Study of the Reserves, Endowments,

and
Surpluses of Hospitals in
Massachusetts

Deval L. Patrick, Governor JudyAnn Bigby, Secretary

Commonwealth of Massachusetts Executive Office of Health and Human Services
Timothy P. Murray David Morales, Commissioner
Lieutenant Governor Division of Health Care Finance and Policy
 Table of Contents

Executive Summary

I. Introduction

II. Study Methodology

III. Definition of Hospital Surplus

IV. Why Hospitals Need to Accumulate Financial Resources

V. Massachusetts Hospital Market Overview

VI. Financial Status of Massachusetts Hospitals

VII. Hospital Systems

VIII. Comparison of Hospital Financial Regulation to Other States

Hospital Community Benefits

Recommendations

Appendix 1: Glossary of Terms

Appendix 2: Public Input Session

Appendix 3: Hospital Subgroup Classifications

Appendix 4: Hospital Financial Data

Appendix 5: Hospital System Maps

Appendix 6: System Structure Examples

Acknowledgements
Executive Summary

Section 35 of Chapter 305 of the Acts of 2008, An Act to Promote Cost

Containment, Transparency, and Efficiency in the Delivery of Quality Health
Care, requires that the Division of Health Care Finance and Policy (DHCFP), in
conjunction with the Division of Insurance (DOI), conduct a study of the
reserves, endowments, and surpluses of health insurers and hospitals. Per
statute, the goal of the study is to provide information to assist both DHCFP
and DOI with the examination of “options and alternatives available to the
Commonwealth to provide regulation, oversight and disposition of the
reserves, endowments and surpluses of health insurers and hospitals.”

DHCFP selected the firm Hinckley, Allen & Tringale to perform analyses and
prepare draft reports to assist the agency in responding to the requirements
of Section 35. This report examines the reserves, endowments, and
surpluses of hospitals. Analysis and review of the reserves and surpluses of
health insurers is provided in a separate report, which is available at
www.mass.gov/dhcfp.

Definition of Hospital Surplus

While relatively clear standards for insurer surplus have been developed, it is
more complicated to analyze hospital surplus for several reasons, which
include, but are not limited to, the following:
• Definitional: The terms “surplus” and “reserves” do not have entirely
clear meanings in the context of hospitals. “Surplus” could refer to
operating or total profits, accumulated profits, the difference between
total assets and total liabilities, the amount of unrestricted net assets,
or accumulated cash and marketable securities in excess of working
capital needs. Hospitals do not generally designate assets as
“reserves” except for certain liquid assets set aside to meet debt
service requirements.
• Regulatory environment: While hospitals are required to report
financial information to state regulatory agencies, there are no
standards, federal or state, for hospitals regarding necessary or
appropriate levels of surplus.
• Complexity: Hospitals need financial resources for a larger variety of
purposes than insurers, whose major need for accumulated financial
resources is solvency protection in the event of unanticipated medical
claims payments or investment losses.
• Diversity of hospitals: The sixty-six acute care hospitals in
Massachusetts are a varied group across multiple dimensions, such as
size, range of services, teaching status, payer mix, geographic
 location, and market dominance. Such factors make it more difficult to
define and measure surplus across hospitals. In contrast, for insurance
companies, the primary financial requirement beyond meeting
operating expenses is setting aside sufficient reserves to meet or
exceed specific regulatory requirements addressing the level of
insurance risk undertaken by the insurer.
• Organizational structure: More than half of the Commonwealth’s sixty-
six acute care hospitals are part of larger health systems. Any detailed
assessment of the financial resources of these hospitals must consider
the resources and obligations of the larger parent system. However,
such analysis would be extensive and uniform systems data is not
maintained or analyzed in any one state agency at this time.
• Restrictions on use of assets: Some hospital assets may not be
available to hospital management or boards to use at their discretion
because of restrictions imposed by donors, or by contractual
obligations (such as those imposed by bondholders or those necessary
for self insurance requirements). Some restrictions are permanent and
can be changed only by the donor or through a formal process
involving the Office of the Attorney General. Other limits on the use of
assets may be changed with the consent of the Board of Directors.
• Form of assets: Many hospital assets are in the form of physical plant
and equipment, which can not be easily disposed of or liquidated.

In this report, DHCFP examines the financial resources of hospitals and

assesses whether any hospitals may have considerable accumulated
financial resources. (This approach is analogous to the analysis performed
by DHCFP for health plans, which examined health insurer reserves in the
context of various commonly accepted measures of financial performance
and financial solvency.) This analysis is intended to provide a baseline
review of hospital financial resources and to provide contextual financial
information on hospitals’ related systems. For the purposes of this report,
DHCFP did not examine specific spending strategies by hospital or allocation
of resources among system entities.

Why Hospitals Need to Accumulate Financial Resources

Hospitals cannot remain financially viable without earning and maintaining

adequate financial resources. Hospitals need to accumulate some level of
financial resources in order to maintain operations, withstand unanticipated
financial events, and make investments in new services, infrastructure, and
technology that are necessary to provide high-quality patient care and
compete effectively. Significant changes in the external environment can
also require hospitals to maintain reserves or make new investments. For
example, the recent passage of federal health reform is an external change
which may require some hospitals to accumulate more financial resources
for specific uses, such as investments in information technology, or
experience significant decreases in reimbursement given anticipated
changes to Medicare payments.

However, the ongoing accumulation of financial resources may lead to higher

than necessary prices and higher than necessary health care costs. Thus, a
careful balance must be struck between adequate and excess accumulated
financial resources for hospitals. In addition, most hospitals in Massachusetts
are organized as non-profit organizations and public charities. These
affiliations render a number of special benefits, including exemption from
most taxes, and impose special obligations to operate solely for the
promotion of health and to engage in community benefit programs. As such,
there is an opportunity cost in hospitals accumulating financial resources at
the expense of utilizing these resources for other important purposes.

Study Methodology

This report utilized a three-pronged study methodology, consisting of:

• A literature review of hospital financial indicators;
• Collection and analysis of financial information for Massachusetts acute
care hospitals from 2003 to 2008; and
• A review of laws, regulations, and regulatory practices in
Massachusetts and five peer states1 impacting hospital surplus.

Initially, a literature review was conducted to assist with defining hospital

surplus, interpreting financial ratios, and understanding the various financial
ratios considered when determining if a hospital is in sound financial
condition. In its report to Congress in June 2004, the Medicare Payment
Advisory Commission (MedPAC) proposed a set of financial ratios comparable
across all hospitals that would accurately portray a hospital’s financial
soundness. The report did not identify a single line item in a financial
statement that would serve as an appropriate indicator of financial
soundness. Rather, MedPAC suggested that “by examining a broad set of
financial measures over several years, analysts could gain a more complete
picture of providers’ financial performance.”2 Such measures include total
profit margin, cash flow generated from operations, changes in net assets,
and level of cash and other liquid assets.3 The MedPAC report did not, and
was not intended to, develop indicators for policymakers to make
determinations on the adequacy or reasonableness of accumulated surplus
levels.

For the purpose of this report, a methodology similar to the one proposed by
MedPAC was adopted in order to accurately portray hospital financial
1
Connecticut, Maryland, New York, Pennsylvania, and Rhode Island
2
MedPAC, Report to the Congress, Sources of Financial Data on Medicare Providers, June,
2004, Executive Summary.
3
Ibid.
performance over time. The study also examines payer mix and utilization
for each hospital to facilitate a more complete understanding of their
financial condition. Such an approach allows for the identification of
hospitals in the Commonwealth that may have the greatest amount of
accumulated financial resources.

Massachusetts collects and maintains standardized hospital financial data

with the Division of Health Care Finance and Policy. Hospital 403 cost reports
(DHCFP-403) were utilized for payer mix data and utilization statistics. The
403 data has been used by DHCFP and its predecessor to collect hospital
data for more than twenty years, and as such is the best source of
comparative data available. Data was analyzed from 2003, 2004, 2005,
2006, 2007, and 2008 filings. Since the 2009 DHCFP-403 hospital financial
dataset has recently become available, the tables in this report have been
updated, where possible, to include this information. However, the written
analysis does not reflect information filed for 2009.

Other financial data used in this report was based upon annual financial
submissions provided to DHCFP by hospitals. In the case of the hospital
systems, consolidated financial statements were utilized for analysis. IRS
Form 990s4 were also reviewed for a number of institutions, as well as Public
Charities filings obtained from the Massachusetts Office of the Attorney
General website.

Lastly, several peer states were surveyed in comparison to Massachusetts to

assess prior efforts and current practices regarding hospital surplus.
Connecticut, Maryland, New York, Pennsylvania, and Rhode Island were
selected for comparison due to their large number of non-profit and teaching
hospitals.

Factors to Consider In Identifying Hospital Accumulated Financial

Resources

In determining whether a particular hospital potentially has considerable

accumulated financial resources, the following should be taken into
consideration:

Financial Performance Indicators

• Profitability - This includes operating margin (the excess of revenues
over expenses for patient care and patient care related activities), and
total margin (the excess of revenues over expenses, including non-
operating revenues such as research grants and donations and non-
operating expenses).
• Liquidity - This includes days of cash on hand and other measures of
the ability of a hospital to pay current liabilities with current assets.
4
An IRS form required of non-profit organizations.
 • Solvency - This includes both the amount of existing debt financing, as
measured by equity financing or long-term debt to equity ratios and
the ability to cover current debt obligations with current operating and
non-operating activity, as measured by the debt service coverage
ratio.

Other Measures
• The total amount of unrestricted net assets - These are assets of the
hospital that are not needed to meet obligations or restricted for
specific purposes.
• The mix of restricted net assets and Board-designated assets - It is
critical to distinguish between those assets which are permanently
restricted because of legal conditions imposed by donors and those
that are limited by Board decision, which can be altered.
• Amount and volatility of investment income - A number of hospitals
have large investments that generate interest income. When
investment income becomes central to a hospital’s meeting its
profitability goals, the hospital may be subject to financial risk if
interest income falls short of expectations.5
• Age of plant - Hospitals with younger buildings potentially have less
need to make new investments and may require lower levels of
financial resources.
• The size of the hospital - Smaller facilities may potentially be less able
to withstand financial fluctuations and therefore have a greater need
for reserves.
• Payer mix - Hospitals that are more reliant on public payers may need
to maintain more reserves because public payers are less likely to
cover the full cost of services provided.
• Trends in utilization - Utilization of services is the major source of
hospital operating revenues. Rising utilization may be absorbed by
existing capacity or require increased capacity. Declining utilization
can increase unit costs if fixed costs cannot be reduced at a
comparable rate.
• Restrictions imposed by outside parties, including bond holders -
Hospitals are generally required by lenders to maintain certain
financial ratios. Bond markets also require a hospital to meet certain
ratios in order to qualify for preferred bond rates.
• Organizational structure - For institutions that are part of multi-hospital
systems, any assessment of the financial status of an individual
hospital, and particularly an assessment of whether there are
considerable financial resources, must consider the financial
arrangements between the hospital and its “parent” system.

5
Given the recent economic downturn, there have been significant fluctuations in the value
of investment portfolios at most institutions.
Specifically, the report selected eleven measures that when collectively
evaluated could identify hospitals that may have considerable accumulated
financial resources:
• A positive operating margin for at least three of the past four years
• A positive total margin for at least three of the past four years
• Unrestricted net assets of more than $100 million for the past two
years
• Net patient service revenues (NPSR)6 of more than $100 million for the
past two years
• No more than 15% of NPSR from non-managed Medicaid business
• No more than 50% of NPSR from Medicare and Medicaid business
combined
• More than $50 million in Board-designated assets
• More than $5 million gained or lost in investment income
• A plant that is younger than eight years old
• Debt service coverage of at least three for at least two of the past four
years
• More than 15 days of cash on hand for the past two years

Of these eleven, the first four measures were identified as critical indicators
of long-term positive financial performance. The remaining seven measures
were regarded as supplemental considerations of positive financial
performance. Therefore, a hospital had to meet all of the first four criteria,
not just a majority of the eleven measures. This approach to identifying
hospitals that may have considerable accumulated financial resources is not
based on any existing legal or regulatory standards but presented merely as
one approach to evaluate these institutions.

Major Findings

Based on the financial performance of hospitals against the identified eleven

parameters, there are ten hospitals in the state that may have considerable
accumulated financial resources through 2008 (see Section VI):
• Berkshire Medical Center
• Beth Israel Deaconess Medical Center
• Brigham and Women’s Hospital
• Children’s Hospital Boston
• Massachusetts General Hospital
• Mount Auburn Hospital
• Northeast Hospital
• South Shore Hospital
• Sturdy Memorial Hospital
• Winchester Hospital
6
Net patient service revenue is the total amount received by the hospital for providing
patient care, taking into account actual rates of payment and unreimbursed bad debt and
free care.
Hospitals whose performance may indicate considerable accumulated
financial resources despite over 15% NPSR from Medicaid or over 50% NPSR
from Medicaid and Medicare through 2008 (see Section VI):
• Baystate Medical Center
• Boston Medical Center
• Lahey Clinic
• Southcoast Hospitals Group
• University of Massachusetts Memorial Medical Center

The financial performance of Massachusetts hospitals varies widely.7 The top

quartile of hospitals had strong performance on both an operating and total
margin basis from 2003-2008, while the bottom quartile of hospitals had
negative performance during almost all of this period. Some hospitals had
consistently strong financial performance; thirty-two of the sixty-six hospitals
in the state had positive financial margins in each of the last four years.
Only a handful of hospitals had consistently negative financial results, but
some hospitals have had financial results that are consistently weak
compared to median hospital performance. In addition, the financial
performance at some hospitals has been volatile, with significant variations
in financial performance over the four-year-period examined in the report.

Median hospital margins in Massachusetts have historically been lower than

those in the U.S. but similar to those in the northeast, on both an operating
and total margin basis.8 Massachusetts hospitals have a history of lower
total margins than hospitals nationwide but similar performance to other
hospitals in the northeast. The trend in financial performance is similar for
Massachusetts hospitals and those in the northeast and nationwide. For
example, total and operating margins, on average, declined significantly in
2008.

Some hospital characteristics are generally associated with better or worse

financial performance.9 Although the performance of individual hospitals
varies widely, certain factors appear to be associated with hospital financial
performance:
• Teaching hospitals had far stronger financial performance than did
non-teaching hospitals. The medians of the operating and total
margins of teaching hospitals were approximately 4% during the study
period, compared to less than 1% for non-teaching hospitals.
• Size of hospital was positively associated with strong financial results.10

7
See Appendix 4, Tables 1-3.
8
See Section V, Figure A.
9
See Section V, Figure C.
10
This is explained by the higher margins of teaching hospitals, which are the largest
hospitals.
 • Hospitals that are part of multi-hospital systems had somewhat
stronger financial performance than did hospitals that are not part of
larger systems.
• Disproportionate share hospitals11 (DSH) had worse financial
performance than non-DSH hospitals.
• As a group, the four hospitals that are for-profit entities12 had weaker
financial performance than the median results for the not-for-profit
hospitals.
• The four specialty hospitals13 in the state, as a group, had weaker
financial performance, but the actual financial status of two is
considerably stronger, due to large foundations and/or endowments.

Some Massachusetts hospitals have very strong liquidity and solvency

positions, while others are much weaker. As noted above, understanding the
financial status of an individual hospital requires a closer analysis and review
of institutional decisions regarding cash management, transfers of money to
parent corporations, and other operations.

Restricted net assets of Massachusetts hospitals totaled $3.6 billion as of

fiscal year end 2008.14

The amount of accumulated financial resources--as measured by total

unrestricted net assets--varies widely among hospitals.15 The Massachusetts
hospitals with the greatest total unrestricted net assets in 2008 were
Children’s Hospital with $951 million and Massachusetts General Hospital
with $710 million. The hospitals with the least were Caritas Carney Hospital
with -$20 million and Merrimack Valley Hospital with -$8 million.16

Assets whose use was limited by Board decisions totaled $3.6 billion in 2008.
From existing public filings, it is difficult to identify the purposes for which
Board limitations have been imposed. Unlike assets whose use is restricted
by a donor, Board-designated assets could be released for general operating
purposes by another Board vote. Some limitations may be less discretionary
than others (e.g., restrictions imposed on assets to meet bond covenants).
Without knowing the intended reasons for, or intended uses of Board-
designated assets, it is difficult to assess if these assets are necessary as
part of the hospital’s essential mission.
11
The Division of Health Care Finance and Policy defines disproportionate share hospitals
(DSH) as hospitals where 63% or more of gross patient service charges are from Medicare,
Medicaid, other government payers, and Health Safety Net.
12
The four for-profit hospitals are: Merrimack Valley Hospital, MetroWest Medical Center,
Nashoba Valley Medical Center, and St. Vincent Hospital.
13
The four specialty hospitals are: Children’s Hospital, Dana-Farber Cancer Center,
Massachusetts Eye and Ear Infirmary, New England Baptist Hospital.
14
See Appendix 4, Table 11b.
15
See Appendix 4, Table 5.
16
Negative assets can occur when total liabilities exceed total assets.
As of fiscal year end 2008, twenty-four percent of hospitals have a significant
level of permanently restricted assets.17 While thirty hospitals have more
than $10 million in total restricted assets, only sixteen hospitals have more
than $10 million in net assets that are permanently restricted. However,
these sixteen hospitals account for 89% of the permanently restricted net
assets of all Massachusetts hospitals.

