Current financial reporting practices inhibit healthcare policymaking, researchers say

Creation of a national database with information from health systems’ audited statements would give policymakers a better sense of how to respond to financial trends, according to a study.

Healthcare policymaking would improve if alternative sources of public financial reporting are used to inform decision-making, according to arguments in a newly published study.

As published in the Journal of Health Care Finance, the article by analysts with the Urban Institute and Harvard T.H. Chan School of Public Health calls for the creation of a national database that contains information from health systems’ audited financial statements. Data reporting should be required to take place three to six months after an organization’s fiscal year-end.

Why different data sources are needed

Drawbacks of current financial reporting include the lack of timeliness of Medicare cost reports and the absence of much insight on the finances of organizations at the system level, the authors wrote.

Such problems would be mitigated if policymakers had access to detailed information from audited financial statements, they said. Those statements are “the gold standard of financial data because of the depth of meaningful disclosure, certification by outside auditors and creditors’ ability to sue if financial disclosures are misleading.”

The statements include financial information on all entities within a system and are made public within six months after an organization’s fiscal-year end.

A better set of metrics

In a cohort of 50 health systems that accounted for nearly a quarter of adjusted admissions nationally in 2018, the authors examined the applicability of 28 financial metrics in assessing an organization’s financial health. They settled on 12 metrics spanning the following categories:

• Profitability (total margin; operating margin)
• Liquidity (days cash on hand; cash and investments)
• Debt capacity and solvency (long-term debt/total capitalization; pension-adjusted LTD/capitalization; cash and investments/LTD only; debt service coverage)
• Adequacy of capital investment (average age of plant; capital expenditure/depreciation expense)
• Financial burden due to insurance status and dependence on state/local assistance (government operating subsidy/total operating revenue; uncompensated care burden)

Among the health systems in the study, 32 were nonprofit organizations of various sizes, four were for-profit and 14 were government-owned.

Theoretical implications for the Provider Relief Fund

Analysis of the metrics showed that audited financial statements provide “comprehensive information about systems’ financial positions that is more policy-relevant than hospital-level profit margins alone,” the authors wrote.

As an example, the authors noted that distributions from the Provider Relief Fund (PRF) could have been targeted differently had they been based on indicators other than estimates of lost revenue as derived from Medicare cost reports.

“PRF allocation criteria were not based on liquidity, solvency, adequacy of capital investment or even on overall financial health, in part because there is no national database that reliably measures these critical components of financial health,” the authors wrote.

Information from audited financial statements suggests that “many health systems with high Medicare revenues and total revenues — the primary basis for allocating PRF — did not have urgent need for federal support during the early stages of the COVID-19 pandemic despite reduced revenues and margins reported early in the pandemic. Our findings show that higher revenues were associated with much higher liquidity.”

One problem, they noted, was that the policymakers in charge of allocating the funding lacked information about days cash on hand at the health system level.

Some proposals likely would face opposition

Chances are some of the policy insights the authors developed from their analysis would stir controversy if implemented. For example, they said days cash on hand data among the nonprofit hospitals in the study “raises questions about the purpose of favorable tax treatment of this class of hospitals.”

They suggest that perhaps nonprofit hospitals be required to “reinvest profits into needed community services or lower their prices rather than building large investment portfolios or expanding to compete for more commercial patients in affluent markets.”

They also note that payment rates or payment updates might merit capping in response to indicators of high profitability, liquidity and solvency. The information from audited financial statements likewise could be used by regulators in assessments of the competitive merits of proposed mergers or acquisitions.