Like never before, not-for-profit hospitals are in the money.
By spending less, cutting expenses and investing wisely, tax-exempt hospitals in 1995 have collected growing stores of cash to invest.
As a whole, not-for-profit hospitals sit atop financial assets of some $200 billion, according to a recent study by the Investment Management Institute and Christine England Associates, both in Greenwich, Conn. That figure includes cash, stocks, bonds and pension funds.
However, not-for-profit hospital officials expect their cash-rich positions will be battered by poorer government reimbursement, the demands of creating integrated systems, the growth of managed care and the Darwinian struggle for survival with investor-owned giants. As a result, these tax-exempt hospitals voice little regret when questioned about their large cash reservoirs.
Methodist Hospital System in Houston has accumulated the nation's largest cache of cash-$778 million, according to a ranking by HCIA, a Baltimore-based healthcare information company (See chart, p. 41). In 1994, the system had net patient revenues of $470 million and assets of $1.4 billion.
"Methodist's cash reserve is an investment for the future of the community we serve," said Larry L. Mathis, president and chief executive officer of the 1,116-bed hospital system.
MODERN HEALTHCARE looked at several measures to determine that cash levels at not-for-profit hospitals were reaching historic levels.
Cash and short-term investments by not-for-profit hospitals have grown 18.1% annually from 1990 through 1994 (See chart, p. 42). That's double the annual growth of total assets, according to the 1995 Almanac of Hospital Financial & Operating Indicators, published by the Center for Healthcare Industry Performance Studies, Columbus, Ohio.
The study is based on a sample of 1,700 not-for-profit hospitals tracked by CHIPS. Another measure is days' cash on hand, which CHIPS says has risen from 60.8 days in 1990 to 85 days in 1994. The sample is not representative of all U.S. hospitals because it contains a higher percentage of larger hospitals and excludes investor-owned and specialty hospitals.
Moody's Investors Service, a New York-based credit-rating firm, confirms the same trend. For tax-exempt hospitals that it rates, days' cash on hand increased 33% to 108 days in 1994 from 81.5 in 1990.
"An industry under competitive pressure needs more cash," explained John Goetz, vice president and assistant director of the health finance ratings group at Moody's. The firm, which grades tax-exempt bonds issued by hospitals, in recent years has placed a higher emphasis on a hospital's cash level.
"We think cash is very important," Goetz said.
When the ratings services place a higher emphasis on cash, so do hospitals and healthcare systems. Higher ratings on their bond debt means lower interest rates, saving them money.
Financial Security Assurance, a New York-based bond insurer, maintains no hard-and-fast rules on the amount of cash a hospital must have to qualify for bond insurance. But the more "threats" a hospital faces, such as consolidation in the marketplace or cuts in reimbursement, "the more cash we like to see on the balance sheet," said Jan I. Weiss, a managing director at FSA.
Still, to cash-strapped states and municipalities, the hospital industry is beginning to look like the fatted calf ready for slaughter. For example, in recent years Pennsylvania has been particularly aggressive in assessing payments from tax-exempt hospitals in lieu of taxes.
As Weiss puts it, if you have too much cash, people may want to assess you, but if you have too little cash, you are vulnerable. "If I have a choice, I'd rather worry about a small tax," he said.
For some the issue comes down to how hospitals can best invest in the community. Instead of just gathering larger cash reserves, couldn't the hospital simply lower charges to the community?
How much is enough?
One problem is that no one can say how much cash a hospital truly needs.
"You should be shooting for between 25 and 30 days' cash on hand," said Steve Chrapla, director of consulting for Zimmerman & Associates in Milwaukee when asked for a benchmark.
When told that numerous hospitals had 10 times that much cash on hand, he expressed surprise. He noted, however, that rising cash levels show hospitals have gotten better at collecting money they are owed.
For example, uncollectible write-offs by hospitals hit an all-time low earlier this year at 4.5% of gross revenues, according to the Hospital Accounts Receivable Analysis from Aspen Publishers, Gaithersburg, Md. That compares with 5.4% in early 1993.
Many communities don't know how much cash their tax-exempt hospitals are amassing. "A lot of hospitals don't want to tell you how much money they have," noted Terry Bilkey, principal for Yanni, Bilkey Investment Consulting, a Pittsburgh-based firm that advises hospitals.
How do hospitals generate higher cash levels?
Anecdotal evidence suggests that some religious systems that have traditionally paid for everything in cash started holding on to their bucks in the 1990s and borrowed for capital projects by issuing low-interest, tax-exempt financing.
In other cases, hospitals have received cash windfalls. For example, between 1993 and 1995, Parkland Memorial Hospital in Dallas doubled its cash position to $190.6 million, according to Moody's. The rating agency cites Parkland's accumulation of Medicaid disproportionate-share funds-$42 million this year alone.
For many years, New Jersey's 84 acute-care hospitals operated under a regulated system that prevented them from building liquidity. Under rate regulation, "nobody really had cash," said John Forsman, corporate senior vice president and chief financial officer of Community-Kimball Healthcare System, parent of Toms River, N.J.-based Community Medical Center.
The 1993 deregulation of hospital rates in the states proved to be a boon to hospitals' cash positions.
In 1994, Community Medical had $91.1 million in unrestricted cash and investments, up from $66.4 million in 1993, according to Moody's. Its 200 days' cash on hand reflects successful appeals of prior-year rate disputes and cost reductions achieved in part through flexible staffing and purchasing discounts, Forsman said.