Most hospitals added net assets during the past five years, but had some
deterioration in 2008.18 The declines in 2008 were largely the result of poor
investment performance, but were exacerbated at most hospitals by
changes in accounting requirements for retiree health and pension benefits,
and changes in the valuation of malpractice reserves. Unrealized
gains/losses also affected financial performance in 2008. These unrealized
gains/losses are notational until the assets are sold.

In 2008, eleven hospitals experienced significant gains or losses on

investments.19 These hospitals either gained or lost $5 million or more on
investments. This suggests that certain hospitals may be subject to
considerable investment risk, which could require additional reporting to
better understand how hospital portfolios are being managed.

A majority of hospitals are members of systems, making it difficult to assess

the actual level of available financial resources. Low performance on certain
financial indicators may simply be a reflection of larger cash management
strategies. Approximately 60% of the state’s hospitals are members of
multi-hospital systems. These systems account for approximately 60% of
hospital beds, inpatient admissions and days, and 62% of net patient service
revenues.20 In 2008, Massachusetts hospital systems’ total net assets
exceeded $17 billion dollars, $12.9 billion of which were unrestricted net
assets.21

Other hospitals that are not members of a multi-institution system have

foundations, outpatient centers, or other affiliated organizations with
significant financial resources that are reported separately from those of the
hospital. These hospitals include Boston Medical Center, Children’s Hospital
of Boston, Dana Farber Cancer Institute, and Tufts Medical Center.

Major Findings of the Review of Hospital Community Benefit

Programs

17
See Appendix 4, Table 10.
18
See Appendix 4, Table 6.
19
See Appendix 4, Table 12.
20
See Section VII, Figure N.
21
See Section VII, Figure O.
The Internal Revenue Service is increasing its review of hospital community
benefit activities. Until recently, the Internal Revenue Service had fairly
general guidelines regarding the types of community benefit activities in
which tax-exempt hospitals must engage beyond the provision of charity
care. However, since 2009, the IRS has required hospitals to provide much
more detailed information on community benefit programs, which should
provide a means of collecting comparable national data to assess whether a
hospital is providing sufficient services to its community to warrant its
federal tax exemption.

In the absence of specific federal guidelines, community benefit

requirements for hospitals differ from state to state. According to a 2008
review by the Government Accountability Office, only fifteen states require
community benefit programs. Of these, only five states specify a minimum
community benefit contribution level (see Section IX).

The Massachusetts Office of the Attorney General (AGO) has long established
detailed community benefit guidelines for hospitals. These guidelines have
recently been revised and strengthened. The AGO first issued community
benefit guidelines in 1994, and they were then reviewed and updated in
2000 and 2002. The AGO recently revised the guidelines, which went into
effect October 1, 2009.

The Massachusetts community benefit guidelines are voluntary. Hospitals

are not required to comply with the AGO guidelines, although most hospitals
submit an annual community benefit filing to the Office of the Attorney
General. Massachusetts does not require specific programs but leaves it to
each hospital and its community to conduct a needs assessment to
determine appropriate programs.

The Massachusetts and federal standards differ in terms of what can be

classified as community benefits. Massachusetts permits community benefit
expenditures to include charity care, including a hospital’s assessment to the
Health Safety Net (HSN) Trust Fund and the cost of claims billed to the HSN
for which payment has been denied. The state does not recognize bad debt,
shortfalls from means-tested government programs like Medicaid, health
professions education, or research to be classified as community benefit
activities

A total of $454 million in community benefits was reported by Massachusetts

hospitals in 2008. This amount includes $149 million in charity care. The
amount of community benefits provided by individual hospitals ranged from
a low of $55,000 to a high of $69.9 million.22

Recommendations
22
See Appendix 4, Table 36.
#1: Improve Data Collection and Reporting

The Division of Health Care Finance and Policy collects extremely detailed
financial information from each hospital in the state and issues quarterly and
annual reports which include a number of financial indicators. However, a
majority of Massachusetts hospitals are part of larger holding companies;
and hospital holding companies are not required to report holding company
level data to DHCFP. Thus the individual hospital data compiled by DHCFP is
an incomplete picture of a hospital’s broader financial situation. A review of
hospital holding company consolidated financial statements indicates that an
assessment of holding company finances is necessary for a thorough
understanding of hospital finances. For example, while some hospitals
appear to be low on cash, a review of holding company finances can reveal
that cash is maintained at the holding company level. The absence of this
information may lead to the inaccurate impression that a hospital may have
inadequate or adequate financial resources. Therefore, DHCFP recommends
that the agency be authorized by legislation to collect complete financial
data on individual hospitals and affiliated systems and to provide access to
this data to other government bodies and interested parties.

Transparency is a key regulatory goal. The ready availability of comparative

holding company financial data would greatly increase understanding and
analysis of hospital finances. While consolidated financial statements are
available on the Attorney General’s website, they are not routinely analyzed
and reported by DHCFP. The challenge facing state monitoring agencies is
not necessarily a lack of financial data, but rather a clear directive to one
agency to compile information from disparate sources and analyze the data
to produce useful information for policy makers and the public. This would
require the following concrete steps:

a. All sources of financial disclosure by hospitals and hospital

system affiliates should be centrally located, in electronic form,
within one agency in the state. Hospitals and hospital systems currently
report a variety of financial information to a range of state and quasi-public
state agencies. Hospitals file quarterly and annual financial statements, and
annual cost reports, with DHCFP while the Massachusetts Office of the
Attorney General collects annual audited financial statements and annual
reports for all non-profit hospitals and hospital systems. Hospital systems
report system-level financial data to a number of state and federal
regulatory agencies including municipal repositories (per Securities and
Exchange regulations), and the Massachusetts Health and Educational
Financing Authority. Often the system-level audited financial reports include
supplemental information that breaks out various sub-elements of the
system; sometimes individual hospital performance is broken out, and other
times it is combined with other sub-elements in the consolidating
supplements. However, these filings lack uniformity as well as the specifics
of intra-system cash flow. The SEC filings typically limit disclosure to only
those entities obligated to repay bondholder debt, which can omit entities
within the system.

Today, this information must be compiled and collected from several

agencies in order to develop a consolidated picture of the financial condition
and status of hospitals and hospital systems. Centralized reporting and
increased transparency will lead to a better understanding of both overall
and hospital-specific finances.

b. The state should build the analytic capacity to compile,

standardize, analyze, and synthesize system financial performance
from this central data repository. Line of business profitability, overall
system indebtedness and capacity to repay, inter-affiliate transfers of
resources, system-wide cash, and investment reserves are all useful metrics
of the financial health of a system with an embedded hospital. Certain non-
financial metrics routinely disclosed on bond prospectuses such as market
share, utilization, background and turnover of Board and senior
management, payer mix, and profitability by major business lines could also
be useful.

#2: Increased Oversight of Hospital Accumulated Financial

Resources

While hospitals require accumulated financial resources in order to

adequately protect patients and providers from unanticipated events and to
fulfill their missions, ongoing accumulation of reserves without corresponding
increased value to consumers may lead to higher than necessary prices of
medical services. Understanding that this is a delicate balance highlights the
concern when hospital resources fluctuate excessively or when regulators
are unable to assess how hospitals use or dispose of their accumulated
resources.

a. The issue of accumulated financial resources should be further

examined to develop guidelines regarding the appropriate amount
of accumulated financial resources for hospitals and hospital
systems. There are currently no standardized methods or guidelines
regarding the appropriate level of hospital accumulated financial resources.
Standardized methods and guidelines are needed to identify when a facility
is under-resourced and may be in danger of failing, as well as when facilities
are maintaining a considerable level of accumulated financial resources.
Regulators have an interest in the solvency of hospitals and ensuring they
are well-capitalized to provide high quality care. However, there are costs to
consumers associated with hospitals accumulating resources in excess of
need, particularly in Massachusetts where the majority of hospitals are non-
profit public charities. The purpose of standard measurement techniques and
guidelines would be to ensure that Massachusetts hospitals are appropriately
capitalized, while not excessively accumulating reserves which may increase
the price of medical care.

b. The Commonwealth should require that hospitals report to DHCFP

on an annual basis the purposes and corresponding amounts for
which Board-designated assets are being reserved. For the sixty-six
acute hospitals studied, over $3.6 billion dollars were labeled Board-
designated assets in 2008. However, there is no centralized repository of
information delineating the purpose for which these funds have been set
aside, making it a challenge to determine if the purposes for which the
restrictions are imposed are necessary or discretionary. Bond-holders
frequently require hospitals to maintain a certain level of available cash;
however, the Commonwealth has no information about what proportion of
the $3.6 billion in Board-designated assets is due to bond covenants. More
detailed and transparent public reporting about Board-designated assets
would enable policymakers to determine how much of the assets reported as
restricted could actually be released for general operating purposes. Once a
complete picture of Board-designated funds is developed, the
Commonwealth may then develop guidelines for reserving funds in this
manner. To the extent that fewer funds are limited in this way, medical
expenses may be reduced or additional services implemented.
I. Introduction

Section 35 of Chapter 305 of the Acts of 2008, An Act to Promote Cost

Containment, Transparency, and Efficiency in the Delivery of Quality Health
Care, requires that the Division of Health Care Finance and Policy (DHCFP), in
conjunction with the Division of Insurance (DOI), conduct a study of the
reserves, endowments, and surpluses of health insurers and hospitals. Per
statute, the goal of the study is to provide information to assist both DHCFP
and DOI with the examination of “options and alternatives available to the
Commonwealth to provide regulation, oversight and disposition of the
reserves, endowments and surpluses of health insurers and hospitals.”

Specifically, Section 35 required the study to consist of the following

elements:

(1) an analysis of the laws, regulations and other measures

currently in effect in the commonwealth which regulate the
amount, nature and disposition of surpluses held by or for the
benefit of health insurers in excess of amounts reasonably
anticipated to be required to pay claims, taking into account the
level of such reserves and surpluses necessary to safeguard the
solvency of health insurers against unanticipated events and
other circumstances which may cause extraordinary medical
losses;
(2) an analysis of federal and state law, regulations and other
measures currently in effect which regulate the amount, nature
and disposition of surpluses and endowments held by or for the
benefit of hospitals in excess of amounts reasonably anticipated
to be required to perform and support services provided by the
hospital and to guard against unanticipated events and other
circumstances;
(3) a review of recent fiscal practices and financial reporting by
health insurers relative to reserves and surpluses and of hospital
fiscal practices and financial reporting required by general or
special law;
(4) a comparison of the commonwealth’s current statutes and
regulations with those of other states which the commission
deems to be reasonably comparable to those of the
commonwealth;
(5) a review and assessment of model acts and regulations and
any other information which the commission finds to be relevant
to its inquiry; and
 (6) a review of the method by which health insurers and
hospitals fund community benefit programs including, but not
limited to, the manner by which funding is regulated by other
states as to the appropriate amount, monitoring and direction of
such funding.

DHCFP selected the firm Hinckley, Allen & Tringale to perform analyses and
prepare draft reports to assist the agency in responding to the requirements
of Section 35. This report examines the reserves, endowments, and
surpluses of hospitals. Analysis and review of the reserves and surpluses of
health insurers is provided in a separate report, which is available at
www.mass.gov/dhcfp.
II. Study Methodology

This report utilized a three-pronged study methodology, consisting of:

• A literature review of hospital financial indicators;
• Collection and analysis of financial information for Massachusetts acute
care hospitals from 2003 to 2008; and
• A review of laws, regulations, and regulatory practices in
Massachusetts and five peer states23 impacting hospital surplus.

Initially, a literature review was conducted to assist with defining hospital

surplus, interpreting financial ratios, and understanding the various financial
ratios considered when determining if a hospital is in sound financial
condition. In its report to Congress in June 2004, the Medicare Payment
Advisory Commission (MedPAC) proposed a set of financial ratios comparable
across all hospitals that would accurately portray a hospital’s financial
soundness. The report did not identify a single line item in a financial
statement that would serve as an appropriate indicator of financial
soundness. Rather, MedPAC suggested that “by examining a broad set of
financial measures over several years, analysts could gain a more complete
picture of providers’ financial performance.”24 Such measures include total
profit margin, cash flow generated from operations, changes in net assets,
and level of cash and other liquid assets.25 The MedPAC report did not, and
was not intended to, develop indicators for policymakers to make
determinations on the adequacy or reasonableness of accumulated surplus
levels.

For the purpose of this report, a methodology similar to the one proposed by
MedPAC was adopted in order to accurately portray hospital financial
performance over time. The study also examines payer mix and utilization
for each hospital to facilitate a more complete understanding of their
financial condition. Such an approach allows for the identification of
hospitals in the Commonwealth that may have the greatest amount of
accumulated financial resources.

Massachusetts collects and maintains standardized hospital financial data

with the Division of Health Care Finance and Policy. Hospital 403 cost reports
(DHCFP-403) were utilized for payer mix data and utilization statistics. (The
403 data has been used by DHCFP and its predecessor to collect hospital
data for more than twenty years, and as such is the best source of
comparative data available.) Data was analyzed from 2003, 2004, 2005,
2006, 2007, and 2008 filings. Since the 2009 DHCFP-403 hospital financial
23
Connecticut, Maryland, New York, Pennsylvania, and Rhode Island
24
MedPAC, Report to the Congress, Sources of Financial Data on Medicare Providers, June,
2004, Executive Summary.
25
Ibid.
dataset has recently become available, the tables in this report have been
updated, where possible, to include this information. However, the written
analysis does not reflect information filed for 2009.

Other financial data used in this report was based upon annual financial
submissions provided to DHCFP by hospitals. In the case of the hospital
systems, consolidated financial statements were utilized for analysis. IRS
Form 990s26 were also reviewed for a number of institutions, as well as Public
Charities filings obtained from the Massachusetts Office of the Attorney
General website.

Lastly, several peer states were surveyed in comparison to Massachusetts to

assess prior efforts or current practices regarding hospital surplus.
Connecticut, Maryland, New York, Pennsylvania, and Rhode Island were
selected for comparison due to their large number of non-profit and teaching
hospitals.

Public Input Session: DHCFP convened a public input session on April 15,
2009. The session provided an opportunity for interested parties to provide
comments, ideas, and recommendations regarding the study to DHCFP, DOI,
and the consultants. The agencies prepared a project summary for meeting
attendees as well as a list of specific questions to be considered. These
materials can be found in Appendix 2. Individuals were encouraged to either
submit comments orally at the session and/or in writing after the close of the
session.

The following individuals or organizations (in alphabetical order of the

presenter) provided comments:
• Marylou Buyse, M.D., President and Chief Executive Officer of the
Massachusetts Association of Health Plans (presented by Eric Linzer)
• Michael Caljouw, Senior Director of Public, Government and Regulatory
Affairs for Blue Cross Blue Shield of Massachusetts
• Joseph F.X. Casey, Treasurer and Chief Financial Officer for Sturdy
Memorial Hospital
• John Erwin, Executive Director for the Conference of Boston Teaching
Hospitals
• Charles R. Goheen, Executive Vice President and Chief Financial Officer
for Fallon Community Health Plan, Inc.
• Joe Kirkpatrick, Vice President of Healthcare Finance & Managed Care
for the Massachusetts Hospital Association
• Georgia Maheras, Health Care for All
• Douglas J. McGregor, Director of Healthcare Services for the Boston
Organization of Teaching Hospital Financial Officers
• Roland Price, Treasurer for Tufts Health Plan, Inc.

26
An IRS form required of non-profit organizations.
All written comments from the public input session are available in Appendix
2.
III. Definition of Hospital Surplus

Hospital “surplus” does not fall readily into accepted definitions or concepts.
A hospital’s “surplus” is often referred to as a hospital’s operating margin or
total margin. A positive margin indicates that revenues are greater than
cost; a negative margin indicates that costs exceed revenues.

Evaluation of hospital surplus requires a broader approach than simply

analyzing operating and total margins. The dollar value of the annual
operating margin and the annual total margin are simply measures of annual
operating and/or total profit or loss. This does not equate to surplus because
each year some of a company’s profits are put back into the business for the
purpose of maintenance and expansion. In order to be comparable to
traditional concepts of capital and surplus, one would want to determine the
total financial resources available to the hospital less the amount set aside
for future business expenses. To maintain the distinction between traditional
surplus and usable hospital resources, this concept shall be referred to as a
hospital’s accumulated financial resources for the purpose of this report.

A number of financial performance ratios are helpful when determining the

ability of a hospital to generate accumulated financial resources. However,
these ratios should not be interpreted alone. These additional ratios and/or
financial data include:

Days of Cash on Hand: A hospital must have sufficient monies to meet

ongoing expenses. Days of cash on hand indicates how long a hospital can
meet its financial obligations should revenues cease. This measure is
comparable to “days of claims payable” in the insurance industry. It is
important to note that a low number of days of cash on hand does not
necessarily mean that a hospital is in financial difficulty. Hospital
management may have a cash management strategy which results in a low
but adequate number of days of cash on hand in order to generate additional
investment income. Additionally, significant current assets may be held at
the holding company level rather than the hospital level.

Total Net Assets: Total net assets, the difference between total assets and
total liabilities, represent assets which are owned by the hospital but are not
needed to meet current obligations. However, these assets are not
necessarily available to hospital management to use at its discretion. Total
net assets are the sum of three elements on the financial statements
hospitals report to the Commonwealth: unrestricted net assets, permanently
restricted net assets, and temporarily restricted net assets. Since both
permanently and temporarily restricted net assets are not available for
discretionary use by hospital management, they should not imply a
hospital’s access to funds. In addition, other non-discretionary funds such as
reserve funds for pensions, employee health benefits, or malpractice may
contribute to total net assets.

