Hospital CFO: Angels With Clipped Wings

Finance chiefs working for hospitals find themselves caught in the Medicare price vice.
David KatzJuly 10, 2002

When the price of steel goes up, a company that makes steel widgets can hike its price to cover the increase soon after it happens. But when health-care costs rise, a hospital’s CFO must deal with a shortfall until the masters of Medicare choose to pay at the higher rate.

And that can be years.

Why so long? Because the Medicare reimbursement system, which pays hospitals for the care of millions of elderly and disabled Americans, is retrospective. The federal system’s managers base their payback rates on past medical cost experience, and lock in those rates for long periods.

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Much to the chagrin of hospital finance managers, governmental payers “haven’t been able to develop real-time reporting” on which to base their prices, says Michael Taylor, a consultant in the Boston office of Towers Perrin who supplied the steel analogy.

Therein lies the special burden borne by CFOs working at non-profit health-care outfits. Non-profits, after all, have much tighter constraints on their ways of raising capital than their peers at publicly owned hospital companies have. They can’t issue stock, for instance, and have to seek extra funding from sources of more limited means, such as charitable donors and state governments.

Sharp upticks in the price of technology, in particular, can wreak havoc on the budget of a non-profit hospital. At Boston Medical Center, for instance, cardiologists are likely to switch to the use of a new medicated version of a “stent,” a small wire-mesh tube used in treating heart blockage, by early next year. The move could cost the center, a 547-bed non-profit with an $800 million yearly budget, well over $3 million, says Ron Bartlett, the hospital’s CFO.

The hospital, however, is a “safety-net” institution with a mission of delivering high-quality care to patients regardless of their ability to pay. The hospital’s managers can’t choose not to use the new stents, which are coated with a blood thinner to reduce the risk of clotting produced by non-coated devices. “Am I not going to give you the best technology, [which could] save your life?” Bartlett asks.

So the hospital will have to pay $3,000 to $4,000 a pop for the new devices, rather than the $550 it’s now paying, says the CFO. He estimates that the switch from regular to drug-coated stents will be made in treating 1500 patients.

Where’s that money going to come from? Not from the Federal government, or at least not soon. “Medicare is not going to change their reimbursements for a year or two down the road,” Bartlett expects. What’s more, there’s “very little true negotiation” with Medicare officials on rates, he adds. “Medicare says, `Here’s what were going to pay for it,’ and you pay for it.”

There Go the Candy-Stripers

Such a downward push on income puts special pressure on hospital CFOs to trim costs elsewhere. “What we try to do is make our operations side [efficient], to keep our costs below what third parties will pay you,” explains Rick Langfelder, CFO at New York’s Health and Hospitals Corporation.

One obvious place for a hospital CFO to hunt for efficiencies: employees. To help cover its new stent costs and other expected expense hikes — including a 12 percent jump in the hospital’s $35 million pharmaceuticals budget — Boston Medical Center is freezing its full-time staff at 4,500. The hospital’s management team had been expecting to hire 100 to 150 full-time employees. Not hiring them would save the hospital about $5 million, says Bartlett.

The finance chief has also sought to rejigger the hospital’s contracts with major vendors. He is also considering borrowing money in the public markets. But defaults on hospital debt have dimmed the appeal of health-care paper, particularly in Massachusetts, notes Bartlett. He says that Boston Medical hasn’t been able to obtain a debt rating anyway.

Of course, CFOs at non-profit hospitals can look to charitable institutions as a source of funding. And indeed, donors are often willing to shell out money for special projects — like the treatment of underweight children or cancer patients. But Bartlett says charitable donors are more eager to support particular programs than ongoing capital spending.

“My impression is that donors would rather give to a program [than] to bricks and mortar,” notes the finance chief. He’s having trouble finding sources to fund the $150 million in capital projects the hospital has planned over the next three to five years.

Pain in the Receivables

Non-profits face a more basic income problem than fund raising or debt issuance, however: Getting paid for the services they perform.

The hard truth is, finance departments at hospitals that serve uninsured, low-income populations can have acute accounts-receivable pains. New York City Health and Hospital Corp.’s Langfelder says his biggest challenge is “producing a viable P&L statement and balance sheet, [while] treating half a million people without health insurance.”

The best way to solve the problem of not getting paid for uninsured care is to find a way to get patients covered, finance chiefs say. Langfelder notes that he constantly works with the state and federally run Medicaid program and a number of state-run insurance programs, like Family Health Plus, to get more patients insured.

That’s not a task a lot of CFOs have to tackle. Langfelder also points out that eligible patients need to be enrolled in the right insurance plans. At NYHHC, which has a $4.1 billion annual budget and is the nation’s largest municipal health system, that’s the CFO’s responsibility. “My job is to make sure our financial counselors are trained [in processing the forms] and know how to deal with patients,” says Langfelder.

That’s not as easy as it sounds. Among the obstacles to getting money back promptly: The forms themselves tend to be complicated and the bureaucracy thick. Says Langfelder: “Different agencies may ask for the same information twenty times.” And unlike finance chiefs in the for-profit world, hospital CFOs can’t just go out and fire their business partners. Why? Many of those partners happen to be state and federal agencies.