Division of Health Facilities Evaluation and Licensing

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Report Of The Advisory Commission On Hospitals - 1999

IV. Recommendations

As described above, there are numerous and complex internal and external factors driving the current financial downturn. No single approach will lift the industry out of this downturn. However, the commission did identify several promising approaches that in aggregate can strengthen the financial condition of hospitals without jeopardizing the quality of care provided to patients. Just as there is no one solution, those responsible for making these changes will include hospital management, boards of trustees, physicians and other health professionals, the state, payers, managed care companies and the general public. All have responsibilities to ensure that hospitals maintain financial viability in this dramatically changed health care environment. This section outlines several recommendations for the current financial situation and the relevant role that each party can play.

The recommendations are organized into three major areas, including:

  • assistance to hospitals and communities in the transition of hospitals to more efficient organizations providing services in the appropriate physical setting;
  • modifications to the state's financial, regulatory, and leadership responsibilities to ensure access to and the quality of health care services in the state; and
  • actions to ensure a climate of fair business practices between payers and hospitals.

While some of the proposals call for funding new programs, the main emphasis is on helping hospitals to restructure and reduce costs in response to the changing health care environment. The commission believes that these structural changes provide a longer-term solution to the financial problems of the state's hospitals than temporary infusions of cash that do nothing to change the fundamental realities of the health care market.

A. Assistance to hospitals and communities in the transition of hospitals to more efficient organizations providing services in the appropriate physical setting

1. Create hospital asset transformation program to assist in reduction of excess capacity

As the evolving health care environment continues to put pressure on the finances of many hospitals, all stakeholders would benefit from a process that would help hospitals address the issues of closures or transition to other uses in a proactive manner. The following Hospital Asset Transformation Program ("HATP") proposal is an attempt to develop a mechanism through which hospitals that are destined to close or transition to non-acute services could receive assistance to transition out of the acute care market in an orderly fashion.

The Commissioner of Health and Senior Services, acting through the Health Care Facilities Financing Authority, with approval from the Director of the Division of Budget and Accounting in the Treasury Department, should be authorized to refinance the debt of the hospital terminating acute care services and pay up to the full amount of the annual debt service. This financial assistance should be conditioned upon the receipt of a plan from the new business partner (whether hospital or other entity) that:

  • ensures continued patient access to urgent care services through urgent care centers or other appropriate means;
  • includes appropriate employee protection commitments, such as job placement assistance, or job training grants. For example, the New Jersey State Nurses Association could assist in the orderly transfer of nurses from one facility to another;
  • provides for limited or temporary credentialing for physicians at remaining facilities;
  • takes responsibility for the remaining liabilities of the hospital;
  • provides for the re-use of the property whenever feasible ;
  • provides an opportunity for input and ongoing involvement by some existing Trustees;
  • ensures that assets will not be transferred across state borders;
  • provides technical assistance upon request to develop an acceptable plan for transforming the hospital from acute care services to financially viable services.

Clearly, this is a sweeping proposal that will require the cooperation of many participants in the health care industry. Further, the issues will be particularly difficult at inner city hospitals that are often critical economic and social institutions and may be the only source of access to health care in the community. However, the commission believes that the HATP will enable New Jersey's hospital industry to radically restructure so that it will face future challenges from a position of strength. The DOH should be an active participant in this process, assuring a fair and open process and the appropriate use of both the facility and state funds.

2. Continue the hospital assistance unit

Earlier this year, the Department of Health established a Hospital Assistance Unit to coordinate state resources and to bring in outside resources, as needed, to aid distressed hospitals. The commission recommends that this concept continue in the form of a Hospital Transition Group. Such a group would help by developing a list of qualified consultants who could quickly identify the cause of financial problems at a particular institution. In addition, the group would be responsible for coordinating state actions to ensure that inappropriate regulatory hurdles do not stymie solutions.

The Department of Health should also continue to retain a merger/consolidation specialist. There will be some situations in which the demand for services requires continued operation of an acute care hospital, but not in its current form. A merger/consolidation specialist would serve as a "broker" to identify potential partners that would offer the appropriate fixes such as economies of scale, broader services, or access to capital.