Unrestricted Net Assets: While the use of these funds is subject to the
discretion of the hospital’s management and Board of Directors, these assets
may not be easily liquidated. Examples of such assets include buildings,
equipment, and other technology.

Board-Designated Assets: Assets recorded under this category represent

those whose use has been limited by the hospital’s Board of Directors or
Trustees. Unlike restricted net assets, these assets are not restricted by
donors but have been allocated by the hospital’s Board of Directors or
Trustees for a specific purpose. Use of these funds can be changed by Board
or Trustee vote.
It is important to note that if Board designation of either current or non-
current assets is to meet the requirements of a bond holder, the Board’s
discretionary use of these funds is limited.

Excess of Revenue, Gains, and Other Support Over Expenses: This amount is
calculated as an annual figure and defined by DHCFP as “Total Surplus.”27
Since it is calculated as an annual figure and not as an accumulated surplus
value, it is not comparable to traditional capital and surplus, and thus an
inadequate measure of a hospital’s accumulated financial resources.

Endowments: Many hospitals in Massachusetts have restricted funds, or

endowments. A hospital’s endowment is an accumulation of funds given to
the hospital for long-term use. These funds are typically raised through
individual donations, and usually come with the stipulation that the donation
be invested, with the principal remaining intact in perpetuity or for a defined
period of time. The appreciated value and investment income from the
donation is used to finance projects and/or services, but frequently has
restrictions placed upon its use by the donor. If the donor is available and
agrees in writing, endowment funds may be used for a different purpose
than originally intended. If, on the other hand, the donor is not available, the
institution must obtain a release from the appropriate court in order to spend
funds differently from the donor stipulation. The Attorney General is notified
of all such requests and has the opportunity to be heard. If the restriction is
found to be “obsolete, inappropriate, or impracticable,” the court may
release the restriction in whole or in part.28 However, to the extent possible,
any modification must be done in accordance with the donor’s probable
intent.

Hospital Fundraising: A key source of non-operating income for non-profit

hospitals is individual donations and fundraising. Both types of funds are
27
Calculated by DHCFP on its Annual Hospital Financial Fact Sheets.
28
M.G.L. ch. 180A, § 9.
frequently set aside for specific programs, buildings, and/or services and
thus not readily available for expenses other than those specified in the
donation or bequest. Fundraising revenue further complicates the definition
of hospital accumulated surplus. While these funds contribute to the overall
financial solvency and resources of an institution, in many cases they are
either donor-restricted endowment funds or Board-restricted funds that may
be so-designated to meet bond covenants.

Hospitals’ accumulated financial resources do not necessarily represent

liquid financial assets and thus cannot be readily measured by any single
financial indicator. Additionally, hospitals’ accumulated financial resources
are not generated solely by patient service activities but include funds whose
use is restricted and funds from investment activity. Further complicating
matters is a hospital’s corporate structure. As will be discussed later,
hospitals are often members of larger systems, and an assessment of an
institution’s accumulated financial resources must consider the entity’s
related corporations’ financial resources and obligations in relationship to
their mission, business activities, and business risks.

Please see Appendix 1 for definitions of the hospital financial terms used in
this report.
IV. Why Hospitals Need to Accumulate Financial Resources

Accumulated financial resources allow a hospital to maintain operations and

withstand unanticipated financial events. These resources allow hospitals to
fund major expenses such as the development of information technology
systems, investment in new clinical technologies, and new services in
response to community needs. In order for a hospital to access bond
financing at favorable interest rates for such projects, the hospital must be in
sound financial condition. Additionally, like all businesses, hospitals face
risks which require the maintenance of adequate financial resources in order
to preserve solvency. This section identifies and discusses various risks
faced by hospitals.

Cost and Availability of Labor: Labor is the largest expense category for
hospitals. A number of elements of labor costs pose potential challenges for
future spending levels:
• Workforce recruitment and retention: Hospitals depend on highly
skilled medical professionals and must compete with other
Massachusetts and out-of-state medical facilities for these workers.
• Labor agreements: Labor costs are predictable if hospitals have a two
or three year agreement with a union. However, as contracts expire,
hospitals must predict, and budget, for future labor agreements.
• Hospitals frequently bear additional costs when there is a shortage of a
particular provider type in their service area. In addition to
recruitment efforts, hospitals in specific regions of the state provide
office space, staff assistance, and/or higher salary to encourage
physicians to practice in the area. However, once a physician practice
is stabilized, the hospital should benefit from referrals and more
appropriate utilization of the emergency room.

Technology: The medical sector is one area of the economy where the
technology is changing constantly. Hospitals routinely purchase and upgrade
equipment to keep pace with emerging medical technologies. New business
and regulatory requirements for information technology require substantial
investment for hospitals that do not already have these elements in place.

Current Economic Environment: The downturn in the economy has reduced

hospitals’ ability to earn investment returns, has led to investment losses,
and may negatively impact philanthropic giving. Additionally, as
unemployment increases and individuals lose their employer-based health
coverage, hospitals may experience an increase in uninsured or under-
insured patients, loss of service volume as elective procedures are
postponed, and an increase in payment default. During 2008, hospital total
margins declined materially due in part to a reduction in investment income.
Competitive Environment: Some hospitals in a competitive environment are
at a disadvantage in negotiating adequate rates. In addition, hospitals
compete not only with each other, but with non-hospital providers such as
physicians in private practice, free standing ambulatory surgery centers,
laboratories, and imaging suites.

Changing Demographics: Hospitals must adjust the services they provide to

meet local needs. Changing demographics, such as a significant increase in
the elderly, may require a hospital to increase spending to meet these new
needs.

Service Volume (Utilization): Under the current hospital fee-for-service

financing system, utilization is a key determinant of hospital operating
revenues. As utilization increases, revenues increase accordingly.
Conversely, as utilization decreases, revenues decrease. In many cases,
hospitals may increase utilization without requiring additional buildings,
equipment, or labor. However, significant utilization increases may require
additional investment in capacity. On the other hand if utilization falls,
decreased revenue may prove insufficient to cover fixed costs. Thus, it is
important to monitor utilization changes in relation to overall capacity and
hospital fixed costs.

The size of a hospital affects the resilience of the institution to changes in

utilization. Typically, larger hospitals can withstand small variations in
utilization more easily than smaller ones. Variations in hospital utilization
may be due to a variety of factors: absolute increases or decreases across
the system, shifts in utilization from one hospital to another, shifts in
utilization from hospitals to alternative sites of care, or changes in average
length of stay. Additionally, physician affiliations, payment incentives,
competition from non-hospital providers, benefit design, changing standards
of care, changing demographics, and the general economic situation may
contribute to utilization pattern changes.

Service Intensity (Case Mix): Service intensity, or case mix, interacts with
volume changes. Changes in case mix are reflected in the provision of
services for a given utilization level. An increase in case mix intensity
requires additional services per patient, while a decreasing case mix means
a hospital will be providing fewer services for a given patient volume.

Significant increases in either service volume or intensity may require

hospital expansion or the addition of new services.

Insurer and Health Plan Contracting Strategies: Health plan contracting

strategies influence a hospital’s need to have additional funds available. A
fee-for-service system pays for each unit of care provided while a capitated
or global payment contract typically pays a set amount per person, per
episode of illness, or per unit of time. In addition, other issues requiring
consideration include health plan interest in limited network products, the
implementation of Centers of Excellence for selected procedures, and a
trend toward longer contract terms. Hospital contracts with insurance
companies and health plans typically run for 3-5 years. The length of these
contracts may place the hospital at risk if unanticipated changes occur
during the life of the contract, or if increases in the cost of labor and/or
technology are not adequately addressed by the negotiated inflation factors.

Payment Reform: A transition to global payment structures was unanimously

recommended by the Special Commission on the Health Care Payment
System in 2009. Integrated payment and risk sharing may change the
current business model which pays hospitals for production (measured by
admissions, visits, and procedures) to one in which performance and funds
are driven by integrated coordination of a patient’s health care. To the
extent that a hospital successfully manages the transition and invests in the
necessary infrastructure, it will survive and/or flourish. Similarly, the recent
passage of federal health reform will present a challenge for hospitals having
to adjust to new requirements as well as reimbursement changes in
Medicare.

Change in Insurance Product Benefit Design: As the cost of health insurance

increases, employers are increasing the share of total costs borne by
employees. There are two major ways an employer can do this – by
changing the employee contribution percentage or by changing the benefit
structure. A change in employee contribution percentage is not likely to
have a significant impact on hospitals; given the individual mandate, most
employees will probably still participate in employer-sponsored coverage.
However, as employers offer products with increased deductibles,
copayments, and coinsurance levels, hospitals face the prospect of
decreased revenue if there is considerable benefit buy-down. Patients may
have increased difficulty making payments at the time of service, thus
increasing accounts receivable and bad debt. Additionally, if patients are
subject to higher out-of-pocket costs, some individuals may choose to
postpone care.

Government as a Payer and Regulator: Government impacts hospitals both

as a payer and as a regulator. Hospitals do not have much control over
payment levels for patients who are covered by government programs such
as Medicare, Medicaid, and the Health Safety Net Trust Fund in
Massachusetts. Government programs are subject to federal and state
budget pressures, and thus their payment rates are typically lower than
those negotiated in the private market.

Massachusetts hospitals attempt to balance their revenue needs by

negotiating higher private insurer and health plan rates to offset the lower
government program rates; this practice is referred to as “cost shifting.” The
more costs a hospital has to shift and the less privately covered patients a
hospital has to shift costs to, the more difficult it is for a hospital to generate
sufficient revenue to achieve positive operating margins. Hospitals with a
high volume of patients financed by public programs have fewer
opportunities to adjust to major changes in the competitive environment or
major public policy shifts. This dynamic has been recognized by state and
federal authorities through a number of special adjustments, including
designation as a Disproportionate Share Hospital (DSH). Due to the
differences in payment levels, payer mix is a crucial component to assessing
a hospital’s ability to accumulate additional financial resources.

Investment Risk: A number of hospitals do engage in investment practices

that generate interest income. When investment income is used as the
primary source for particular activities, a hospital is subject to risk when such
investment income falls short of expectations. The hospital may also
experience a higher total margin in good market years, thereby relieving
some pressure on operating margins.
V. Massachusetts Hospital Market Overview

In 2008, there were sixty-six acute care hospitals in Massachusetts. These

hospitals provide care for a wide variety of conditions requiring inpatient,
outpatient, laboratory, imaging/radiology services, ancillary services, and
twenty-four hour emergency care services. Massachusetts hospitals are the
largest employer in the state health care sector, and comprise 15.8% of
Massachusetts employment.29

Very few hospitals in the Commonwealth are geographically isolated or meet

the federal definition of critical access institutions, thereby contributing to
competitive pressure among and between community hospitals and
academic medical centers. This pressure has fostered a dynamic hospital
industry in Massachusetts in which hospitals are continuously merging,
developing clinical affiliations with other hospitals, changing corporate
structures, changing hospital and physician alignments, adding new services,
and responding to the changing competitive environment. One such change
has been the significant reduction in the number of independent campuses
and bed capacity across the state over the last twenty years. In 1988,
Massachusetts had over a hundred short-term acute care hospitals in
operation. Through 2008, sixty-six remain operational.30

The sixty-six acute care hospitals examined in this report vary greatly both in
size (in 2008 nine hospitals had under $50 million in net patient service
revenue (NPSR) while three hospitals had over $1 billion) and in organization
type (from independent, community hospitals to large, multi-hospital holding
companies).31

Service organizations such as hospitals cannot remain financially viable

without earning and maintaining adequate reserves. Cash flow (income
adjusted for non-cash expenses) is generally positive for hospitals even when
margins are negative due to the substantial non-cash expenses of hospitals
(e.g. depreciation). Hospitals must meet normal cash requirements for
working capital, debt principal payment, and investment in capital. It is
important to note that Massachusetts hospitals have a history of lower total
margins than hospitals nationwide but similar performance to other hospitals
in the northeast.32 Figure A shows Massachusetts hospitals’ median total
margin trend below that of the nation but following a similar trajectory. In

29
BLS/DUA Q1 2008 Quarterly Census of Employment & Wages (ES-202); healthcare sector
includes direct care, medical industry and research.
30
In 2009, there were sixty-five acute care hospitals in Massachusetts with the closing of
Hubbard Regional Hospital.
31
For NPSR data see Appendix 4, Table 21.
32
Total Margin = Total Income/Total Revenue
2008, hospitals across the United States experienced a median total margin
of 2.3% compared with the Massachusetts hospital rate of 0.9%.33

33
U.S. and Northeast Region source: 2010 Almanac of Hospital Financial and Operating
Indicators, INGENIX; Massachusetts source: Division of Health Care Finance and Policy
Hospital Financial Database
Figure A: Hospital Total Margins 2003-2008
Hospital Total Margins

5.0%

4.2% 4.3% 4.2%

4.0%

3.4%
3.0% 3.1% 3.1% 3.0%
2.9% 2.8% U.S.
2.5% Northeast
2.3%
2.1% Massachusetts
2.0%
1.6%
1.2%
1.0% 0.9%

0.0%
2003 2004 2005 2006 2007 2008

Median total and operating margins in 2008 for Massachusetts acute care
hospitals were at their lowest during the past five years.34 Total margin
ranged from -8.5% to 7.4%, with a median of 0.9%. Total surplus ranged
from a loss of $49.5 million to a gain of $106.6 million, with a median of less
than one million. Although Figure B shows Massachusetts acute care hospital
operating margins declined in 2008, the decline is not as steep as total
margins due to a difficult year with non-operating revenue performance.
Median operating margin declined from 1.7% in 2007 to 0.7% in 2008.

See 2008 Annual Acute Hospital Financial Report, available at http://www.mass.gov/dhcfp,

34

Reports and Publications. For individual hospital data on total and operating margin see
Appendix 4, Tables 2-3.
Figure B: Massachusetts Acute Care Hospital Operating Margins 2003-2008

Massachusetts Acute Care Hospital Operating Margins

4.0%
3.5% 3.4% 3.4%
2.9% 2.9%

2.0% 2.1%
1.8% 1.9%
1.7% 1.7%

0.8% 0.7% 25th percentile

0.2% 0.1% 0.1%
0.0% 0.0% Median
-0.2%
2002 2003 2004 2005 2006 2007 2008 75th percentile
-1.1%
-1.7%
-2.0%
-2.4%
-2.7%

-4.0%

Examination of the Massachusetts hospital industry is enhanced by

conducting categorical analyses of financial performance measures on
hospital subgroups. The subgroups examined in this analysis include system
hospitals, specialty designation, for/non-profit status, teaching status,
disproportionate share status, hospital size, and geographic location.
Although two of these groups consist of only a few hospitals, it is still useful
to include them in order to provide a fuller picture of the variety found within
the acute hospital market in Massachusetts. A full list of the hospitals
included in each subgroup is available in Appendix 3. Summary data for each
subgroup is contained in Figure C at the end of this section.

System Hospitals

There are many different types of hospital organizational structures in

Massachusetts ranging from multi-hospital entity systems with other
affiliated organizations, to single acute care hospitals that may have other
affiliated organizations such as foundations, real estate management groups,
or physician group practices.35 For the purposes of this analysis, system
hospitals are defined as those hospitals that have a parent organization
which operates more than one acute care hospital in Massachusetts. In 2008,

35
See Appendix 6 for pictorial examples of systems of varying complexity.
thirty-seven of the sixty-six acute care hospitals in Massachusetts may be
considered system hospitals (56%).36

System hospitals reported somewhat stronger total and operating margins

than did non-system hospitals. System hospitals experienced a median total
surplus that was three times that of hospitals not in systems ($1,099,294
versus $364,687, or $4,900 vs. $2,100 per bed), and they also had greater
median net assets in 2008 ($77,824,265 versus $62,280,622). System
hospitals had two more days of cash on hand and earned far more net
revenue per adjusted discharge ($7,228 and $4,367) than did non-system
hospitals. It is important to note that the discharge data is not case mix
adjusted. Though system hospitals are not necessarily correlated with a
sicker patient population, this group also contains 60% of the state’s
teaching hospitals, which tend to treat high acuity patients. System hospitals
were slightly more reliant on Medicare revenue than hospitals not in
systems.

Specialty Hospitals

Most hospitals provide a wide range of health care services to the general
public for a number of health-related conditions. Hospitals which specialize in
services for specific populations or conditions are considered specialty
hospitals. Only four of the sixty-six acute care hospitals in Massachusetts are
specialty hospitals: Children’s Hospital, the Dana Farber Cancer Center, the
Massachusetts Eye and Ear Infirmary, and New England Baptist Hospital.

