6 Challenging Components of Managing a Hospital's Finances

When a hospital is able to post a net income or a higher-than-expected operating margin, a sigh of relief usually follows. However, a positive end result does not always mean the road to get there was easily navigated.

Ed Ladely, director of the financial services practice at IMA Consulting and former CFO of Montgomery Hospital in Norristown, Pa., says there are unexpected difficulties with any job, but there are six financial areas in particular that may cause any hospital CFO, controller or other financial team member to get a headache.

1. Pensions.
Mr. Ladely says the most difficult thing he had to deal with as a hospital CFO involved the management of pension plans, specifically defined-benefit plans. The unpredictability of investment returns is concerning for hospitals, as they still must pay out retirement funds, and a large pension block can make it difficult for a hospital to plan for capital acquisitions and expenditures. "[This] varies from year-to-year on investment returns, but the market hasn't been where it normally was," Mr. Ladely says.

Additionally, when a hospital has to take more cash out of their capital operations and commit it to the pension plan, it usually doesn't bode well for the hospital's credit. "When you have large unfunded amount in pensions that shows up on financial statements, it reduces the hospital's equity," Mr. Ladely says. "When banks see that, they are more hesitant to lend out money."

2. Contract negotiations with commercial payors. When Mr. Ladely was at Montgomery Hospital, which is just outside of Philadelphia, there were two main commercial payors: Independence Blue Cross and Aetna. Although negotiating with payors as large as Blue Cross, Aetna, Cigna, UnitedHealthcare and the other main commercial payors can be challenging, Mr. Ladely says hospitals must have good contracts with them to be successful.

Instead of being trapped into a corner during negotiations, hospitals should make sure they verbalize how their hospital business is vital to the payor's market with specific data and figures. Otherwise, the payor may lock the hospital into a multiyear contract with lower-than-desired reimbursements. "If you negotiate a bad contract, you could find yourself essentially out of business," Mr. Ladely says.

3. Accounting errors. There are several common accounting blunders that hospitals can avoid, and Mr. Ladely says several happen too often. Misstating allowances, underestimating governmental payor payments and others can alter a hospital's current year earnings statement, and that typically puts the CFO and his or her staff in an unfavorable position. "When [these mistakes] do occur, it makes your bottom line look very bad, and it makes your board concerned," Mr. Ladely says. "You have to defend what happened."

4. Budget estimates. Distinguishing between a "want" and a "need" is a fine line for hospitals and their respective departments. Mr. Ladely says in the current economic environment, hospitals must focus on the "needs," but that is where financial management could become frustrating.

Hospital financial teams try to juggle the "wants" and pushback from different departments all while trying to make sure there are enough resources for everyone. Mr. Ladely says it becomes difficult for some departments to realize they need to give things up to maintain an operational budget, and if issues become too complex, they must be brought up at senior management meetings with the hospital's CEO. "The last thing you want to do is bring an unbalanced budget to the board," Mr. Ladely says. "Team members just have to feel that everything you did was fair for the institution."

5. Bank-hospital relationship. Hospitals have to work with banks on leases, loans and finance rates, which is not always the easiest thing to do, Mr. Ladely says. However, a proactive hospital CFO can stay in routine contact with the bank to make future interactions, such as capital expenditures, more seamless. "It's easiest to accomplish [a working relationship with a bank] with communication between the hospital and the bank on a quarterly basis," Mr. Ladely says. "You talk about what was going on, what wasn't going so well, and if we need capital, they wouldn't be surprised." He also suggests hospitals share their capital budgets at the beginning of each fiscal year with the bank to improve communication.

6. Annual rating reviews. The annual rating reviews with Moody's Investors Service, Fitch Ratings, Standard & Poor's or any other credit rating agency can be hectic, as the hospital and the agency both must evaluate the hospital's performance. Issues include the hospital's volumes, what the competition in the area had done, how the hospital was reacting to competitors and how the hospital can defend its overall production. Mr. Ladely says although these meetings do not always end in good news, the hospital CFO should meet with the credit rating agency's representatives face-to-face when possible to establish a closer relationship for the future.

Related Articles on Hospital Finance:

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