospital filling its beds or is the hospital half-empty or one-third empty most of the time? Was there a trend year after year? I looked at Worksheet S-3 Part 1. It was computed by looking at the number of beds and the bed days available. How wealthy was the hospital? Worksheet G gave you a general fund balance. In our case, that amounted to more than $470 million. Bad debt reimbursements were found on Worksheet G-3.

I identified eight other hospitals to use for comparison. To choose them, I looked at other information on costreportdata.com – number of beds, the share of Medicare patients, type of ownership and services provided. We wanted to compare the hospital with two other taxpayer-backed hospitals in the state, as well as at local not-for-profit and proprietary hospitals to get a good variety.

I looked at 11 hospital departments at each of the hospitals over six years. These included: General Routine Care, Intensive Care Unit, Nursery, Radiology, Lab, Operating Room, Recovery Room.

Seeing the pattern

After all the numbers were laid out, it was clear that our taxpayer-based county hospital had implemented the most aggressive spikes in charges of any of the hospitals over the six-year period. It was dazzling to see the increases, particularly in services where indigent patients were concentrated.

Hospital administrators were surprised that we had access to the information, but then they explained, very openly, that by increasing charges, particularly in hot spot areas such as labor and delivery used by many low-income patients – the hospital would obtain more federal reimbursement dollars. In labor and delivery, where the county hospital had the largest increases, we were told by hospital officials that those areas are specifically targeted to trigger the largest millions of dollars in federal Medicaid reimbursements through supplemental programs – particularly Upper Payment Limit.

The Upper Payment Limit, the newest program the federal government introduced for Medicaid, is supposed to pay hospitals extra for more complicated surgeries and other services. To compute the UPL, in simplest terms, the government takes the amount paid normally by Medicaid and then subtracts how much Medicare would have paid – the difference is the allotment of UPL (Upper Payment Limit) to that hospital.

Hospital administrators acknowledged that those charges, were key in the hospital's success in racking up millions of dollars in surpluses. But the hospital officials also said that the price hikes really didn't affect the majority of patients, since they didn't pay the charges. Medicaid covered many and others got discounts from the hospital, officials said.

To check that out, after my spreadsheet was complete, I asked experts to review it and comment on the increases. They provided a host of good material for the story. They also explained that there would be patients hurt by the price hikes – uninsured people who didn't qualify for discounts, as well as underinsured patients – in fact, anyone who paid a portion of their hospital bill were paying extra.

Most of the experts I tapped had written articles or conducted studies about the topics I was writing about. I read their studies and called them to inquire about their methodology and asked if they would help me along this road. I've found that often experts will spend time to help you if they realize that you have an earnest interest in learning about the topic.

Telling the story through people

The clincher, of course, was finding actual patients who were billed those charges. I found patients mostly by word-of-mouth – people I knew who knew of other folks who had stories to tell. We tapped a vital group in the community that for years has played an important advocacy role for the poor at our county hospital. These grass roots organizers had helped many a patient wade through the rigmarole of trying to access care – often encountering resistance, denial, downright rudeness, insensitivity and callousness. These organizers pointed us to patients they had helped and, obviously with their permission, we shared their stories with the public.

We brought the issue home to readers by showing them patients billed $5 for painkillers that cost a few dimes at a local pharmacy. We also found a patient who had been hospitalized at both our county taxpayer-backed hospital and a not-for-profit hospital that we had studied – and compared those room prices, as well. The public hospital costs were significantly higher.

The Medicare reports had some inconsistencies year to year, which we tried to resolve by questions to hospital administrators. And the reports didn't provide some detail that was important to the analysis. For example, we wanted to get yearly totals for the amount of money that the hospital had received from various indigent funding sources. The hospital provided some information in ways that made it indecipherable. In fact, we did a story about how the hospital didn't provide straight answers to some questions. But we were able to obtain some data instead from the state. That was key to finding out the annual Medicaid Upper Payment Limit funds and Disproportionate Share funds paid to the hospital; money from state funds for indigent care; and some charitable contributions. And we used the Federal Audit Clearinghouse to get information on federal grants to the health care system.

Not every Excel spreadsheet – once it is filled with numbers and completed – packs as much punch as what we did this time around. This time, it was a thrill to see the numbers tell the story to readers. What's more, by understanding the financial operations of the hospital, we were able to ask better questions and probe the answers. Some sources, usually hesitant to talk with reporters, came forward because we had done the homework.

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Yamil Berard is reporter on the Fort Worth Star-Telegram's investigative team.