Three of the four specialty hospitals in Massachusetts had weaker total and
operating margins than non-specialty hospitals, with Children’s Hospital as
the outlier. Specialty hospitals experienced a 2008 median total surplus of
$1,498,736. When Children’s Hospital is removed from the analysis, the
median drops to a deficit of $3,589,528. In comparison, non-specialty
hospitals posted a median surplus of $752,898 in 2008. Median total net
assets were also significantly greater at specialty hospitals than at non-
specialty hospitals ($510,320,581 versus $58,151,743) due primarily to the
fact that some specialty hospitals have large foundations and/or
endowments. Specialty hospitals had about one week of cash available
compared with 19 days for non-specialty hospitals in 2008. Specialty
hospitals earned far greater net patient service revenue per adjusted
discharge than did non-specialty hospitals ($16,425 versus $5,468), and are
less dependent on Medicare as a source of revenue. Medicare gross revenue
as a proportion of total gross revenue was 26.9%37 at specialty hospitals
versus 40.8% at non-specialty hospitals in 2008.
36
See Appendix 3 for the list of system hospitals.
37
This is primarily due to the inclusion of Children’s Hospital which provides very few
services to Medicare patients.
For/Non-Profit Status

The vast majority of Massachusetts hospitals are non-profit, 501(c)(3)

organizations. Only four hospitals are for-profit: the Hospital of Merrimack
Valley, Nashoba Valley Hospital, Saint Vincent Hospital, and MetroWest
Medical Center. These four institutions are owned by national for-profit
hospital chains, the first two by Essent Healthcare and the latter two by
Vanguard Health Systems.

For-profit hospitals in Massachusetts had weaker total and operating margins

than non-profit hospitals, with a median total margin of -2.2% whereas for-
profit hospitals had a median total margin of 1% in 2008. Net assets of for-
profit hospitals were also negative in 2008, meaning that there were more
liabilities than assets on the balance sheets of these hospitals. Since the
cash balances are maintained at the parent level, it is not possible to
calculate days cash on hand for the hospital entity alone. Massachusetts for-
profit hospitals earned higher net patient service revenue per adjusted
discharge than did non-profit hospitals ($7,909 versus $5,527), and are more
dependent on Medicare as a source of revenue. In 2008, Medicare gross
revenue as a proportion of total gross revenue was 46.1% at for-profit
hospitals versus 39.6% at non-profit hospitals.

Teaching Status

Teaching hospitals are defined as hospitals that have at least twenty-five

full-time equivalent medical student residents per one hundred inpatient
beds.38 Based on this definition and using a 2006 base year, fifteen
Massachusetts acute care hospitals are considered teaching hospitals.39

Teaching hospitals had far stronger median total and operating margins than
did non-teaching hospitals. Teaching total and operating margins were
around 4% while non-teaching hospital margins were less than 1 percent.
Teaching hospitals had more than three and a half times the net patient
service revenue per adjusted discharge than did non-teaching hospitals
($17,783 and $4,873 respectively). Teaching hospitals were also less
dependent on Medicare than non-teaching hospitals. In 2008, Medicare gross
revenue as a proportion of total gross revenue was 34.5% at teaching
hospitals versus 41.4% at non teaching hospitals.

Disproportionate Share Status

The Division of Health Care Finance and Policy defines disproportionate

share hospitals (DSH) as hospitals receiving 63% or more of gross patient
38
This is the Medicare Payment Advisory Commission’s definition of a major teaching
hospital.
39
See Appendix 3 for the list of teaching hospitals.
service charges from Medicare, Medicaid, other government payers, and the
Health Safety Net. Based on this definition and using a 2007 base year,
eighteen Massachusetts acute care hospitals may be considered
disproportionate share hospitals.40

Disproportionate share hospitals had lower total and operating margins than
did non-DSH facilities. DSH facilities also reported a total loss versus a
surplus, and less than half the total net assets as compared to non-DSH
facilities. DSH facility net patient service revenue per adjusted discharge
was $4,822, nearly one thousand less than the non-DSH facilities at $5,924.
DSH facilities were much more likely to be dependent on Medicare than non-
DSH facilities. Medicare gross revenue as a proportion of total gross revenue
was 46% for DSH versus 39% for non-DSH facilities in 2008.

Hospital Size

For analyses based on hospital size, hospitals have been assigned to one of
four size categories: small, small/medium, medium, and large. The four
categories were determined using the number of weighted average available
beds reported in 2008 and looking at the distribution by quartiles. There are
seventeen small hospitals with beds ranging from 19 to 103; sixteen
small/medium hospitals with 105 to 181 beds; seventeen medium hospitals
with 197 to 330 beds; and sixteen large hospitals with 335 to 951 beds.41

Total margin ranges from 2.3% to 0% by size category. Operating margin

ranges from 2.5% for large hospitals to -1.0% for the smallest state hospitals,
with the statewide median operating margin at 0.7% in 2008. The largest
hospitals also had the largest total surplus and total net assets, in both cases
significantly greater than the statewide medians. The largest hospitals net
patient service revenue per adjusted discharge was nearly eight times the
level of the smallest hospitals and three times the statewide median
($16,198, $2,138, and $5,527 respectively). Also, at 37.7%, the largest
hospitals had the lowest Medicare gross revenue as a proportion of total
gross revenue in 2008 compared to the other three size categories.

Geographic Location

The categorical analysis of hospital geography assigns hospitals to five

different regions in the state. The regions are based on the Massachusetts
emergency medical services (EMS) regions. The Massachusetts EMS regions
are defined by grouping the state’s towns into five state regions: West,
Central, Northeast, MetroBoston, and Southeast. The region with the largest

See Appendix 3 for the list of disproportionate share hospitals.

40

Interestingly, the smallest hospital, Nantucket Cottage Hospital, and the largest hospital,
41

Massachusetts General Hospital, are both members of the same large hospital system –
Partners Healthcare System, Inc.
number of hospitals is MetroBoston with twenty-five, followed by the West
and Southeast regions with eleven, the Northeast region with ten, and the
Central region with nine.

Total and operating margin among all the regions are very close to the
statewide medians. Hospitals in the Northeast region experienced the
highest total surplus and hospitals in the MetroBoston region the largest total
net assets. The hospitals in the West region had nearly half the total net
assets as the statewide median total net assets. The hospitals in the
Southeast and West regions had nearly a month’s worth of cash available,
but the hospitals in the Central region had just twelve days. The hospitals in
the MetroBoston region had more than twice the level of net patient service
revenue per adjusted discharge ($12,466) compared with the statewide
median ($5,527) and nearly four times as much as the Central region
($3,544). Also, among the five regions, the hospitals in the MetroBoston
region had the lowest Medicare gross revenue as a proportion of total gross
revenue in 2008.
 Figure C: Massachusetts Acute Care Hospital Selected Median Measures
(2008)
By Hospital Fiscal Year End 2008
Total Days Net
Total Operatin Surplus Total Net Cash on Revenue/Adj Medicare/To
Hospital Type Margin g Margin (Loss) Assets Hand Discharge t GPSR
Hospitals in Systems
(n=37) 1.1% 1.0% $1,099,294 $77,824,265 19 7,228 40.8%
Hospitals not in
Systems(n=29) 0.5% 0.1% $364,687 $62,280,622 17 4,367 39.0%

Specialty Hospitals
(n=4) 0.7% -2.3% $1,498,736 $510,320,581 7 16,425 26.9%
Non Specialty
Hospitals (n=62) 0.9% 0.7% $752,898 $58,151,743 19 5,468 40.8%

For-Profit Hospitals
(n=4) -2.2% -2.3% ($1,851,402) ($1,357,569) -1 7,909 46.1%
Non-Profit Hospitals
(n=62) 1.0% 0.7% $802,000 $66,969,188 20 5,527 39.6%

Teaching Hospitals
(n=15) 3.9% 4.1% $30,111,095 $423,824,000 13 17,783 34.5%
Non Teaching
Hospitals (n=51) 0.8% 0.4% $702,734 $45,634,435 20 4,873 41.4%

Disproportionate Share
Hospitals (n=18) -0.6% 0.4% ($1,014,326) $33,155,533 22 4,822 46.1%
Non Disproportionate
Share Hospitals (n=48) 1.0% 0.7% $850,914 $73,617,980 19 5,924 39.1%

Small Hospitals (n=17;

19 to 103 beds) 0.1% -1.0% $49,977 $20,009,350 22 2,138 40.8%
Small/Medium
Hospitals (n=16; 105
to 181 beds) 1.0% 0.7% $1,092,782 $54,247,000 21 5,130 40.5%
Medium Hospitals
(n=17; 197 to 330
beds) 0.0% 0.0% $8,417 $70,738,000 17 5,515 40.8%
Large Hospitals (n=16;
335 to 951 beds) 2.3% 2.5% $15,163,164 $194,739,397 17 16,198 37.7%

West Region (n=11) 1.1% 0.5% $702,734 $33,501,660 27 4,130 42.6%

Central Region (n=9) 1.1% 0.7% $720,349 $45,714,800 12 3,544 40.8%
Northeast Region
(n=10) 0.9% 1.3% $1,971,752 $57,187,500 18 5,219 42.8%
MetroBoston Region
(n=25) 0.3% 0.7% $716,924 $91,612,000 17 12,466 36.4%
Southeast Region
(n=11) 0.0% 0.0% $8,417 $58,881,486 35 5,515 41.7%

All Massachusetts 0.9% 0.7% $752,898 $62,740,499 19 5,527 40.1%

Acute Care
By Hospital Fiscal Year End 2008
Total Days Net
Total Operatin Surplus Total Net Cash on Revenue/Adj Medicare/To
Hospital Type Margin g Margin (Loss) Assets Hand Discharge t GPSR
Hospitals (n=66)
($49,469,32
Lowest Value -8.5% -9.4% 7) ($17,982,819) -5 327 1.6%
$106,649,00 $1,538,998,0
Highest Value 7.4% 8.5% 0 00 464 248,744 53.9%
VI. Financial Status of Massachusetts Hospitals

This section presents and analyzes individual financial data for the sixty-six
acute care hospitals in the Commonwealth.

Since the hospital industry is constantly evolving, it is difficult to properly

interpret trends in financial indicators without an understanding of the
comprehensive hospital environment. Generalizations from and comparisons
across hospitals using financial data alone must be understood with this
limitation in mind.

The financial data that follows is grouped into five sections – profitability and
assets, liquidity, solvency and capital structure, payer mix, and utilization.
The profitability indicators measure the funds generated above and beyond
those needed to meet the current expenses of running a hospital. Liquidity
ratios demonstrate whether or not the hospital is able to continue to
generate additional cash to meet current expenses. The solvency/capital
structure ratios indicate the degree of debt or equity financing as a portion of
liabilities, as well as a hospital’s ability to meet its debt payments or to
obtain additional debt. Payer mix indicates the programs from which a
hospital is receiving income and may indicate the volatility of a hospital’s
income stream. Change in utilization is an additional indicator of the stability
of a hospital’s revenue stream.

Each of these financial indicators provides information that contributes to

assessing the overall level of a particular hospital’s accumulated financial
resources. The tables referred to in each subsection appear in Appendix 4.
Where possible, hospital financial data contained in Appendix 4 has been
updated to include 2009 filing information which was recently made
available. However, due to the extensive analysis required in assessing
hospital accumulated financial resources, it was not possible to include 2009
information in the written analysis.

Table 1a of Appendix 4 provides a 2008 snapshot of the acute care hospitals

that were reviewed. 2008 is the last year of fully analyzed data, and thus
the annual baseline from which any future changes will be measured. The
financial indicators in this chart include many of the key determinants of
hospital accumulated financial resources. Table 1b of Appendix 4 provides
2009 snapshot data for comparison.

Profitability and Assets

Margins: Operating margin is defined as the “profit” or excess of revenues

over expenses that an institution earns from its patient care and patient care
related activities. Total margin, on the other hand, includes income from
activities not directly related to patient care (i.e., non-operating income). As
many hospitals receive revenue from non-operating sources, such as grants,
donations, or interest, both operating and total margins were analyzed. The
analysis indicates that a number of hospitals in the Commonwealth rely on
non-operating revenues to support patient service operations and
presumably may consider these revenues in the development of their annual
budgets.

As Figure D illustrates, six Massachusetts hospitals have had negative

operating margins every year between 2005 and 2008. On the other hand,
twenty-nine hospitals had positive operating margins every year for that
same time frame.42 Only eleven hospitals did not have positive operating
margins in at least two of the last four years. In 2008, twenty-six hospitals
reported negative operating margins, and another nine hospitals reported
operating margins lower than 1%.43

Figure D: Hospitals with Negative Operating Margins 2005-2008

Hospitals with Four Consecutive Years of Negative OperaingMargins
Operating Margin
Hospital Name 2008 2007 2006 2005
Cambridge Health Alliance -6.77% -0.91% -4.32% -4.58%
Dana-Farber Cancer Institute -5.58% -5.85% -5.97% -6.74%
Massachusetts Eye and Ear Infirmary -9.42% -10.88% -7.93% -8.70%
Merrimack Valley Hospital -6.01% -11.46% -3.97% -0.04%
Nantucket Cottage Hospital -8.13% -1.83% -5.95% -13.02%
Quincy Medical Center -2.33% -3.14% -6.43% -5.37%

Examination of total margin indicates that thirty-four hospitals had positive

total margins from 2005 to 2008, and only five hospitals did not achieve at
least two years of positive total margins during this period. Twenty-three
hospitals reported negative total margins in 2008, with another eleven
hospitals having a positive total margin of less than 1%. Only twelve
hospitals had a higher total margin in 2008 than in 2005.44 The weak
performance of the financial markets is reflected in the total margins
reported in 2008. In addition, Chapter 58 of the Acts of 2006 restructured
the way many low-income individuals access health care, impacting the
state’s Medicaid program (MassHealth), Commonwealth Care, and the Health
Safety Net. These programs, which tend to concentrate volume in a subset
of institutions, plus the associated changes in free care payment rates and
services have had an impact on hospital financial performance which will
evolve over time and will require close examination.

42
See Appendix 4, Table 2c.
43
See Appendix 4, Tables 2a and 2b.
44
See Appendix 4, Table 3.
Operating margin ranged from -9.4% to 8.5% in 2008, while total margin
ranged from -8.5% to 7.4% in that same year. The range was equally great
in 2005, -13.0% to 8.5% for operating margin and -9.1% to 14.6% for total
margin.

The relative range of operating and total margin performance among these
hospitals is noteworthy. There is not only great variation among hospitals,
but also internal fluctuations within individual hospitals of over five
percentage points from 2005 to 2008.

A hospital’s total margin is influenced by many factors in addition to

operating results, such as endowment level, investment strategy, and type
and breadth of ancillary businesses (both clinical and non-clinical) owned and
operated by the hospital. Ancillary services can include associated,
community-based clinical services such as home health, hospice, imaging
centers, and physician corporations. The financial performance of these
ancillary services varies significantly across hospitals due to the same
aforementioned factors. In addition, academic medical centers frequently
have significant levels of public and private research grants.

It is important to note that long-term debt financing is primarily available to

fund capital projects, not operations, although there may be some financing
available for equipment and information technology. Thus, when looking at
the need for accumulated financial resources in hospitals, it is important how
many hospitals generate positive total margins on a consistent basis over
time.

Assets: One benefit of being a 501(c)(3) non-profit organization is that an

institution can accept donations which are tax deductible for the donor.
These donations, commonly referred to as endowments, may be either
designated towards specific projects or services or may be left to the
hospital’s discretion. Hospital financial statements report three different
categories of net assets: permanently restricted net assets, temporarily
restricted net assets, and unrestricted net assets. For the purpose of this
analysis, there is no difference between the “temporarily restricted” and
“permanently restricted” categories.

There is great variation over time with respect to the level of unrestricted net
assets. Asset valuations were impacted by the Financial Accounting
Standards Board’s adoption of Statement of Financial Accounting Standard
No. 157 (FAS 157). As a result of FAS 157, most corporations began valuing
assets at their current market level (mark to market) for fiscal years
beginning after November 15, 2007. The subsequent drop in the stock
market since 2007 has resulted in decreased asset levels for reporting
purposes based on realized and unrealized losses in institutional investment
portfolios. In addition, changes in accounting requirements for retiree health
and pension benefits will impact the asset levels of hospitals which provide
retiree health benefits and defined benefit pension plans.

Unrestricted net assets do not clearly delineate the level of funds available
for general use. In order to determine this amount, one must examine the
level of funds that are liquid, and available for cash and spending.

Appendix 4, Tables 4 and 5 list total net assets and total unrestricted net
assets. Variability within the industry is notable, with 2008 unrestricted net
assets ranging from a deficit of $19,975,522 for Caritas Carney Hospital and
deficit of $8,412,776 for Merrimack Valley Hospital to surpluses of
$951,528,000 for Children’s Hospital Boston and $710,281,000 for
Massachusetts General Hospital. These hospitals represented the extremes
in 2007 and 2006 as well. Most, but not all, hospitals saw a decrease in their
unrestricted net assets from 2007 to 2008. Asset valuation for hospitals
within systems, however, must be reviewed with an eye toward holding
company impacts as well (see Section VII).

Changes in net assets indicate how much the hospital is adding or

subtracting from its assets from one year to the next. Multiple years of
negative change in net assets severely hamper a hospital’s ability to remain
in operation. Appendix 4, Table 6 depicts the changes in net assets at
Massachusetts hospitals from 2005 to 2008.

While many hospitals appear to have added to net assets from 2005 to 2007,
the vast majority of hospitals in the Commonwealth experienced difficulties
in 2008. This was driven in large part by poor investment performance, poor
operating results, accounting policy changes which necessitated funding
defined benefit plans for pension and retiree health care programs, and
changes in the valuation of malpractice reserves. Nineteen hospitals had
negative changes to their net asset levels on two or more occasions in the
past four years.

Hospital unrestricted net assets may be used as one indicator of growth in

discretionary net assets. Seventeen hospitals experienced decreases in
unrestricted net assets in at least two years from 2005 through 2008.45 The
degree to which these decreases are short-term depends on the hospital’s
overall situation and cannot be determined from financial data alone.

