New York hospital leaders are livid over the state's release of a report crediting the industry with achieving record profits in 1997.
The state's characterization of hospitals as fiscally sound contradicts the industry's own assessment and highlights the confusion that reigns nationally over how best to measure hospitals' financial performance.
The situation mirrors what's happening at the federal level, where the hospital industry is fighting Medicare spending reductions expected in President Clinton's fiscal 2000 budget at the same time hospitals are enjoying record Medicare inpatient profit margins and record profits generally.
In New York, health department officials unveiled the seemingly positive news two days before Gov. George Pataki proposed lopping millions out of the state's $28 billion Medicaid budget in fiscal 2000.
Hospital representatives say the report presents an inflated and misleading characterization of hospitals' fiscal health and was timed to bolster Pataki's political agenda.
"This was just a classic setup to justify the unjustifiable," charged Daniel Sisto, president of the Healthcare Association of New York State.
Asked to comment on the purported attempt to influence the upcoming Medicaid debate, health department spokesman John Signor would say only that the revenue and expense report is an annual publication prepared by the department and released when ready. The state also made public 1997 compensation data for New York hospital executives. A number of chief executives pulled down salaries in the high six figures; a few topped $1 million.
The hospital financial report shows private not-for-profit and for-profit hospitals recorded a collective surplus of $739.2 million in 1997, up 42% from the previous year. Including public hospitals, total profitability rose to $851 million. The report references 221 hospitals.
Sisto and others say those figures are misleading because they include unrealized gains on investments and donations earmarked for capital projects.
The association said the 1997 data also fail to capture more recent pressures, including a problem with late payments and denials by managed-care plans, a rise in the number of uninsured in the state and a $3.9 billion reduction in Medicare payments that New York hospitals face under the federal balanced-budget act through 2002.
Pataki's proposed Medicaid cuts translate into an $850 million hit for hospitals, according to HANYS.
"All of these factors now are coming home to roost in 1999, creating a tailspin for the hospital community," said Kenneth Raske, president of the Greater New York Hospital Association. "If their aim is to put hospitals out of business, they will."
Hospital leaders say income from operations is a better indicator of 1997 performance. Statewide, operating profits dropped nearly 28% to $218.2 million in 1997. The state's report does not provide net income figures.
Accountants and financial analysts interviewed last week tended to agree that the state's depiction of profitability is distorted.
Instead of net income or operating income, the state uses "unrestricted net assets" to measure profitability.
"That's absolutely not the way we do it," said Martin Arrick, a director at Standard & Poor's. "(The ratings agency) absolutely does not look at (unrestricted net assets) as a measure of operating or excess profitability." Arrick said the state's interpretation runs counter to the agency's observation of hospital performance nationally.
"We are seeing a number of negative results and from startling players, people who have always done really well and are really taking it on the chin in 1998," Arrick said.
Accounting experts said growth in unrestricted net assets is a measure of available funds but does not reflect hospital performance in a given year, because it includes items such as donations released from restriction for investment in capital projects and unrealized income on investments.
John Lavan, senior vice president and chief financial officer at New York Hospital, said his facility's reported $82.6 million profit was inflated by a $74.6 million nonoperating gain. Much of that money was donated by people in the community for the hospital's expansion and modernization. In 1997, the funds were transferred to pay construction-related bills. He said the hospital earned $8 million from operations.
"If anybody's going to be held accountable, they ought to be accountable for their operating performance," said John Bigalke, national partner in charge of assurance and advisory services for healthcare at Deloitte & Touche in Orlando, Fla.
The New York health department is sticking with its interpretation of the facts.
"Hospitals for the past four years have said they were in financial trouble," Signor said. "In addition . . . with the first year of deregulation they said they would not do as well financially. Well, each of the past four years we've seen that their statements were incorrect."