There are dozens of individual examples of why hospitals are building cash reserves. Yet, for most tax-exempt hospitals, it's simply a function of budgeting. They are taking in more money and spending less.
Hospitals are cutting outlays on bricks and mortar because communities already have too many inpatient beds. Although they may be spending millions buying physician practices, they've shied away from the multimillion-dollar capital projects of the 1970s and 1980s.
In 1994, the median capital expenditure growth rate, which measures the percentage of a hospital's total property, plant and equipment that was added in a year, sank to 6.8% from 7.9% in 1991, according to CHIPS.
Hospitals also are cutting personnel costs. According to Challenger, Gray & Christmas, a Chicago-based outplacement firm, 14,489 healthcare jobs were eliminated in 1994, up from 5,699 the previous year. The vast majority of those positions were hospital jobs. In the first nine months of 1995, the firm recorded 4,219 layoffs, mostly at hospitals.
Cash may be flowing. But hospitals' cash-rich positions may be a fleeting phenomenon, industry watchers cautioned. Investments in integrated delivery systems and managed-care strategies will siphon off millions from hospitals' stockpiles of cash, they said.
"They've always been saving money for a rainy day, but I think now they see a reason to spend," said Gerard Anderson, director of the Johns Hopkins Center for Hospital Finance and Management, Baltimore. "I would expect that hospitals will make major purchases and, therefore, there will be less cash on hand. As competition heats up in a marketplace, you're going to see major cash outlays by hospitals."
Because capital investments are being deferred, the average age of hospitals' fixed assets has grown to a median of 8.5 years in 1994 from 7.9 years in 1990. Even though they're stockpiling capital, it may not be enough to replace aging buildings, said William O. Cleverley, a co-founder of42
CHIPS and a professor of hospital and health services administration at Ohio State University. In 1994, hospitals tracked by CHIPS had just 21.9% of their replacement costs funded. In other words, they had to fund 78.1% of the cost by adding debt.
Cleverley believes measures of liquidity will begin to plummet over the next five years. Cash will be used to offset the erosion in hospitals' profitability and to acquire physician practices, he said.
New Brunswick, N.J.-based Robert Wood Johnson University Hospital, the hub of RWJ Health System, doubled its nest egg to $91.2 million in 1994 from $49.4 million in the previous year through re-engineering, better purchasing practices and increased patient referrals from affiliated hospitals.
But that cash won't sit around for long. Administrators have a list of programs and capital projects in the planning process, including an $8 million investment in a family medicine residency program and $20 million for a children's hospital.
"That's what makes us different from a proprietary, or for-profit, hospital," said Harvey A. Holzberg, the hospital's president and CEO and president of the six-hospital system. "We don't distribute the money (through profits or salaries). We reinvest the money in the community," he said.
Added Methodist's Mathis: "Years ago we (the system) predicted today's uncertain healthcare climate-consolidations, managed-care contracts, and cuts in Medicare and Medicaid reimbursement rates. To finance our continuing commitment to excellence in patient care, teaching and research, we created an endowment for the future-one that has grown substantially through prudent management."
Methodist officials declined to be interviewed about how they invest their cash.
Other observers note that hospitals taking capitated contracts, which require them to accept financial risk for patient care, must maintain larger cash reserves, as insurers do.
One example is Harris Methodist Health System in Fort Worth, Texas. The system's HMO, which has about 200,000 enrollees, last year had an unexpected loss of $20 million on revenues of $295.7 million.
As a result, its cash level of $171 million in 1994 dropped to $167 million in 1995. "Learning curves are going to require cushions," said Ron Borland, Harris Methodist's chief financial officer.
In New Jersey, Community-Kimball has volunteered to participate in the federal government's Medicare Choice program as a provider service network. If selected, Community-Kimball would have to make a multimillion-dollar investment in a sophisticated information system capable of monitoring Medicare patients at home, in the hospital and in long-term-care facilities, Community-Kimball's Forsman said.
Some question how the cash reserves of not-for-profit hospitals compare with for-profit chains or HMOs.
Columbia/HCA Healthcare Corp. isn't particularly rich in cash. Despite annual revenues of $16 billion, the nation's largest hospital chain had just $127 million in cash on hand in the second quarter ended June 30.
Even so, the clout of Columbia and its investor-owned colleagues lies in its access to cash in other forms. For example, banks have given Columbia a $3 billion credit line. That $3 billion isn't recorded as cash because Columbia only taps into it as needed.
What's more, Columbia's money supply would be higher if it didn't have such a voracious appetite for acquisitions.
"If you told (Columbia CEO) Rick Scott that he couldn't buy any hospitals in the next 12 months, he'd have billions," said Josh Nemzoff, a mergers-and-acquisitions consultant in Nashville, Tenn. "Not-for-profits are hoarding cash and keeping it. For-profits are also generating tons of cash, but they're spending it."
Columbia officials confirm that they keep low cash levels because they get a better return by investing in other assets-like hospitals. Columbia's return on invested capital last year was 11.5%, compared with the 5% or 6% it could have made through traditional investments.
And only a few hospitals can compare with the riches of HMOs.
Earlier this year, The Wall Street Journal published a story headlined: "Money Machines: HMOs Pile up Billions in Cash." Physicians were outraged that their incomes were being squeezed by the cash-rich HMOs. Cash levels for four HMOs-Kaiser Permanente, United HealthCare Corp., U.S. Healthcare and WellPoint Health Networks-were more than $1 billion.
If Houston's Methodist Hospital had been included it would have ranked just behind Humana's cash horde of $887 million.