In addition, hospital Boards may designate funds to be used for specific

purposes. Boards may establish “restricted” accounts to provide a cushion
of operating cash, allow a hospital to withstand a downturn in operating
and/or investment performance, save for a particular project, or protect
against unforeseen events. Board-designated funds may also be a
requirement of a bond covenant. Forty-two hospitals had over $10 million in
45
See Appendix 4, Table 7.
Board-designated non-current assets in 2008.46 Unlike some of the other
asset categories, these assets are typically liquid, although not in the short-
term.

The level of permanently restricted assets held by each hospital is collected

by DHCFP. Appendix 4, Table 8 depicts temporarily restricted net assets by
hospital for the years 2005 through 2008. Appendix 4, Table 9 depicts
permanently restricted net assets. Figure E below notes the sixteen hospitals
with more than $10 million in permanently restricted net assets in 2008. In
Appendix 4, Table 10, permanently and temporarily restricted assets for
2008 have been added together to gain an understanding of the level of total
restricted net assets by hospital. When the permanently restricted and
temporarily restricted assets are combined, restricted assets still total more
than $10 million for only thirty hospitals, less than half of the total number of
hospitals. System-wide, restricted net assets amount to approximately $3.6
billion, equal to the value of Board-designated assets in that same year.47

See Appendix 4, Table 11a.

46

See Appendix 4, Table 11a and 11b. Since Board-designated assets are limited by Board
47

decision, they are not considered restricted assets.

Figure E: Hospitals with More Than $10 million in Permanently Restricted Net
Assets in 2008
Net Permanently
Hospital Name Restricted Assets
Children's Hospital Boston $266,099,000
Massachusetts General Hospital $156,213,000
Dana-Farber Cancer Institute $145,417,982
Lahey Clinic $53,576,632
Brigham and Women's Hospital $49,775,000
Massachusetts Eye and Ear Infirmary $47,622,250
Beth Israel Deaconess Medical Center $41,864,000
Southcoast Hospitals Group $38,633,868
UMass Memorial Medical Center $24,155,000
Nantucket Cottage Hospital $21,314,000
Health Alliance Hospital $19,677,792
North Shore Medical Center $17,995,000
Cape Cod Hospital $15,833,674
Hallmark Health $14,006,000
Tufts Medical Center $13,614,000
Jordan Hospital $10,393,746

With the exception of 2008, operating performance within the industry has
been much more volatile than non-operating performance. This may suggest
that operating results have been driving net asset changes. The impact of
the financial markets and the subsequent non-operating results would
account for the more prevalent decreases in 2008.

Investment Income: Investment income provides hospital Boards and

management with resources to maintain and expand core services, provide
additional community services and benefits, reduce borrowing, and reduce
the cost of borrowing that would otherwise be required.

The level of a hospital’s investment income is reflective of not only the total
funds available for investing but also of the hospital Board’s investment
strategy. The Board’s investment strategy will be driven by the hospital’s
strategic requirements. A hospital that needs stable investment income to
subsidize operations will have a different investment mix from a hospital that
is more interested in the long-term growth of its endowment. Also, the funds
available for investment vary by hospital, and those with a relatively small
amount of capital available for investment will have more limited investment
options than those hospitals with more capital. Furthermore, the use of
interest income generated by donor-restricted assets can also be stipulated
by the donor, so it is not necessarily available for general use.

Appendix 4, Table 12 depicts investment income by hospital over time. Such

income varies widely not only among hospitals but also over time, with 2008
standing out as a year in which seventeen hospitals reported no or negative
investment income and only one hospital generated more than $10 million in
investment income and only six more than $5 million. It is important to note
that the investment activity on hospital financial reports reflects the financial
performance of the hospital only and does not reflect financial performance
of related entities within its broader corporate structure. For example,
UMass Memorial Medical Center, a hospital with one of the higher operating
margins and total margins, reports no investment income. However, the
2007 Annual Statement for UMass Memorial Health Care Inc. and Affiliates on
a consolidated basis reports $30 million in donations, investment income,
and capital gains. Several other hospitals also record investment income at
the parent level or within other related entities.

Figure F: Hospitals Reporting $5 million or more in Investment Income in

2008

Hospital Name
Liquidity

Cash, Cash Equivalents, and Short-Term Investments: Cash and cash

equivalents are the principal measure of the level of funds available to a
hospital to meet immediate spending needs. Short-term investments, which

Beth Israel Deacones

can be relatively easily converted to cash, have been combined with cash for
analytic purposes to provide a better representation of funds available to
meet current needs. Appendix 4, Table 13 combines cash, cash equivalents,
and short-term investments. In 2008, fourteen hospitals had greater than $5
million in short-term investments and four hospitals had over $90 million in
short-term investments. Excluding these investments would understate a

Baystate Medical Cen

hospital’s short-term financial resources.

Southcoast Hospitals
UMass Memorial Me
Figure G: Hospitals with More Than $5 million in Short-Term Investments in
2008

Hospitals
Ho
Sturdy Memoria
Hospitals have different cash management strategies, with some large

Baystate Medica
institutions maintaining only low levels of cash. Some hospitals may transfer
cash to parent corporations as part of their cash management and
investment strategy. In addition, a large cash position may be temporary in
nature, such as proceeds from the sale of bonds for capital projects that are
not yet in progress. Conversely, a low cash position may be due to recent
repayment of debt.

Beth Israel Deac

Days of Cash on Hand: The level of cash, cash equivalents, and short-term
investments is more meaningful when it is directly related to the number of
days of operating expenses it will cover. Thus, days of cash on hand yields a
more valuable perspective on a hospital’s cash position. This ratio is
calculated by dividing the sum of cash, cash equivalents, and short-term
investments by total expenses per day, less accumulated depreciation and

Hallmark Health
bad debt.

Appendix 4, Table 14 demonstrates that in 2008, forty-three hospitals had

less than thirty days of cash on hand. The number of hospitals across the
Commonwealth with less than thirty days of cash on hand has increased
since 2005; there were thirty-four hospitals in 2007; forty hospitals in 2006;
and thirty hospitals in 2005. Some hospitals maintained 60 or more days of

Southcoast Hos
cash on hand, with sixteen hospitals in 2005, twelve in 2006, eleven in 2007,
and eleven in 2008.
Figure H: Hospitals with 60 or More Days Cash on Hand in 2008

H
At the public input session, the Massachusetts Hospital Association (MHA)
was asked to provide national data concerning the days of cash on hand.

Figure I: Median Days Cash on Hand 2002-2007

Medians 2002 2003 2004 2005 2006 2007

Sturdy Memoria
US 76.2 76.5 68.6 96.5 62.6 75.7
MA 73.5 75.0 75.6 74.4 63.8 60.7
Source: 2008 and 2009 Ingenix Almanac of Hospital Financial and Operating Indicators48
Note: The ratio for this formula is different from the one used in calculating days cash on
hand above, although the ratio used here is consistent between the U.S. and Massachusetts.
This ratio includes unrestricted long-term investments in the numerator and does not
subtract bad debt expense in the denominator.

Hallmark Health
Current Ratio: A hospital’s current ratio is an indication of the adequacy of a
hospital’s current assets to pay its current debt. A number of factors
influence the current ratio, and a low number may simply mean that a
hospital’s cash management policy purposely places “excess” current assets
into longer-term vehicles in order to generate more revenue. Furthermore,
hospitals that have been unable to access the long-term debt market may
actually have a very strong current ratio.

Falmouth Hospi
The bond markets generally require a current ratio of 2.0 in order to qualify
for preferred bond rates. Most Massachusetts hospitals have been
consistently below 2.0 over the past few years. In 2008, only fourteen
hospitals had current ratio values of 2.0 or above, slightly less than the
eighteen hospitals in 2007, seventeen hospitals in 2006, and twenty
hospitals in 2005.49 Nine hospitals were above 2.0 from 2005 to 2008. A

48

Martha's Vineya
MHA Responses to Follow-up Questions from the April 15 Public Input Session on the
Chapter 305 Mandated Study of the Reserves, Endowments, and Surpluses of Health
Insurers and Hospitals, See Appendix 2.
49
See Appendix 4, Table 15.
current ratio of less than 1.0 may limit access to capital funding through the
bond market. Five hospitals were below 1.0 from 2005 to 2008.
Figure J: Hospitals with Current Ratio Above 2.0, 2005-2008

Current
Hospital Name
Solvency/Capital Structure

Baystate Medica
Age of Plant: Understanding a hospital’s age of plant is important for placing
its capital financing needs into context. Maintaining capital facilities and
technology that reflect current patients’ needs is important to a hospital’s
ability to deliver quality, patient-centered care. For the purpose of this
analysis, hospitals’ age of plant was calculated by dividing accumulated
depreciation by depreciation and amortization expense. While this is not a

Beth Israel Deac

precise measure, it is the conventional approach in the hospital industry and
a comparative indicator of a hospital’s age of plant. However, this may
underestimate the age of the plant, as a fully depreciated asset will not be
included in the denominator. Even so, in 2007, forty hospitals in the
Commonwealth had plants that were ten or more years old.50 MHA stated in
its public testimony that the median age of Massachusetts hospitals in 2006
was 11.4 years, with a comparable national figure (based on the 2006

Children's Hosp
Ingenix Almanac of Hospital Financial and Operating Indicators) of 9.7 years.
This places the median age of hospitals in Massachusetts 17.5% greater than
the median age of hospitals in the nation as a whole.

Equity Financing: Equity financing is the ratio of total net assets to total
assets and is an indication of a hospital’s ability to assume more debt. A
higher ratio indicates that a hospital is financed through equity rather than

Falmouth Hospi
borrowing. Appendix 4, Table 17 demonstrates that in 2008, twenty-four
hospitals had an equity financing ratio of 50% or greater. This represents a
decrease from thirty hospitals in 2007, twenty-seven in 2006, and twenty-six
hospitals in 2005. From 2005 to 2008, the majority of hospitals relied on
borrowing for over 50% of their capital asset needs.

Lahey Clinic
Cash Flow to Total Debt: This ratio indicates the ability of a hospital to pay
off its long-term debt, or the percentage of a hospital’s debt obligations that

50
See Appendix 4, Table 16.
can be covered by cash. A higher percentage represents a greater ability to
meet debt obligations and stronger financial performance. In 2008, only
thirteen hospitals had a ratio of 20% or more. This represents a decrease
from thirty-two hospitals in 2007, twenty-eight in 2006, and twenty-four in
2005.51

51
See Appendix 4, Table 18.
Figure K: Hospitals with Cash Flow to Total Debt Ratio Greater Than 20% in
2008

Cash Flow t
Hospital Name
Debt Service Coverage: Debt service coverage measures the ability of a
hospital to cover current debt obligation with funds derived from both
operating and non-operating activity. The higher the ratio, the more easily a

Saint Vincent Ho
hospital may pay its current interest and principal obligations. Thirteen
hospitals have a ratio of 1.0 or less in 2008, indicating that their income
cannot cover their interest and principal obligations on existing debt.52

When considering debt service coverage, it is important to note that different

hospitals may have no debt for very different reasons. Some hospitals are
unable to borrow funds, while others may be able to fund capital projects

Martha's Vineya
with donations or other funding sources and thus do not need to borrow.

Debt Capitalization: The bond markets look at the debt capitalization ratio,
which is the ratio of long-term debt to total capitalization. Using available
data, a variant of the traditional debt to capitalization ratio was calculated
looking at the ratio of the current portion of long-term debt plus long-term

Massachusetts G
debt over total assets.53 This is another measure of an institution’s ability to
repay debt.

It is important to note that some hospitals may have high debt to

capitalization ratios because they have few assets, or because they have a
large amount of debt. Low debt may be due to lack of access to bond
market reasonable rates, or the fact that the hospital does not need to

Health Alliance H
52
See Appendix 4, Table 19.
53
See Appendix 4, Table 20.
borrow. The degree to which a hospital goes into debt to finance capital
projects can be an indication of strong operating results, strong non-
operating revenues, and/or the Board’s ability to raise funds through fund-
raising and capital campaigns. It is not necessarily an indication that the
hospital was not able to obtain bond financing.

Financial Status and Bond Rating: As noted previously, non-profit hospitals’

rely on raising funds through either contributions or the bond market. Given
the prevalence of bond financing, a hospital’s ability to borrow funds in the
bond market is a key indicator of financial soundness. Bond rating agencies
look at a number of different financial ratios to determine the hospital’s
ability to make future debt payments in a timely fashion. The stronger the
financial condition of the hospital, the more likely the hospital can make its
debt payments, and thus the lower the interest rate a hospital will be
charged.

In response to a request at the public input session (see Appendix 2), MHA
supplied figures on the financial performance criteria required by bond
markets as well as the ratings of Massachusetts and national bonds.

Figure L: Performance Measures Recognized by the Bond Market

Performance Performance
Financial associated with associated with
Performance Criteria broad access to limited access to
capital capital
Operating margin >2% <0.0%
Debt service coverage ratio >3.50 <1.25
Days cash on hand, short- N/A <5
term
Current ratio >2.0 <1
Debt to capitalization 0%-3.5% <0% or >70%
Source: MHA Responses to Follow-up Questions from the April 15 Public Input Session on
the Chapter 305 Mandated Study of the Reserves, Endowments, and Surpluses of Health
Insurers and Hospitals. See Appendix 2.

In 2008, only one Massachusetts hospital met all the requirements for “broad
access to capital.” It is important to note, however, that for many hospitals
this is clearly due to specific management strategies and not necessarily to
weak financial condition.

Distribution of ratings for outstanding bonds in the U.S. and Massachusetts

were analyzed using Moody’s Healthcare Ratings by State (as of July 31,
2008). As indicated in Figure M, Massachusetts hospitals that accessed bond
financing have lower rated bonds in the aggregate than hospitals nationally.

Figure M: Distribution of Bond Ratings Nationally and in Massachusetts

US (N=530) MA (N=29)
Rating at or better than A 61% 48%
Rating at Baa 30% 28%
At or below Ba 9% 24%
Source: MHA Responses to Follow-up Questions from the April 15 Public Input Session on the
Chapter 305 Mandated Study of the Reserves, Endowments, and Surpluses of Health
Insurers and Hospitals. See Appendix 2.

Hospital Payer Mix

All hospitals are required to submit their uniform charge structures to

DHCFP. These uniform charges are referred to as gross charges and can be
thought of as list prices. Very few payers actually pay on a charge basis;
government payers independently determine their payment rates while
private health plans and insurers negotiate payment levels that are typically
below charge levels. Payment received for charges is referred to as net
patient service revenue (NPSR). NPSR is the appropriate measure to use
when analyzing hospital payer mix and comparing hospital revenue.

Appendix 4, Table 21 provides net patient service revenue, including

premium revenue, from the hospital financial statements submitted to
DHCFP. FY2008 revenues range from just over $21 million to over $1.7
billion. While percent increases vary widely, all but two hospitals have seen
increases in NPSR from 2005 through 2008.

Both Medicare and Medicaid administer prospective fees for all services
received at inpatient and outpatient hospital settings. The percentage of
payments received by each hospital from Medicare and Medicaid in 2008
was examined to gain an understanding of the variability in payer mix across
Massachusetts hospitals.

Medicaid: Medicaid is a joint federal and state program providing health

coverage to low income and disabled individuals. Medicaid has multiple
programs; the program for which people are eligible depends on specific,
state-approved criteria. For some programs, enrollees have the option of
joining a Medicaid Managed Care Organization (MMCO). In most programs,
hospital payments are set prospectively by the Commonwealth under a fee-
for-service system, but MMCOs negotiate hospital rates with each hospital.

In 2008, hospitals’ total Medicaid revenue ranged from a low of 1% of total

net patient service revenue at Beth Israel – Needham and New England
Baptist to a high of 28% at Boston Medical Center. At thirty-four hospitals,
Medicaid revenue accounted for 10% or more of NPSR. For MMCO payments
where the hospital rate is negotiated, the percent of NPSR ranged from a low
of 0% at six hospitals to a high of 19% at Holyoke Hospital. For non-MMCO
business, Medicaid revenue ranged from 1% at five hospitals to 19% at
UMass Medical Center. Appendix 4, Table 22a provides detail on Medicaid
revenue by hospital.54

The analysis also separately examined MMCO revenue as a percent of total

Medicaid revenues. While six hospitals have less than 1% of their Medicaid
business from MMCOs, five hospitals have greater than 70% of their Medicaid
business from MMCOs, and twenty hospitals have 50% or more of their
Medicaid business from MMCOs.

Medicare: Medicare is a federal program in which payments are

prospectively established by the Centers for Medicare and Medicaid Services
(CMS) with Congressional oversight. Medicare beneficiaries, primarily
seniors and disabled individuals, can participate through a traditional, fee-
for-service program or through the Medicare Advantage program, which
utilizes local health maintenance organizations.

Reimbursement from traditional Medicare represents 25% or more of NPSR

for fifty of the sixty-six acute care hospitals, ranging from 4% of total NPSR
at Children’s Hospital Boston (the only hospital in single digits) to 48% at
Merrimack Valley Hospital. Reimbursement from Medicare Advantage plans,
on the other hand, represents 10% or more of NPSR for only eleven
hospitals.55 For Medicare Advantage, private health plans contract with
hospitals on behalf of the Medicare patients for whom they manage care.
Congress has enacted changes to Medicare Advantage that will result in
decreased federal payments to health plans and may affect hospital
payment levels.

