The 4 Dimensions of Hospital Accountability

Hospitals are entering into an era of "accountable care," but what does that really mean? How are hospitals being held accountable, what areas should be measured and why is being "accountable" more important in today's society?

William Cleverley, PhD, president of Cleverley + Associates, and James Cleverley, principal of Cleverley + Associates, spoke at the American College of Healthcare Executives 2012 Congress on Healthcare Leadership to answer those questions and to give healthcare executives a better understanding of how they can measure their hospitals' accountability viewed from the public eye.

What is accountability, and why is it important?

Accountability, first and foremost, is the ability for a hospital to explain and justify its conduct to the public and the board of directors. (For the presentation, "accountability" was specifically tied to non-profit hospitals.) Dr. Cleverley said accountability for non-profit hospitals is becoming more important because there is a growing public distrust of them. Citing a report, he said the public currently perceives non-profit hospitals as "faceless corporate entities…run by CEOs who manage with all the trappings of big business" instead of the previously-held view that they were community-owned institutions of public good.

The federal government has stepped in, requiring non-profit hospitals to disclose almost every aspect of their business, ranging from community benefits to executive compensation and other items found on the Form 990. Dr. Cleverley said those are obvious and required forms of hospital accountability, but how can hospitals go further to display and showcase their value to the community at-large?

Four areas of accountability for non-profit hospitals
Dr. Cleverley said there are four main metrics or dimensions of public expectation for non-profit hospitals, each with their own set of statistics and measurements. For each metric, the hospital should compare its numbers with the numbers of a peer institution, the state average and the national average.

1. Stewardship/sustainability. Dr. Cleverly said a hospital's stewardship and sustainability issues directly pertain to the finances: Does the hospital have too much or too little money? Does it have too much or too little cash on hand? What is appropriate, from the community's point of view, for executive compensation, debt and reinvestment?

Hospital executives can answer these questions with the following 10 measurements, all compared with their respective peer institutions, state average and national average:

•    Operating margin. Hospitals want to look at multiple years, perhaps a five-year average, of their operating margins as opposed to small samples. Small sample sizes of operating margins skew results and do not give the public a true image of the organization's fiscal health.

•    Total margin. This figure includes investment income, which the public views just as highly as operating income.

•    Return on equity. The return on equity is net income divided by equity, or the rate of return on a hospital's investment. This fundamental measurement has a very simple explanation: "Your level of asset growth cannot exceed the level of equity growth," Dr. Cleverley said. "Otherwise, the balance sheet gets top heavy with debt."

•    Cash to replacement cost percentage. A hospital's cash to replacement cost percentage factors in the hospital's total current cash, how much cash is needed for roughly 25 days cash on hand and accumulated depreciation, which will determine if a hospital has an appropriate amount of cash for replacement needs.

•    Long-term debt to capital. A hospital's debt position is not the CEO's decision — it is the board of director's decision, Dr. Cleverley said.

•    Cash flow to total debt. Both debt metrics must also factor in bond ratings, as high-rated hospitals tend to carry more cash on hand.

•    Growth in net fixed assets. "Communities like to hear [the hospital] is taking money and providing it back into the community," Dr. Cleverley said. As such, a reasonable growth in net fixed assets shows hospitals are devoting financial resources back.

•    Fixed asset turnover. Fixed asset turnover is net revenue divided by the average net of fixed assets. A higher ratio shows the hospital has less money tied into fixed assets. This could be a sensitive point for the community perspective, as hospitals must straddle the fine line between need and return on investment. A project with a lot of need but a small ROI is a "Samaritan," while a project with not a lot of need but a good ROI is similar to what Dr. Cleverley called the "heart hospitals," which could have a negative public perception.

•    CEO compensation to hospital average compensation. Generally, the public does not think non-profit hospital executives should have large salaries. Hospitals should therefore compare the hospital CEO's compensation with the average rank-and-file hospital employee's. The average CEO-to-average ratio depends on hospital size, revenue and other factors, but a 20-to-1 ratio is fairly common.

•    CEO compensation to expected compensation. Adjusting the CEO's compensation based on hospital bed size, revenue, demographics and comparability data could give more insight, particularly for the board, if CEO compensation is too high for the community's liking.

2. Reasonable healthcare costs. Mr. Cleverley said hospitals can display community accountability by assessing the hard costs of providing essential services. The following three metrics show why hospitals shift costs to private payors, how demographics impact costs, how the cost of living affects hospital costs and how the relative cost position of hospitals compares with other hospitals and industry segments.

•    Per capita Medicare cost. As hospitals try to break even on Medicare margins, the per capita Medicare cost becomes even more relevant, Mr. Cleverley said.

•    Specific hospital cost composition. Cleverley + Associates developed a facility-level cost measure called the Hospital Cost Index, which compares the Medicare cost per discharge and Medicare cost per visit at the hospital (both adjusted for case complexity and wage index differences) to the U.S. average value for each measure. Mr. Cleverley says the HCI is one of the most objective cost comparisons available, as it separately factors inpatient and outpatient costs. A full explanation on the HCI can be found here (pdf).

•    Net patient revenue per equivalent discharge. Hospitals can measure the net patient revenue per equivalent discharge in the following manner: Inpatient charges are divided by the Medicare charge per case mix adjusted discharge; outpatient charges are divided by the Medicare charge per relative weight, and then the outpatient units are converted to the equivalent inpatient. "It's a one-stop shop for volume," Mr. Cleverley said. "It says, 'What is our cost — our operating cost per patient encounter — but also what is the cost we're passing off to the community?"

3. Care to the poor/community benefits. Non-profit hospitals are in unique situations, as they must provide a certain amount of indigent care to justify their tax-exempt status. Consequently, hospitals must be able to show they provide enough care to those who have poor reimbursing payors (e.g., Medicaid, self-pay) while still making an appropriate profit off commercial patients.

•    Hospital Charge Index. Similar to the Hospital Cost Index, the Hospital Charge Index looks at a hospital's case mix complexity for both inpatient and outpatient operations.

•    Payor mix. Hospitals must be able to show they provide enough care to Medicaid patients and those who have no or little health coverage. This could be an essential fabric of the hospital's mission statement and will be scrutinized by the community.  

•    Schedule H metrics. Every hospital must fill out a plethora of Schedule H comparatives, such as charity care and unreimbursed Medicaid, and hospitals must compare those metrics with peers, state and U.S. averages.

4. Quality of care. Value-based purchasing will begin Oct. 1, 2012, and hospitals need to be prepared to associate Medicare payments with quality measures.

•    Risk adjusted mortality rates. Actual deaths to expected deaths for heart attack, heart failure and pneumonia are some of the basic quality measurements that hospitals should be measuring, if they don't already, Mr. Cleverley said.

•   Risk adjusted readmission rates. Similarly, the readmission quality rates for heart attack, heart failure and pneumonia must be recorded and compared with peers, state averages and national averages.

More on Hospital Metrics:

3 Data Points to Track to Drive Hospital Discharge Best Practices

Profit Potential: How Stamford Hospital Has Hit Positive Margins for 8 Consecutive Years

7 of the Most Important Metrics for Measuring OR Efficiency

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