The first six months of 2005 have seen a flurry of activity on a number of issues of prime interest to hospital and health system boards. As we head into the summer, here’s a mid-year summary of where we are on four high visibility issues: oversight of tax-exempt organizations; the moratorium on physician-owned, limited service specialty hospitals; pay-for-performance programs; and a boost for investments in healthcare information technology.
Reminder: The Summer 2005 issue of Great Boards is out.
The issue focuses on these timely subjects: a Governance Institute study on whether not-for-profit boards are emulating corporate boards; the Save 100,000 Lives Campaign; an interview with Richard P. Chait, co-author of the provocative new book, Governance as Leadership; and answers to frequently asked questions about meeting minutes and executive committees.
Download your copy at www.GreatBoards.org
From Washington to state capitals, the heat is on for not-for-profits. Charity care policies and billing practices, executive compensation, and even travel and entertainment expenses are all coming under increased scrutiny.
Last week, a prestigious panel of nonprofit leaders charged with considering reforms for the nonprofit sector issued its final report. The report from Independent Sector recommends eight principles and more than 120 steps for not-for-profits, Congress and the Internal Revenue Service to take to improve the governance, transparency and accountability of charitable organizations and private foundations.
To strengthen public reporting, the panel recommends that IRS require Form 990s to be signed, under penalties of perjury, by the CEO, CFO; or a trustee. The panel also calls for timely electronic filing of the 990s and for audited financial statements to be attached to the 990 for organizations with $1 million or more in annual revenues. The report recommends imposing or increasing existing penalties on board members who approve self-dealing or excess benefit transactions that they knew of, or "should have known of."
The panel recommended against having IRS regulate the number of board members or requiring detailed operating performance results to appear on the 990, but it did recommend that boards as a matter of good practice pay careful regular attention to the size and the effectiveness of their oversight functions. It also called for the "full board," as a matter of good practice, to "approve any change in the compensation of the CEO annually and in advance," and to review the full staff compensation program periodically. See the full report at http://www.nonprofitpanel.org/.
The report comes shortly after committees in both houses of Congress held hearings to assess whether tax exempt organizations, including hospitals, were fulfilling their obligations to the public good. After his committee's hearings, Senate Finance Committee Chairman Charles Grassley (R-Iowa) sent an extensive questionnaire to 10 tax-exempt hospitals and health systems asking for detailed information about their charitable operations.
Meanwhile, IRS is reviewing tax exempts' executive compensation practices, and it's expected to publish a revised Form 990 in the Federal Register soon.
Locally, although many of the lawsuits challenging hospitals' charity care policies and billing practices have been dismissed, the litigation and heightened attention from legislatures and Attorneys General have prompted an industry-wide push to reform uncompensated care practices and make them more transparent. Minnesota Attorney General Hatch signed his third agreement with a health system to change its charity care and billing practices.
A subtle but important change may be occurring in the yardstick for local governments to assess tax exemption. A key measure is not the amount of charity care or overall community benefits provided per se, but rather, how these benefits compare to the value of the organization's tax exemption. For example, San Francisco's director of public health recently attacked Sutter Healthcare and its California Pacific Medical Center, citing city figures showing the hospital got 22 times more in tax breaks than it provided in charity care in 2003. A Sutter spokesman strongly defended the system, calling it "a model and a leader" in following ethical business practices, providing generous charity and discounted care, and using "fair and appropriate" collections' practices. For details, see the San Francisco Business Time's story at http://www.bizjournals.com/industries/
health_care/hospitals/2005/06/13/sanfrancisco_story3.html.
Continued scrutiny by tax-hungry local jurisdictions is inevitable. Not-for-profit hospitals and health need to be ready to respond, and even better, take the initiative to communicate their good works and responsible stewardship to the community.
The $64,000 question is whether Sarbanes-Oxley style legislation and tougher IRS oversight are in the works for not-for-profits. Stay tuned this fall.
Also, take note: IRS is looking more closely at travel and entertainment expenses by not-for-profits. Minnesota AG Hatch blazed the path in this area with investigations at several Twin Cities health systems. Hot button areas are golfing excursions, stadium club memberships, spousal expenses at outside meetings, and travel outside the 50 states. McDermott Will & Emery has released a useful paper on this subject at http://www.mwe.com/info/news/ots0605c.htm.
As the moratorium ended June 9, the Centers for Medicare & Medicaid Services (CMS) said that -- to promote "true and fair competition" in hospital services -- it will review over the next six months its procedures for enrolling new, physician-owned, limited service and specialty hospitals in the Medicare program, and will take steps to reform Medicare payments that may give these hospitals an unfair advantage over full-service, community hospitals.
CMS is instructing its fiscal intermediaries not to process any applications from these hospitals while it studies possible changes. The decision basically continues the moratorium prohibiting physicians from self-referring patients to specialty hospitals that they own.
In May, CMS released its long-awaited mandated report on limited-service hospitals. The report calls for a series of payment changes to reduce incentives for physician owners of the facilities to target healthier patients and select conditions, and closer scrutiny of whether facilities meet CMS' definition of a hospital. For a copy, go to http://www.cms.hhs.gov/media/press/files/
052005/RTC-StudyofPhysOwnedSpecHosp.pdf.