Commonwealth Care: Commonwealth Care was established by Chapter 58

of the Acts of 2006 and provides subsidized health insurance coverage to
Massachusetts residents not eligible for MassHealth (Medicaid) but whose
incomes are less than 300% of the Federal Poverty Level. From its inception
in 2006, Commonwealth Care has been provided by the MMCOs, with
hospital payment levels negotiated between the MMCO and each hospital.
Commonwealth Care income for 2008 was over $5 million for fifteen
hospitals and over $10 million for eight hospitals. That same year four
hospitals reported Commonwealth Care income representing 5% or more of
NPSR. However, given the relatively recent implementation of this program,
the numbers reported are likely understated. The accuracy of reporting
should improve over time. See Appendix 4, Table 24a for each hospital’s
2008 reported Commonwealth Care revenue as a percent of NPSR.56

54
See Appendix 4, Table 22b for information on 2009 Medicaid revenue by hospital.
55
See Appendix 4, Table 23a. See Appendix 4, Table 23b for information on 2009 Medicare
revenue by hospital.
56
See Appendix 4, Table 24b for information on 2009 Commonwealth Care revenue as a
percent of NPSR by hospital.
Other Government: This category includes programs from the Department
of Mental Health, Department of Public Health, Department of Social
Services, CHAMPUS (the federal program for military families), out-of-state
Medicaid, and other local, state, or out-of-state government programs. In
2008, other government sources accounted for 3% or more of revenue for
only nine hospitals, and over 5% for only one. For Caritas St. Elizabeth’s,
other government revenue is 32% of NPSR; this is primarily revenue from the
program for armed services personnel and their families at Brighton
Marine.57

Total Government Revenue as a Percent of NPSR: In 2008, Medicaid and

Medicare combined represented 40% or more of NPSR for fifty-two hospitals
in the Commonwealth; 50% or more for thirty-two hospitals across the
Commonwealth; and 60% or more for eight hospitals. All sources of
government revenue (including Commonwealth Care and other government
payers) accounted for 40% or more of NPSR for fifty-five hospitals, 50% or
more for forty hospitals, and 60% or more for eighteen hospitals. Please see
Appendix 4, Table 24 for more detail.

Uncompensated Care and the Health Safety Net Trust Fund: As low income
residents in Massachusetts move from uninsured to insured status, the
Health Safety Net Trust Fund should be examined for the total funds
hospitals are receiving from the Commonwealth for uninsured patients.
Appendix 4, Table 25 depicts total revenue from the Uncompensated Care
Pool and its successor the Health Safety Net (HSN). Appendix 4, Table 26
depicts the change in these revenues over time. The vast majority of
hospitals have experienced a decrease in the absolute dollars received from
HSN due partly to the success of health care reform in expanding access to
health insurance coverage.

Utilization

Under the current hospital financing system, utilization is the major source of
hospital operating revenues. As utilization rises, revenues increase
accordingly. In many cases, hospitals can meet increased utilization without
adding capacity such as buildings, equipment, or labor. At some point
however, significant utilization increase requires increased capacity. As
utilization falls, hospital fixed costs cannot be decreased at a comparable
rate. Thus, it is important to monitor utilization changes.58

Appendix 4, Tables 27 and 28 depict the number and percent change of total
patient days by hospital. Utilization changes vary dramatically by hospital.59
Few hospitals appear to display a consistent, steady pattern of either
57
See Appendix 4, Table 24a. See Appendix 4, Table 24b for 2009 information.
58
The data for all utilization tables comes from the Hospital 403 reports, Schedule V A,
submitted to DHCFP.
decreases or increases in patient days. Across the system, patient days
varied by less than 100,000 days each year between FY2005 and FY2007,
even as many services shifted to outpatient settings. Total admissions follow
a pattern similar to patient days, with an even smaller system-wide increase
from 2005 to 2007.60

The shift from inpatient to outpatient care may have an impact on the
competitive hospital environment. There are typically far more consumer
options for outpatient care than inpatient care. Appendix 4, Tables 31 and 32
illustrate total clinical/ambulatory visits over time. Total hospital outpatient
visits have only slightly increased over recent years. However, the variability
among hospitals is great. Please see Appendix 4, Tables 33 and 34 for more
detail.

Identification of Hospitals with the Greatest Accumulated Financial

Resources

Given the complexity associated with the concept of hospital accumulated

financial resources, it is difficult to know if a particular facility has an
appropriate amount of resources based upon a single factor alone. However,
measuring hospital performance over several financial indicators may
identify those hospitals which are most likely to have the greatest
accumulated financial resources.

Appendix 4, Table 35 depicts the sixty-six acute care hospitals in the

Commonwealth along a number of different financial parameters. Eleven
measures were selected that when collectively evaluated could identify
hospitals that may have considerable accumulated financial resources:
• A positive operating margin for at least three of the past four years
• A positive total margin for at least three of the past four years
• Unrestricted net assets of more than $100 million for the past two
years
• NPSR of more than $100 million for the past two years
• No more than 15% of NPSR from non-managed Medicaid business
• No more than 50% of NPSR from Medicare and Medicaid business
combined
• More than $50 million in Board-designated assets
• More than $5 million gained or lost in investment income
• A plant that is younger than eight years old
• Debt service coverage of at least three for at least two of the past four
years
• More than 15 days of cash on hand for the past two years

59
Note that not all 2008 data was received. Also, note that reporting for hospital outpatient
utilization is not considered particularly reliable, as different hospitals count units of service
differently.
60
See Appendix 4, Tables 29 and 30.
Of these eleven, the first four measures were identified as critical indicators
of long-term positive financial performance. The remaining seven measures
were regarded as supplemental considerations of positive financial
performance. Therefore, a hospital had to meet all of the first four criteria,
not just a majority of the eleven measures. This approach to identifying
hospitals that may have considerable accumulated financial resources is not
based on any existing legal or regulatory standards but presented merely as
one approach to evaluate these institutions.

Based on the financial performance of hospitals against these eleven

parameters, there are ten hospitals in the state that may have considerable
accumulated financial resources through 2008:
• Berkshire Medical Center
• Beth Israel Deaconess Medical Center
• Brigham and Women’s Hospital
• Children’s Hospital Boston
• Massachusetts General Hospital
• Mount Auburn Hospital
• Northeast Hospital
• South Shore Hospital
• Sturdy Memorial Hospital
• Winchester Hospital

Hospitals whose performance may indicate considerable accumulated

financial resources despite over 15% NPSR from Medicaid or over 50% NPSR
from Medicaid and Medicare through 2008:
• Baystate Medical Center
• Boston Medical Center
• Lahey Clinic
• Southcoast Hospitals Group
• UMass Memorial Medical Center

While the performance of these hospitals on the selected indicators suggests

they have considerable accumulated resources, an individual hospital
analysis is insufficient to fully capture an institution’s financial situation. As
will be discussed in greater detail in the following section, a facility’s
participation in a larger system may distort or downplay their apparent
performance. A comprehensive evaluation of accumulated financial
resources must take into account not only the institution itself, but the
financial performance of any affiliates and parent organization. Due to the
complexity of hospital systems, other hospitals not appearing on these lists
may have considerable accumulated financial resources available that do not
appear as a result of system strategy. Additionally, some of the identified
institutions listed may have even greater financial resources available than
evident from an individual analysis.
VII. Hospital Systems

The Massachusetts health care delivery system has been marked by a trend
toward hospital consolidation. From 1990 to 2008, 111 acute care hospitals
condensed to 66, a 40% decrease in eighteen years. Mergers and
acquisitions made up 70% of the change, with closures accounting for the
remaining 30%.

Consolidation has resulted in many larger hospitals and health care systems
absorbing some shuttered hospitals. The trend towards systems has allowed
isolated community hospitals to benefit from direct connections to advanced
teaching hospitals, neighboring hospitals to develop geographic dominance,
and financially struggling facilities to receive immediate cash infusions.
Some systems are additionally able to promote clinical effectiveness by
sharing electronic medical records and providing a full range of coordinated
care.

As hospital systems have expanded, their ability to shape patient choice,

prices, and the delivery of health care has increased significantly. Large
hospital systems may wield greater market power, shifting the balance of
power between providers and insurers in payment negotiation. This
imbalance may hinder the commercial insurance sector’s ability to negotiate
prices that reflect quality.

The financial analysis of individual hospital entities in Section VI does not

reflect the performance of the larger systems in which hospitals are often
embedded. However, these systems can have a substantial impact on any
member hospital’s financial viability and access to reserves. These complex,
multi-hospital entities have grown in scope and influence in the
Massachusetts health market place in the last two decades.

Many systems hold accumulated financial reserves which are often difficult
to assess due to the complexity of the organization and inconsistent
reporting requirements in place for systems and parent companies. In 2008,
for six large multi-hospital systems in the state, any one hospital’s share of
total system assets ranged from 4% to 92% and any one hospital’s share of
total revenues ranged from 5% to 98%. Some hospitals’ profits exceed the
total system profits; for others, the system’s profits greatly exceed those of
the hospital. In four large single-hospital but multi-entity systems, hospitals
generated from 48% to 98% of total revenues, and from over 100% (the
hospital was profitable but the system lost money) to only 12% of total
operating profits. A full understanding of the accumulated financial resources
held by hospitals is incomplete without an in-depth look at hospital system
resources.

The Reach of Multi-Hospital Systems

In considering the significance of hospital systems on the health care
landscape of Massachusetts and the financial status of subsidiary hospitals,
it is important to take into account the market reach of hospital systems. To
capture the impact of hospital closings, mergers, and affiliations on patient
choice and hospital use, maps in Appendix 5 were designed to depict the
percentage, by town, of hospitals discharges associated with a hospital
belonging to a larger hospital system.

To create these maps, the state’s hospitals were assigned into “system” and
“non-system” groups.61 Though many of the hospitals in the state are owned
by a parent company, for the purposes of this analysis, the definition of a
“system” hospital was based on whether the parent company operated two
or more hospitals in the state. Approximately three-fifths of acute hospitals
in Massachusetts fall into this category.

The maps in Appendix 5 highlight the concentration of system hospitals in

the state. From the Metrowest and Worcester county areas, to the
Berkshires and the Cape and Islands, system hospitals represent a large
portion of total hospital use. In fact, three-quarters of Massachusetts
residents live in a town where system hospital discharges are more than
30% of the total. Almost 30% of the state’s residents live in a town where
80% of all hospital visits are to a system hospital.

Approximately 60% of the state’s hospitals are considered system hospitals.

System hospitals represent a proportional amount of statewide discharges,
total beds, and hospital revenue, as shown below:

Figure N: Percent of Massachusetts System Hospital Beds, Admissions, and

Discharges
Percent of Total
System Non-
System
Available 60% 40%
Beds Staffed 60% 40%
Licensed 61% 39%
Inpatient Days 61% 39%
Patient Admissions 61% 39%
Statistics Discharges 61% 39%
Total FTEs 57% 43%
Other Net Patient Service Revenue 62% 38%
Source: DHCFP-403 Hospital Cost Report

The multi-hospital definition of a system used in this analysis does not cover
the entire spectrum of hospital systems that exist in Massachusetts. Rather,
61
The system and non-system designations are the same as those used in Section V’s
subgroup comparison. The list may be found in Appendix 3.
this definition conveys the consolidation of care within the state and serves
as an indicator to the changing landscape of health care delivery. Enhanced
financial reporting requirements that capture the full range of hospital
systems may create a more robust picture of the integration of care in
Massachusetts.

Notably, multi-state and local corporations that own a single in-state hospital
are able to shift financial resources from one entity to another yet are not
categorized as systems under this analysis. Single hospital systems such as
Boston Medical Center, Children’s Hospital of Boston, Dana Farber Cancer
Center, and Tufts Medical Center have significant foundations or networks of
outpatient centers, but are also treated as non-systems under this definition.
This designation produces an artificially low system-discharge percentage for
the Boston area and explains why the City of Boston shows unusually low
system penetration relative to its neighbors, despite the concentration of
large teaching and system hospitals in the area.

System Structure

Hospital systems are highly variable in structure as well as number and

relationships between components. Organizational structures may range
from a small community hospital and its physician’s group to a vast, fully
integrated network of providers, outpatient centers, nursing homes, teaching
hospitals, and community centers. There is also variation in cash
management strategies, with some systems operating components more or
less independently and others using some entities to subsidize operations in
other system areas. The complex and varied nature of hospital systems
poses a challenge to clearly understanding the financial dimensions of these
organizations. Please refer to Appendix 6 for pictorial examples of systems of
varying complexity.

System Description of Identified Hospitals

The following section describes the systems associated with the hospitals
identified in Section VI as having potentially considerable accumulated
financial resources. Notably, all of the hospitals identified are part of
systems, suggesting that their actual accumulated resources may be even
greater than the individual analysis suggests.62 The system descriptions rely
on the systems’ 2008 consolidated audited financial statements, as
submitted to the Division of Health Care Finance and Policy and information
available from the Attorney General’s website. Total Net Assets refers to the
holdings of the entire system and is defined as total assets less total
liabilities.
62
Lahey Clinic, while part of a system, is not identified as such because it is a single hospital
system with a foundation which holds the bulk of its assets at the hospital level. As such, the
Lahey Clinic individual analysis is sufficient to understand its available resources.
Please note that the hospital system information below has not been subject
to analysis and is presented only for an understanding of the broader
financial resources contained in complex systems. Systems are highly
variable in structure and thus caution should be used when comparing
system resources or inferring resources available to hospitals contained
within a system. Without an in-depth review of system assets and cash
management strategies, it is not possible to determine if the level of
financial resources available to a system hospital is adequate, inadequate, or
excessive.

Baystate Health Inc.

$645,841,000 in Total Net Assets
Baystate Health is the largest delivery system in the western region of the
state. It operates one tertiary hospital – Baystate Medical Center – and
two acute community hospitals – Baystate Franklin and Baystate Mary
Lane. In addition, the system manages a real estate company, an academic
research group, and a physician group that serves Baystate patients.

Berkshire Health Systems

$181,578,881 in Total Net Assets
Berkshire Health System is the parent company of Berkshire Medical
Center, an acute care hospital, and Fairview Hospital, a critical access
hospital, both located in Berkshire County. The system also operates a
management service company, a physician group, a real estate
management company, and a captive insurance company.

Boston Medical Center and Affiliates

$1,342,618,000 in Total Net Assets
The Medical Center was formed in 1996 when Boston City Hospital and the
University Hospital at BU Medical School merged. The parent of Boston
Medical Center, the state’s largest disproportionate share hospital, also
operates managed care organization BMC Healthnet, twenty-one faculty
practices, two real estate companies, and two captive insurance companies.

CareGroup, Inc.
$779,286,000 in Total Net Assets
CareGroup manages four hospitals -- Beth Israel Deaconess and Mount
Auburn Hospital, which are tertiary providers, and Beth Israel
Deaconess-Needham and New England Baptist Hospital, both
community hospitals. Other CareGroup subsidiaries provide billing services
and investment and real estate management. The system houses its own
for-profit diagnostic imaging corporation and multiple radiology and other
medical outpatient centers. It is also affiliated with Joslin Diabetes Center.

Children’s Medical Center

$2,392,113,000 in Total Net Assets
Children’s Medical Center is the parent of Children’s Hospital, supporting
organizations including Children’s Extended Care Center, and several real
estate arms. In addition, the Medical Center is affiliated with sixteen
physician group foundations. The parent medical center reimburses the
groups for services provided to Children’s Hospital, and supports physician
retention and recruiting through loans and restricted gifts.

Northeast Health System

$164,269,785 in Total Net Assets
Northeast Health System is a holding company for Northeast Hospital in
addition to several other subsidiaries. Major affiliates include a primary care
practice, a nursing home and assisted living center, a foundation, substance
abuse and community health services, and a physician group.

Partners Healthcare
$5,727,165,000 in Total Net Assets
Partners Healthcare is the state’s largest health care system. It was founded
in 1994 by Massachusetts General Hospital and Brigham and
Women’s Hospital. It now also includes Newton-Wellesley Hospital,
Faulkner Hospital, North Shore Medical Center, Martha’s Vineyard
Hospital, and Nantucket Cottage Hospital. Several of the Partners
hospitals operate their own foundations, fundraising arms, and physician
groups. Partners also manages a large network of long-term, rehabilitation,
and other outpatient services. Massachusetts General Hospital and Brigham
and Women’s Hospital serve as the teaching hospitals for Harvard Medical
School, which has also joined Partners in several for-profit and non-profit
joint ventures in research and education.

South Shore Health and Education Corporation

$164,789,045 in Total Net Assets
The Corporation is the parent of South Shore Hospital, located in
Weymouth, in addition to three physician group practices in the South Shore
area.

Southcoast Hospital Systems, Inc.

$468,799,000 in Total Net Assets
In addition to three acute care disproportionate share hospitals, Charlton,
Tobey, and St. Luke’s, Southcoast Hospital Systems manages a physician
practice group, a visiting nurses association, a long-term care facility, and
several management and business ventures.

Sturdy Memorial Foundation

$290,219,063 in Total Net Assets
The parent of Sturdy Hospital is the Sturdy Memorial Foundation, which
also includes a radiology group and a physician group practice based locally
in Attleboro.

Winchester Healthcare Management Inc.