3. Institute hospital quarterly financial reporting and management plan

The Department of Health should establish, through regulation, a mandatory quarterly financial monitoring system to identify potential problems before they become unmanageable. The commission favored quarterly over annual monitoring because the annual audited financial statements are typically issued four to six months after the end of the year. A problem starting in the first quarter of one year might not be detected for another 15 months. Financial data provided must be of sufficient detail to allow the DOH to calculate a broad range of financial indicators, including liquidity (days cash on hand and average payment period), profitability (total margin), and utilization (occupancy rate). (Although the New Jersey Health Care Facilities Financing Authority collects data of this type, it cannot release hospital-specific information without the written permission of the facility.)

The commission discussed selecting specific levels of financial performance that would qualify a facility as "distressed". However, it decided that financial distress should not be defined as failure to meet a specified number of ratio targets, but should instead be based on expert judgments made after reviewing those indicators in combination with other information about the facility.

4. Assure certificate of need and licensing regulations facilitate needed changes

The Hospital Asset Transformation Program, described earlier, will assist hospitals that want to transition from acute care services to other services through the regulatory process. The commission recommends that similar resources be made available to hospitals that want to consolidate campuses to ensure that emergency and ambulatory services are maintained appropriately. DOH regulations should also be reviewed to clarify and strengthen the procedures that apply in the event of closures and bankruptcies.

5. Expand access to affordable health insurance to reduce charity care burden

As noted earlier, the burden of charity care continues to rise in New Jersey despite the state's unique subsidy programs. Revisions to that subsidy program are discussed earlier in the report, but the commission felt that another way to attack the problem is to improve access to affordable health insurance. The state has already seen some success in this area with the NJ KidCare program that makes low-cost insurance available for uninsured children in families with incomes up to 350 percent of the federal poverty level.

The commission recommends that the state investigate other affordable insurance programs for the remaining uninsured population. Implementing other affordable insurance programs would provide a more sustainable approach to providing and paying for patient care. The commission applauds Governor Whitman's creation of a Task Force on the Affordability and Accessibility of Health Insurance. The importance and magnitude of this task require representatives of all key stakeholders to work together to recommend actions that the state can take to make health insurance more affordable. The commission also recommends that the state consider withholding state contracts from employers that do not provide reasonably comprehensive health insurance for their employees. Hospitals should consider a similar approach. For these ideas to have an effect there would need to be an array of insurance options for small employers.

For existing and new state insurance programs, hospitals play a vital role in enrolling eligible patients into these plans. Sister Jane Frances Brady, past Chief Executive Officer of St. Joseph's Hospital in Paterson, described for commission members the steps that St. Joseph's has used to significantly increase enrollment in the KidCare insurance program in its market area. These included:

  • creating marketing materials in a variety of languages;
  • working with community-based groups to identify potential families;
  • distributing token gifts, such as key rings and t-shirts with promotional literature; and
  • dedicating staff to the task of enrolling families in the program.

One potential concern with new insurance programs is that providers believe that they won't relief until subscribers are enrolled. It may be possible to significantly accelerate enrollment of large numbers of uninsured given the state's knowledge of identities and incomes of parents of children already enrolled in KidCare, Medicaid, and general assistance. The Task Force on Affordability and Accessibility of Health Insurance should also investigate how to provide health insurance for health care professionals, including hospital, nursing home, and home health workers.

6. Explore additional financing approaches that the new jersey health care facilities financing authority should consider

The New Jersey Health Care Facilities Financing Authority (Authority) plays an important role in the area of the state's acute care hospital debt. As the primary issuer of tax-exempt debt on behalf of the state's hospitals, the Authority should continue to explore ways to lessen the impact of indebtedness, both bonded and commercial. This should include identifying opportunities to refinance for savings and/or cash flow relief. The Authority should also take every opportunity to educate various constituencies such as the rating agencies and bond insurance companies with regard to the strengths of New Jersey's health care institutions and the environment in which they operate. Last, the Authority should take every opportunity to advocate on behalf of the state's acute care hospitals on issues that relate to their cost of borrowing.

7. Explore modifications to state medicaid payment rules

Financial distress at necessary and efficiently run hospitals providing needed services presented a different problem for the commission. Put differently, if necessary and efficiently run facilities are still struggling financially, then the state must re-examine existing policies to assist those hospitals. As these hospitals often provide the only access to acute services or specialty services for area residents, closure of these facilities is not an option. Although it considered developing criteria to explicitly identify such "anchor hospitals," the commission opted to support recommendations that would help those hospitals through improved public program reimbursement, closer monitoring, and technical support.