Political leaders haven't reached a consensus on the issue yet. Senators Charles Grassley and Max Baucus (D-Montana) introduced a bi-partisan bill, the Hospital Fair Competition Act of 2005, to level the playing field, but a recent Republican Policy Committee paper concluded that extending the moratorium on physician-owned specialty hospitals was unwarranted. It's not clear how much help hospitals will get from a Congress and Administration committed to open markets and competition.
Look for further action late in the year, before Congress adjourns. Meanwhile, some states could act on their own. In Texas, which has no CON law and the largest number of physician owned specialty facilities of any state, the Senate passed SB 872, which requires the Texas Department of State Health Services to conduct a comprehensive study of the impact of niche hospitals on the financial viability of other general hospitals in Texas. For more information, see the Houston Business Journal's story at http://www.bizjournals.com/industries/health_care/hospitals/
2005/05/23/houston_story3.html?f=et163.
Pilot efforts to pay hospitals and physicians who achieve quality performance targets are growing and getting good early reviews, but some observers are still skeptical.
More than 270 hospitals that are participating in the CMS/Premier Hospital Quality Incentive (HQI) Demonstration Project improved their quality significantly during the project's first year, according to a report issued in May. The project tracks hospital performance on a set of 34 widely accepted quality indicators and pays annual incentives to top performers.
CMS and Premier said that "with four quarters of preliminary data gathered, there is a clear trend toward significantly improved quality among the participating hospitals. The median performance composite score for all hospitals -- just one measure of improvement -- went up 7.5 percent in the project's first year."
In addition to the several hundred hospitals in the CMS/Premier demonstration, CMS has proposed that for FY 2006, all acute care hospitals that submit data on 10 quality measures receive a 3.2% increase in their payment rates for inpatient services, while hospitals that do not submit the information will receive only a 2.8% update.
In April, Med-Vantage, a consulting firm in San Francisco that develops and sells healthcare-provider scorecard applications, released a White Paper that found 104 pay for performance programs had been established between insurers and physicians and hospitals as of March 2005, up from to 84 programs in November 2004 and 35 programs in 2003. It expects the number of P4Ps will grow to 160 by 2006. Download the report at http://www.medvantageinc.com/publications.htm.
More than half of health leaders surveyed by The Commonwealth Fund, or 57 percent, rated "pay for performance" as an "extremely or very effective way" to reduce health care costs. Many believe the approach begins to build a stronger business case for quality.
However, many physicians (and executives too) are skeptical of the pay-for-performance (PFP) trend. They worry that PFP will lead to cost and utilization controls in disguise and add yet another barrier to the physician-patient relationship. The American Medical Association's Board of Trustees has adopted a preliminary paper containing guidelines for PFP programs, saying they should be designed to promote quality, be evidence-based, allow for variation based on patient needs, and pilot tested before wide use begins. For a copy go to http://www.ama-assn.org/ama/pub/category/15254.html.
Pay-for-performance, publicly available quality reports, and consumer-driven health plans are all moving in the same direction -- toward providing more tools for consumer choice and more incentives for providers who can document and deliver quality and value.
While caution remains advisable, these trends compel boards to take an ever-stronger interest in supporting their institutions' efforts to measure quality outcomes, enroll physicians in improvement efforts, and document their performance to payers and the public.
It looks like political leaders are finally paying attention to what healthcare leaders have been saying: healthcare information technology investments lag private industry because of payment and regulatory disincentives. For example, current Stark and anti-kickback laws make it difficult for hospitals to help private physicians upgrade office-based IT systems to connect to the hospital's system. Medicare, the largest single hospital payer, makes no special provision for reimbursing IT capital investments.
The White House and Congress are listening. David Brailer, President Bush's national coordinator for health information technology, has said that modernizing the healthcare system's information technology could save the health care system upward of $140 billion a year and dramatically improve quality of care and patient safety. Patient safety advocates have underscored the importance of IT enhancements, such as computerized physician order entry systems, to improve safety and clinical outcomes.
Several bi-partisan bills have been introduced to authorize federal grants and other types of support for adoption of health information technology. The 21st Century Health Information Act of 2005 (H.R. 2234) is sponsored by Reps. Patrick Kennedy, D-R.I., Tim Murphy, R-Pa. and Sen. Hillary Clinton, D-N.Y (and backed by former House Speaker Newt Gingrich, founder of the Center for Health Transformation). It would finance the development and implementation of regional, health information organizations to facilitate the sharing of patient health information across providers in a state or community. The bill also calls for financial assistance to physicians to deploy IT.
In June, in a joint press conference that had Beltway tongues wagging, Sen. Clinton and Senate Majority Leader Bill Frist (R -Tennessee), announced their support for The Health Technology to Enhance Quality Act of 2005. It would implement health information technology standards that would guide the design and operation of interoperable health information systems. The legislation establishes standards for the electronic exchange of health information, and also authorizes $125 million in grants to local and regional consortiums to implement IT infrastructure enhancements.
The national attention to healthcare IT is welcome and overdue. Many hospital and health system boards have made major IT investments in their capital budgets, and yet, vast opportunities remain to make the entire healthcare system as digitally seamless as the airline or financial services industry. We'll continue to watch these developments in Great Boards.
To all our subscribers, have a great summer. We'll see you with our next issue in the fall.
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Barry S. Bader, Bader & Associates
12225 Seline Way, Potomac MD 20854, 301-340-0903
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