$154,034,198 in Total Net Assets
Winchester Healthcare Management owns and operates Winchester
Hospital, which is in turn supported by a large foundation. Other
subsidiaries include investment management, real estate, and captive
insurance organizations, as well as a physician group practice. The majority
of the system’s assets are held at the hospital level.

UMass Memorial Health Care Inc.

$574,401,000 in Total Net Assets
UMass Memorial Health Care is central Massachusetts’ largest system,
operating three acute care community hospitals (Clinton, Marlborough,
and Wing Memorial Hospitals), as well as its flagship tertiary facility,
UMass Memorial Medical Center (UMMMC). UMMMC additionally
manages Health Alliance Hospital. Other subsidiaries of the system
include a 900-member physician network, behavioral health, health care
business, and real estate management companies.
Figure O: Hospital System Assets in 2008

Parent Nam
Baystate Health Inc., and Subsidiaries

Berkshire Health Systems

Boston Medical Center and Affiliates

Cambridge Public Health Commission
Cape Cod Health Care and Affiliates

Care Group

Caritas Christi
VIII. Comparison of Hospital Financial Regulation to Other States

Monitoring and regulation of hospitals varies greatly depending upon a

facility’s for/non-profit status, participation in a system, and state of
residence. Massachusetts laws and regulations do not explicitly focus on the
regulation, oversight, or disposition of hospital accumulated financial
resources, but rather, require the periodic filing of financial and organization
statements with various government agencies.

In order to understand some of the possibilities available to the

Commonwealth with respect to regulation of hospital financial resources, a
peer group of states, Rhode Island, Pennsylvania, Connecticut, Maryland, and
New York were identified for comparison by DHCFP. These states were
selected because they have a large number of non-profit and teaching
hospitals. Maryland was chosen because of its experience with a hospital
charge control system.

Similar to Massachusetts, the peer states do not explicitly focus on the

regulation, oversight, or disposition of hospital accumulated financial
resources. However, several of these states have significant hospital
reporting requirements and a few perform in-depth financial analyses on
each hospital within the state. Several of the peer states have also recently
engaged in comprehensive reviews of their state’s health delivery system
and developed sweeping recommendations for change.

Massachusetts

In Massachusetts, the Division of Health Care Finance and Policy (DHCFP) is

the state agency responsible for collecting, analyzing, and publicly
disseminating acute hospital utilization and financial information. Every
hospital in the state must submit to DHCFP individual annual and quarterly
financial statements as well as an annual cost report containing detailed
organizational, financial, and utilization information.

DHCFP analyzes the data that is collected to produce a number of annual

and quarterly reports, such as the Health Care in Massachusetts: Key
Indicators report, the Massachusetts Acute Hospital Financial Performance
report, and the Annual Hospital Financial Fact Sheets. The content for each
report is delineated below:
Figure P: DHCFP Hospital Reporting
Frequency of
Report Data Reported
Publication
Health Care in Quarterly Total, operating, and non-
Massachusetts: Key operating margins
Indicators Report
Massachusetts Acute Quarterly and Annual Total, operating and non-
Hospital Financial operating margins; current
Performance Report ratio; days in accounts
receivable; average payment
period; debt service
coverage; cash flow to total
debt; and equity financing
ratio
Hospital Financial Fact Annual Profitability, liquidity, and
Sheets solvency/capital structure
ratios compared to MA and
Northeast U.S. regional
medians
Measuring Health Care Annual Comparative view of
Quality in Massachusetts hospitals based on quality
and cost performance
measures

All DHCFP analyses and publications are posted at www.mass.gov/dhcfp, to

assure the availability of relevant health care delivery system data to health
care purchasers, providers, employers, consumers, and policymakers.

Outside of the reporting requirements with DHCFP, the specific documents,

depth of data, and the relevant government agency depend on the for/non-
profit status of the hospital and parent company. All hospitals and health
care systems must file tax returns with the IRS and the Massachusetts
Department of Revenue; however non-profit hospitals report financial and
programmatic data on the IRS Form 990 while for-profit hospitals file a Form
1040. The differences between the two forms allow these entities to better
capture the different ways that organizations spend, earn, and distribute
revenue depending on their profit status.

In addition, the Massachusetts Office of the Attorney General’s Office (AGO)

collects annual audited financial statements and annual reports for all non-
profit hospitals and hospital systems as part of its charity and non-profit
oversight responsibility. The AGO additionally reviews one use of hospital
accumulated financial resources through its Hospital Community Benefits
program. This is discussed in more detail in Section IX, Hospital Community
Benefits.
Federally, publically traded for-profit companies are required to file annual
(form 10-K) and quarterly (form 10-Q) financial reports with the Securities
and Exchange Commission.63

Hospital systems report system-level financial data to a number of state and

federal regulatory agencies including the state Attorney General’s office,
municipal repositories (per Securities and Exchange regulations), and the
Massachusetts Health and Educational Financing Authority. Often the
system-level audited financial reports include supplemental information that
breaks out various sub-elements of the system; sometimes individual
hospital performance is broken out, and other times it is combined with other
sub-elements in the consolidating supplements. However, these filings lack
uniformity as well as the specifics of intra-system cash flow. The SEC filings
typically limit disclosure to only those entities obligated to repay bondholder
debt, which can omit entities within the system.

The disparate nature of these various reports and forms, and the fact that
they are all reported to different government entities, makes conducting in-
depth analyses on the financial status and trends among hospital systems a
challenge. The filings required by Massachusetts hospitals and hospital
systems are listed below.

Figure Q: Massachusetts Hospital Data Sources

Form Data Reported Required Filers
Income, expenses, investment gains or All non-profit hospitals and
IRS Form 990
losses from the previous tax year hospital systems
Income, expenses, investment gains or All for-profit hospitals and
IRS Form 1040
losses from the previous tax year hospital systems
Organization description, list of related All non-profit hospitals and
AGO Form PC organizations, annual audited financial hospital systems in
statements Massachusetts
Company financial performance and Public, for-profit hospitals
SEC Form 10K
solvency (annual) and hospital systems
Company financial performance and Public, for-profit hospitals
SEC Form 10Q
solvency (quarterly) and hospital systems
Borrower’s financial state relative to the Obligated groups of
Mass HEFA
terms of loan agreement recipients of HEFA loans

Connecticut

In Connecticut, the Office of Health Care Access (OHCA) collects a wide

range of hospital financial and utilization data to ensure Connecticut
residents have access to a quality health care delivery system. The thirty
acute care hospitals in the state are required by law to file an Actual
Reporting and Twelve Month Actual Filing, which includes audited financial
This is a federal requirement which applies to all for-profit institutions, not simply those in
63

Massachusetts.
statements, Medicare Cost Reports, a Board approved budget, balance sheet
information, uncompensated care data, and utilization information. The
hospitals are also required to file corporate information on their organization
and all related entities. OHCA analyzes this data for utilization trends,
financial stability, and to determine payments for uncompensated care.

OHCA produces a financial report, Annual Report on the Financial Status of

Connecticut’s Short Term Acute Care Hospitals, which provides summary
information on financial performance of Connecticut hospitals and parent
companies, as well as individual hospital financial profiles. The latest
financial report based on FY2008 data noted the impact of the recession on
non-operating income. Non-operating losses resulted in statewide revenue
losses of approximately $73 million.

In 2007, Connecticut Governor Rell formed the Hospital System Strategic

Task Force to address the financial hardships being faced by the state’s
hospitals. The Task Force issued its report with recommendations in January
2008. Among the most critical problems the Task Force identified was the
recruiting and retaining health care professionals, the erosion of employer-
sponsored/commercial insurance to subsidize losses from government
payers, and the lack of access to primary care, substance abuse, and mental
health services.64 The Task Force developed 29 recommendations related to
state and federally funded health care programs, access to capital, utilization
and planning, and workforce issues.

Maryland

Hospitals in Maryland are required to submit to the Maryland Health Services

Cost Review Commission (HSCRC) an annual filing similar to the Medicare
Cost Report regarding hospital financial operation, audited and un-audited
financial statements, and revenue and volumes reports which include billed
charges and the corresponding volume of services.

Maryland’s HSCRC was established in 1971 and has developed annual

payment rates for Maryland hospitals since 1977. HSCRC has broad
responsibility regarding hospital payment policies, rate methodologies, and
reporting. HSCRC’s authority has been clarified in a series of cases decided
by the Court of Appeals. In 1976, the Court directed HSCRC to approve rates
on the basis of fair cost and fiscal integrity. In 1984, the Court held that
HSCRC is not required to guarantee the solvency of a hospital, however,
HSCRC is required to set reasonable rates such that if a hospital is operated
efficiently and effectively, it will operate on a solvent basis and receive fair
return on the value of its assets.65 In order to fulfill this responsibility, HSCRC

Hospital System Strategic Task Force Report: Findings and Recommendations, January 8,
64

2008.
periodically reviews and issues reports on the financial condition of the
Maryland hospital industry.

HSCRC’s last financial conditions report, issued in July 2008, solicited input
from financial experts in order to understand issues surrounding: 1) the
current environment for hospital credit; 2) the most important factors when
evaluating the credit-worthiness of an issuing institution; 3) factors and
circumstances unique to the Maryland environment; and 4) the outlook for
the availability of and cost of credit in the future.66 The report analyzed
operating margin, excess margin, and cost per equivalent inpatient
admission, as measures of operating profitability and efficiency. The report
also includes debt to capitalization, days of cash on hand, and age of plant,
as measures of balance sheet strength. HSCRC included target levels for
selected indicators,67 shown below in Figure R. The indicators and targets are
meant to inform policy decision making. They were not meant to be applied
as hard targets or determinants for individual hospital review.68

Figure R: HSCRC Financial Target Levels

Target
Financial Measure
Level
Operating Margin 2.75%
Excess Margin 4.0%
Average Age of Plant 8 years
Debt to Capitalization 0.40
Days of Cash 115 days
Efficiency Deferred
EBIDTA Ratio 10.75%
Debt Service Coverage Ratio 3
Note: Excess Margin is the term Maryland uses for Total Margin.

These Maryland target levels were used to review Massachusetts hospitals

over the past four years, as seen in Figure S below. Notably, in 2008, only
thirteen Massachusetts acute care hospitals met both the operating margin
and total margin target levels.

Figure S: Number of Massachusetts Acute Care Hospitals Meeting Selected

Maryland Financial Targets
Financial Target Level 200 2007 2006 2005
Measure 8
Operating Margin 2.75% or higher 17 26 25 23
Total Margin 4.00% or higher 14 31 27 27
Average Age of Plant 8 or lower 17
Debt to Capitalization 0.40 or lower 50 53 49 47
65
Final Staff Report on the Financial Condition of Maryland Hospitals, July 2, 2008, Health
Services Cost Review Commission.
66
Ibid.
67
Ibid.
68
Ibid.
Debt Service Coverage 3 or higher 24 38 33 33
Note: A comparison of Days of Cash on Hand was excluded as the ratios were calculated
differently for the two states.

HSCRC issues a number of other annual reports including the Governor’s

Report, Annual Disclosure of Hospital Operations, Community Benefits
Report, Uncompensated Care Policy Reports, as well as rate reports.

New York

The New York Department of Health is responsible for the monitoring and
regulation of hospitals in New York State. The Department collects annual
financial filings from hospitals, including audited financial statements.
However, to obtain data for a specific hospital, a Freedom of Information Act
request is required.

In 2005, the Commission on Health Care Facilities in the Twenty First Century
(the Berger Commission) was formed to review and strengthen the state’s
acute care and long-term care delivery systems. The Berger Commission
reviewed data, conducted public hearings, and met with key stakeholders
over the course of 18 months. In December 2006, the Berger Commission
produced a 231 page report outlining the weaknesses with the system and
providing recommendations for reform.

Some of the cited weaknesses in New York’s acute and long-term systems
include:
• As a group, the state’s hospitals have lost money over the past eight
years. Since 1983, 70 hospitals and 63 nursing homes have closed.
• There have been persistent negative or inadequate fiscal margins
which limit providers’ ability to reinvest in their infrastructure.
• Average Length of Stay (ALOS) is too long in many portions of the
state.
• Insufficient capacity for primary care and home and community-based
services.
• Excessive provision of high-end services.
• There is excess capacity in the hospital system.

The Berger Commission issued a set of sweeping reforms to restructure

hospital and nursing home systems to reduce excess capacity. Financing
available to implement these reforms was provided by the Health Care
Efficiency and Affordability Law for New Yorkers ($1B) as well as Federal-
State Health Reform Partnership funds ($1.5B). The Berger Commission’s
mandatory recommendations included the closure or reconfiguration of 57
hospitals (one quarter of state hospitals) to reduce inpatient bed capacity by
approximately 4,000 beds. The Commission also provided broader policy
recommendations including:
• Review and revise the reimbursement policies and develop new
payment systems.
• Strive for universal health coverage.
• Expand primary care capacity including facilities, equipment,
information technology, and workforce.69

The Berger Commission estimated a savings of approximately $1.5 billion

annually for the next ten years from implementing these recommendations.
The annual savings to the Medicaid system alone were estimated at $106
million.

In January 2007, the Berger Commission recommendations became legal

mandates upon the Governor’s approval and the Department of Health was
charged with implementing these recommendations. By the end of 2008,
almost 2,800 beds had been eliminated from the system with approximately
700 more expected to be eliminated by 2011.

Pennsylvania

The Pennsylvania Health Care Cost Containment Council (PHC4) is an

independent state agency created in 1986 to address health care cost
growth. PHC4’s primary responsibility is the promotion of health care
transparency via the collection, analysis, and reporting of cost and quality
data.

As part of this mission, PHC4 produces a series of hospital reports including

an annual financial report that analyzes Pennsylvania hospitals and surgical
centers. The financial analysis report is separated into two volumes: General
Acute Care Facilities and Non-General Acute Care Facilities. The data for the
Acute Care Facilities report is obtained from annual hospital financial
statements and additional submissions by hospital facilities. The report
focuses on income analyses including operating margins and total margins
for all facilities. The report also reviews utilization information, including
hospital inpatient discharges and average length of stay.

The most recent financial report reviews FY2008 data for Pennsylvania’s 172
general acute care facilities. The report indicated that statewide total
margins fell in FY2008 to 4.7% after five years of growth. Fifty-one of the
state’s general acute care hospitals posted a negative total margin in
FY2008, compared to forty-two in FY2007. Examination of hospitals’ three

A Plan to Stabilize and Strengthen New York’s Health Care System, Final Report of the
69

Commission on Health Care Facilities in the 21st Century

year average margin suggested a general decline in the hospitals’ reporting
data.70

Rhode Island

The Rhode Island Department of Health collects hospital financial information

such as audited financial statements and other ad hoc data requests. From
this data, the Department produces reports such as The Health of Rhode
Island Hospitals, Hospital Uncompensated Care, and Hospital Capital
Investment, and posts them on its website. The hospital financial
statements and a financial dataset summarizing hospital financial
information are also publicly available.

The Health of Rhode Island Hospitals is an annual report analyzing the

financial performance of the thirteen private non-profit hospitals in Rhode
Island and comparing them to other New England hospitals. The report
focuses on twelve financial measures which are divided into three
categories: profitability, capital structure, and liquidity. The table below
depicts the financial indicators analyzed.

Figure T: Financial Indicators Included in the Health of Rhode Island Hospitals

Profitability Capital Structure Liquidity
Total Margins Debt Servicing Coverage Days Cash on Hand
Return on Assets Fixed Asset Financing Days in Account
Receivable
Change in Net Worth Capital Expenses Average Payment Period
Operating Margin Age of Plant Current Ratio

The report published in December 2008 analyzed calendar year 2007

financial statement information. The report indicated that Rhode Island
hospitals are showing increased profitability, higher debt capacity, and
strengthened liquidity.

In additional to hospital financial reporting, the Rhode Island Department of

Health has conducted additional monitoring of hospital consolidations and
mergers since 1997. Rhode Island’s Hospital Conversions Act71 requires that
proposed transfers of 20% interest or more in a hospital’s ownership, assets,
membership interest, authority, or control receive approval from the
Department of Health and the Rhode Island Attorney General. Upon receipt
of an application for consolidation, the Department posts non-confidential
portions of the application online, holds an informational meeting, and
provides a written public comment period.

70
Financial Analysis Volume One: General Acute Care Hospitals, Fiscal Year 2008,
Pennsylvania Health Care Cost Containment Council (June 2009).
71
RIGL Chapter 23-17.14
Therefore, based on available information, Massachusetts appears consistent
with peer states’ data collection and reporting activities.
IX. Hospital Community Benefits

Section 35 of Chapter 305 also required the review of the method by which
hospitals fund community benefit programs including the manner by which
funding is regulated by other states as to the appropriate amount,
monitoring, and direction of such funding.

Community benefits are one use of hospital resources. The definition of

community benefits has been evolving since a 1969 Internal Revenue
Service (IRS) ruling, resulting in state-by-state guidelines. The key elements
with respect to defining a community benefit are:
 The service(s) provided, and the community’s need for the
service;
 The population to whom the service is provided;
 The cost of the service, and the way the reported cost is
calculated; and
 Whether or not to offset the cost by any revenue received for the
provision of the service.