First of all, improvements in the three key areas discussed above -- reducing excess capacity and Medicare length of stay and increasing access to health insurance - will work to ensure that needed facilities remain financially viable. As noted earlier in the report, the added revenue of patients coming from closed facilities will improve the bottom line of surviving hospitals without any change in total reimbursement from payers. Similarly, reducing length of stay for Medicare patients lowers costs without affecting revenues. And, with more people insured, the burden of charity care can be lightened. But there are also many other ways that the various players in the health care sector can ensure access to needed facilities.

The state should explore several changes to the Medicaid reimbursement system. These include:

  • considering basing the Medicaid rates (fixed rate per admission) on more recent cost data to reflect current hospital operations and changes in medical practices. Currently, the system uses cost data from 1988, updated for inflation.
  • exploring the possibility of creating a new peer group in the Medicaid rate structure to recognize that hospitals serving a disproportionate share of charity care and Medicaid patients tend to have higher costs. Since Medicaid is moving more and more enrollees to managed care, these changes might seem of little consequence. However, even with the movement to managed care, hospitals will likely be reimbursed on a fixed rate per admission for some Medicaid patients. More importantly, because charity care and hospital relief fund cases are priced at the Medicaid fixed rate per admission, changes in the Medicaid rates would redistribute these subsidies more equitably.
  • considering some type of Periodic Interim Payment (PIP) system for Medicaid managed care for hospitals that meet explicit financial and utilization criteria. A PIP system for Medicaid would advance, under limited conditions, reimbursement to facilities with low cash reserves to ensure that delays in payment did not jeopardize the operations of these hospitals.

Given the current financial condition of some hospitals, these options should be considered as quickly as possible. The commission also discussed the fact that payments for graduate medical education (GME) included in the Medicaid managed care rates do not go directly to the hospitals for the TANF population. However, Medicaid plans to make GME payments directly to hospitals for the SSI population about to move into managed care. While many hospital representatives urged that all GME payments should go directly to hospitals, the commission did not reach a consensus on this issue. Another unresolved issue was the adequacy of Medicaid rates. Some commission members contended that New Jersey's rates were low in comparison to many other states. Medicaid officials noted that courts have found that the state's Medicaid rates meet statutory and regulatory requirements.

C. Resolve billing and claims processing issues

Hospitals face two major challenges that few other industries face when attempting to collect revenues for services they render. First, hospitals must document that the services they rendered complied with whatever criteria third-party insurers deem necessary. This, in itself, can be a cumbersome and time-consuming process. And, since documentation is partially dependent on physician cooperation, this burden is not entirely under the control of the hospitals. Second, even after documentation is complete, payment may not be forthcoming if the insurer questions some aspect of the treatment. Both steps can add many days between the time of service provision and payment and increase the cost of collecting patient revenues. These and other factors have led to uncertainty of hospitals' accounts receivable and problems in managing this aspect of their finances.

1. Enforce existing payment and claims denial regulations and strengthen regulations as needed

The state issued regulations requiring managed care plans to provide notice of denials or to make payment to providers within 60 days. Also, the state legislature recently passed laws requiring prompt payment or notice of deficiencies in a claim; regulations will be issued to implement these laws. The commission heard differing reports as to whether the earlier regulations have been effective. The commission supported enforcement of existing regulations.

Another area for the state to consider is the insolvency of managed care companies. Hospitals and other providers are still owed large sums from outstanding claims resulting from two previous insolvencies. New regulations strengthening the solvency requirements for HMOs were recently adopted.

2. Institute study of claims processing and billing problems between managed care organizations and hospitals

The commission has created a work group to investigate the validity of hospital reports of delays and denials of claims submitted to third party insurers, especially managed care organizations. The work group determined that the information available was anecdotal and that there is currently no satisfactory data upon which to make informed decisions. After speaking with representatives of the University Health System and Ernst & Young, the group determined that the system was incredibly complex and susceptible to major delays in payments. For example, hospitals and payers often use third-party vendors, which greatly increases the chances of system incompatibility and miscommunication.

Therefore, the work group will commission a study of the claims generated by five hospitals during a three-month period with two managed care organizations to track claims processing and payment to accurately determine where problems exist. The objective of the study will be to identify the points at which a claim can be rejected, the reasons for the rejections, the dollar value of these claims and the time lags involved at each level of processing, including preparation of the initial bill.


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