Federal Government Activity

Non-profit hospitals, which qualify as 501(c)(3) organizations, are exempt

from federal income tax. “Non-profit hospitals must be organized and
operated exclusively for the promotion of health, ensuring that no part of
their net earnings inure to the benefit of any private individual, and may not
participate in political campaigns on behalf of any candidate or conduct
substantial lobbying activities.”72

Until 1969, the provision of charity care was considered payment to the
community in lieu of federal income tax. In 1969, the IRS determined that
for hospitals to maintain their tax-exempt status they must provide a benefit
to the community beyond charity care. According to the IRS, benefits to the
community that support non-profit status are:
(1) The operation of an emergency room open to all members of the
community without regard to ability to pay;
(2) A governance board composed of community members;
(3) The use of surplus revenue for facilities improvement, patient care,
and medical training, education, and research;

US Government Accountability Office, “NonProfit Hospitals: Variation in Standards and

72

Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements,”

September, 2008, GAO-08-880, p. 10.
(4) The provision of inpatient hospital care for all persons in the
community able to pay, including those covered by Medicare and Medicaid;
and
(5) An open medical staff with privileges available to all qualifying
physicians.73

Recently, the IRS has been working to develop a means of collecting

comparable, national data concerning a hospital’s provision of community
benefits. The presumed ultimate goal is to develop a standard means of
determining whether or not hospitals are providing sufficient services to their
communities to warrant their federal tax-exempt status.

Non-profit organizations complete IRS Form 990, comparable to a for-profit

income tax return, annually. Effective in 2009, a new “Schedule H –
Hospitals” will be required. Prior to 2009, only Part V of Schedule H, “Facility
Information,” was required. In the updated version of Schedule H, detailed
information is required regarding the hospital’s charity care policy and
community benefits program (Part I), including guidance regarding
calculation of program costs. The following items are considered part of
charity care and community benefits:
• Charity care, based on the organizations charity care policy;
• Un-reimbursed costs of Medicaid;
• Un-reimbursed costs of other means-tested government programs;
• Community health improvement services and community benefit
operations;
• Health professions education;
• Subsidized health services;
• Research; and
• Cash and in-kind contributions to community groups.

Part II of Schedule H requests information regarding a hospital’s community

building activities, including:
• Physical improvements and housing;
• Economic development;
• Community support;
• Leadership development and training for community members;
• Coalition building;
• Community health improvement advocacy; and
• Workforce development.

Part III requests information on bad debt and Medicare revenues (including
surplus and/or shortfall), as well as information about a hospitals’ collection
practices. Part IV requires information on management and joint ventures
and Part V has remained the same (see above). Part VI collects narrative
information about the community the hospital serves, the needs assessment
73
Ibid, p.11.
each hospital performs, patient education about the charity care programs,
and community building activities.

The Senate Finance Committee, under the direction of Senator Charles

Grassley, has also been examining the appropriateness of federal tax
exemptions provided to hospitals. In addition to pursuing particular
hospitals, the Committee’s staff produced a discussion draft in 2007 which
raised the potential for a broader and more targeted approach to assessing
the appropriateness of a hospital’s tax-exempt status. This draft suggests
that 5% of a hospital’s revenue should be the target community benefit
contribution.74 More recently, at the Senate Finance Committee hearings on
health reform, Senator Grassley suggested that non-profit hospitals all
become for-profit hospitals and be taxed accordingly.

In September 2008, the Government Accountability Office issued its report of

community benefits programs in various states and the problems involved in
comparing community benefits programs across the country. Nationwide,
only fifteen states require community benefits programs. Furthermore, only
five states – Alabama, Mississippi, Pennsylvania, Texas, and West Virginia –
specify a minimum community benefit contribution level, with the Alabama
requirement of 15% “of the business of the hospital”75 the most explicit
mandate.

States differ greatly with the respect to the level of detail required to be
included in their community benefit programs, the presence or absence of a
target budget, and the presence or absence of penalties. The GAO report
echoed the difficulty comparing programs across states given the different
requirements, definitions, and cost methodologies.

Massachusetts

Massachusetts is not one of the fifteen states requiring community benefits

programs; participation is currently voluntary. However, M.G.L. Chapter 111,
§ 51G(3) states that “[n]o original license shall be granted to establish or
maintain an acute-care hospital…unless the applicant agrees to maintain or
increase the percentage of gross patient service revenues allocated to free
care.”

In June 1994, the Massachusetts Office of the Attorney General (AGO) first
issued Community Benefit Guidelines. In order to ensure that they remain
current, the guidelines have been reviewed and updated in 2000 and 2002.
74
Senate Committee on Finance – Minority, staff document, “Tax-Exempt Hospitals:
Discussion Draft,” p. 7.
75
US Government Accountability Office, “NonProfit Hospitals: Variation in Standards and
Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements,”
September, 2008, GAO-08-880, p. 57.
The guidelines adopted a broad definition of community benefits and
recommended that hospitals conduct a full community needs assessment
every three years in order to determine the needs of the community. Their
main tenets follow:
A. The governing body of each non-profit acute care hospital should affirm
and make public a Community Benefits Mission Statement, setting
forth its formal commitment to provide resources to and support the
implementation of its annual Community Benefits Plan.
B. The Hospital should demonstrate its support for its Community
Benefits Plan at the highest levels of the organization. The hospital’s
governing Board and senior management should be responsible for
overseeing the development and implementation of the Community
Benefits Plan including designating the programs or activities to be
included in the plan, allocating the resources, and ensuring its regular
evaluation.
C. The hospital should ensure regular involvement of the community,
including that of the representatives of the targeted underserved
populations, in the planning and implementation of the Community
Benefits Plan.
D. To develop its Mission Statement and Community Benefits Plan, the
hospital should conduct a Community Health Needs Assessment, a
comprehensive review of unmet health needs of the community by
analyzing community input, available public health data, and an
inventory of existing programs.
E. The hospital should include in its Community Benefits Plan the Target
Populations it wishes to support, specific programs or activities that
attend to the needs identified in the Community Health Needs
Assessment, and measurable short and long-term goals for each
program or activity.

Each hospital should submit an annual Community Benefits Report to the

AGO which details:
1) The process of developing its Community Benefit Plan;
2) Information on community benefit programs, including program
goals and measured outcomes; and
3) Community Benefits Expenditures.
The hospital shall make the report available to the public.76

Massachusetts does not require specific programs, but rather leaves it to

each hospital and its community to conduct a needs assessment to
determine appropriate programs. In addition to community benefit
programs, hospital community benefit expenditures also include charity care,
which for this purpose includes:

76
Office of the Attorney General, “Attorney General’s Community Benefits Guidelines, Non-
profit Hospitals,” Page 6, available at www.mass.gov.
 • A hospital’s assessment to the Health Safety Net (HSN) Trust Fund
(including any payment reductions or shortfall allocation);
• The cost of claims billed to the HSN for which payment has been
denied (defined as charges times the cost/charge ratio); and
• Free or discounted care provided based on the hospital’s financial
assistance policy.

Massachusetts explicitly excludes bad debt from its definition of charity

care,77 shortfalls from government programs, third party contractual
adjustments, and services for which federal, state, and/or various quality
initiatives determine the hospital should not be paid. It is important to note
that Massachusetts does not recognize payment shortfalls from government
means-tested programs, such as Medicaid, to be a community benefit.

Figure U presents a comparison of what the IRS and the Commonwealth of

Massachusetts consider community benefits:

Figure U: Comparison of Massachusetts and IRS Community Benefit

Standards
IRS Schedule H, Massachusetts
Item* Form 990, effective Office of the
2010 Attorney General
Charity care at cost Yes Yes
Unreimbursed Medicaid Yes No
costs
Unreimbursed costs from Yes No
other means-tested
government programs
Community health Yes Yes, including
improvement services and Determination of Need
community benefit expenditures, employee
operations volunteerism, and other
leveraged resources
Health professions Yes No
education
Subsidized health services Yes Yes
Research Yes No
Cash and in-kind Yes Yes (presumably
contributions to community considered to be
groups community service
programs)
Bad debt** Information requested. Can report if follow
suggested debt collection
practices
Corporate Sponsorships Presumably included in Yes
“contributions to
community groups”

Although, if hospitals follow the Attorney General’s suggested collection policies, hospitals
77

may report bad debt in their Community Benefits report.

*Note: This list starts with items from Part I –Charity Care and Certain Other Community
Benefits at Cost – of IRS Form 990, Schedule H. Starting with “bad debt,” the list includes
additional items from the Massachusetts Community Benefits report.
**According to Salinsky,78 “the IRS has indicated that the status of bad debt, Medicare
shortfall, and community building is under consideration, pending review of initial Schedule
H reports.” Data for these items is requested in Parts II and III of Schedule H.

Other Entities

The Hospital Financial Management Association (HFMA), a national

organization, takes a strong stance on the issue of bad debt versus charity
care stating that “[b]ad debts result when a patient who has been
determined to have the financial capacity to pay for healthcare services is
unwilling to settle the claim, whereas charity care is provided to a patient
with demonstrated inability to pay.”79 However, the HFMA also notes that its
opinion is limited to financial reporting issues and therefore not a policy
comment on whether or not bad debt should be considered a community
benefit.

The Catholic Health Association and the VHA (previously the Voluntary
Hospital Association) take a broad view of community benefits, believing that
the major themes of any program should be:
1. Community health improvement;
2. Underserved populations and unmet needs;
3. Collaboration outside the hospital; and
4. Coordination and strategic management inside the hospital.80
Under this broad approach, charity care and losses due to means-tested
government programs (e.g., Medicaid) are considered to be community
benefits, as are the unreimbursed costs of education and programs designed
to provide services to the community. However, shortfalls from patients
covered by the Medicare program and bad debt would not be considered
community benefits.

The American Hospital Association has an even broader definition of

community benefits. The “AHA Guidance on Reporting of Community
Benefit,” released November 13, 2006, extends the definition of community
benefits to include shortfalls on all government programs (including
Medicare), subsidized health services such as emergency room and
behavioral health services, and community building activities such as
physical improvements and housing, environmental improvements, and
coalition building.

Contribution Levels by Hospital

78
Salinsky, Eileen, “Show Me the Money: The Implications of Schedule H,” National Health
Policy Forum, Issue Brief No. 831, April 21, 2009, p.7.
79
HFMA, P&P Board Statement 15
80
See Catholic Hospital Association website, www.chausa.org
Total community benefits, net charity care, and community service
expenditures reported by Massachusetts hospitals for FY 2008 ranged from a
low of $55,000 to a high of $69.9 million, with reports for three of the
hospitals included in the financial section of this report (Cambridge Health
Alliance, Merrimack Valley Hospital, and Nashoba Valley Medical Center) not
on the AGO website. All community benefits, community service
expenditures, and net charity care reported to the Commonwealth totaled
over $454 million; $149 million of this resulted from charity care. Appendix
4, Table 36 provides hospital-specific information as reported to the Attorney
General.

Appendix 4, Table 37 reports 2008 community benefits filed by hospital

systems. To the extent that hospital holding companies provide community
benefits, holding company programs may not be captured in these reports.

The Community Benefits Guidelines specifically state that the “Attorney

General is not recommending a specific target level of annual gross
community benefit expenditures at this time.”81 However, the Guidelines do
provide a target range, based on total patient operating expenses, which
hospitals may consider. The targets provided are 3% of audited total patient
operating expenses for hospitals with under $200 million in such expenses,
and between 3% and 6% of audited total patient operating expenses for
hospitals with over $200 million in such expenses.

Recommendations

The Massachusetts Office of the Attorney General recently announced

revisions to the Community Benefits Guidelines for Non-Profit Acute Care
Hospitals. The revisions were developed with the assistance of an Advisory
Task Force which included representation from the community, industry, and
various state agencies. The key revisions to the guidelines are listed below
and can be found at www.mass.gov/ago:
• Encourage community input in all phases of plan development;
• Require goal setting and measurement for all community benefit
programs;
• Require that community benefit programs be based on a community
health needs assessment and focus on a target population identified at
the beginning of the plan year;
• Streamline and standardize reporting;
• Address medical debt by encouraging hospitals to adopt fair medical
debt collection practices; and
• Encourage hospitals to address the statewide health priorities of
supporting health care reform; reducing health disparities; improving
chronic disease management; and promoting wellness in vulnerable
81
Ibid, p. 19
 populations.”82

The new Guidelines are effective as of October 1, 2009. It is recommended

that the Commonwealth assess the impact of these new Guidelines in
approximately two to three years.

82
www.mass.gov
X. Recommendations

#1: Improve Data Collection and Reporting

The Division of Health Care Finance and Policy collects extremely detailed
financial information from each hospital in the state and issues quarterly and
annual reports which include a number of financial indicators. However, a
majority of Massachusetts hospitals are part of larger holding companies;
and hospital holding companies are not required to report holding company
level data to DHCFP. Thus the individual hospital data compiled by DHCFP is
an incomplete picture of a hospital’s broader financial situation. A review of
hospital holding company consolidated financial statements indicates that an
assessment of holding company finances is necessary for a thorough
understanding of hospital finances. For example, while some hospitals
appear to be low on cash, a review of holding company finances can reveal
that cash is maintained at the holding company level. The absence of this
information may lead to the inaccurate impression that a hospital may have
inadequate or adequate financial resources. Therefore, DHCFP recommends
that the agency be authorized by legislation to collect complete financial
data on individual hospitals and affiliated systems and to provide access to
this data to other government bodies and interested parties.

Transparency is a key regulatory goal. The ready availability of comparative

holding company financial data would greatly increase understanding and
analysis of hospital finances. While consolidated financial statements are
available on the Attorney General’s website, they are not routinely analyzed
and reported by DHCFP. The challenge facing state monitoring agencies is
not necessarily a lack of financial data, but rather a clear directive to one
agency to compile information from disparate sources and analyze the data
to produce useful information for policy makers and the public. This would
require the following concrete steps:

a. All sources of financial disclosure by hospitals and hospital

system affiliates should be centrally located, in electronic form,
within one agency in the state. Hospitals and hospital systems currently
report a variety of financial information to a range of state and quasi-public
state agencies. Hospitals file quarterly and annual financial statements, and
annual cost reports, with DHCFP while the Massachusetts Office of the
Attorney General collects annual audited financial statements and annual
reports for all non-profit hospitals and hospital systems. Hospital systems
report system-level financial data to a number of state and federal
regulatory agencies including municipal repositories (per Securities and
Exchange regulations), and the Massachusetts Health and Educational
Financing Authority. Often the system-level audited financial reports include
supplemental information that breaks out various sub-elements of the
system; sometimes individual hospital performance is broken out, and other
times it is combined with other sub-elements in the consolidating
supplements. However, these filings lack uniformity as well as the specifics
of intra-system cash flow. The SEC filings typically limit disclosure to only
those entities obligated to repay bondholder debt, which can omit entities
within the system.

Today, this information must be compiled and collected from several

agencies in order to develop a consolidated picture of the financial condition
and status of hospitals and hospital systems. Centralized reporting and
increased transparency will lead to a better understanding of both overall
and hospital-specific finances.

b. The state should build the analytic capacity to compile,

standardize, analyze, and synthesize system financial performance
from this central data repository. Line of business profitability, overall
system indebtedness and capacity to repay, inter-affiliate transfers of
resources, system-wide cash, and investment reserves are all useful metrics
of the financial health of a system with an embedded hospital. Certain non-
financial metrics routinely disclosed on bond prospectuses such as market
share, utilization, background and turnover of Board and senior
management, payer mix, and profitability by major business lines could also
be useful.

#2: Increased Oversight of Hospital Accumulated Financial

Resources

While hospitals require accumulated financial resources in order to

adequately protect patients and providers from unanticipated events and to
fulfill their missions, ongoing accumulation of reserves without corresponding
increased value to consumers may lead to higher than necessary prices of
medical services. Understanding that this is a delicate balance highlights the
concern when hospital resources fluctuate excessively or when regulators
are unable to assess how hospitals use or dispose of their accumulated
resources.

a. The issue of accumulated financial resources should be further

examined to develop guidelines regarding the appropriate amount
of accumulated financial resources for hospitals and hospital
systems. There are currently no standardized methods or guidelines
regarding the appropriate level of hospital accumulated financial resources.
Standardized methods and guidelines are needed to identify when a facility
is under-resourced and may be in danger of failing, as well as when facilities
are maintaining a considerable level of accumulated financial resources.
Regulators have an interest in the solvency of hospitals and ensuring they
are well-capitalized to provide high quality care. However, there are costs to
consumers associated with hospitals accumulating resources in excess of
need, particularly in Massachusetts where the majority of hospitals are non-
profit public charities. The purpose of standard measurement techniques and
guidelines would be to ensure that Massachusetts hospitals are appropriately
capitalized, while not excessively accumulating reserves which may increase
the price of medical care.

b. The Commonwealth should require that hospitals report to DHCFP

on an annual basis the purposes and corresponding amounts for
which Board-designated assets are being reserved. For the sixty-six
acute hospitals studied, over $3.6 billion dollars were labeled Board-
designated assets in 2008. However, there is no centralized repository of
information delineating the purpose for which these funds have been set
aside, making it a challenge to determine if the purposes for which the
restrictions are imposed are necessary or discretionary. Bond-holders
frequently require hospitals to maintain a certain level of available cash;
however, the Commonwealth has no information about what proportion of
the $3.6 billion in Board-designated assets is due to bond covenants. More
detailed and transparent public reporting about Board-designated assets
would enable policymakers to determine how much of the assets reported as
restricted could actually be released for general operating purposes. Once a
complete picture of Board-designated funds is developed, the
Commonwealth may then develop guidelines for reserving funds in this
manner. To the extent that fewer funds are limited in this way, medical
expenses may be reduced or additional services implemented.