How much is enough? Hospital and Insurer Reserves Hearing
While there was no definitive answer to this question, DHCFP and DOI hosted a public input session to discuss hospital and insurer reserves, endowments and surpluses. The goal: to find out how much these entities should have in their reserve accounts.
Today’s hearing offered an insight into one of the lesser-known aspects of our health care system: hospital and insurer reserves. Reserves are surpluses held by these entities to pay for capital expenses and guard against shortfalls in cases of extraordinary demand. Currently, the DOI has a requirement that all insurers maintain a certain level of reserves based on Risk-Based Capital analyses. There is no such equivalent requirement for hospitals, but there are hospital benchmarks. In a sense, reserves are like a household savings account, only bigger. Hospitals and insurers set aside money, some generally and some with a specific goal in mind, to make sure that they can stay solvent and make the improvements they want to make. Each of the hospitals and insurers who testified were given “homework” of sorts from the panel, which consisted of Steve McCabe from DHCFP, Kevin Beagan from DOI and consultant Steven Tringale from Hinckley, Allen and Tringale. Our full report is below the fold.
First up was Mike Caljouw from BCBSMA who covered points that were repeated by the other insurers who testified. Caljouw testified that this is a critical issue for the company and for the Commonwealth. He went on to say that reserves exist to help meet financial obligations even in the midst of market disruption. BCBSMA considers the reserves to be “members’ reserves” so that the members can be “covered no matter what.” BCBSMA has reserves that are equivalent to $438 per member and this covers their self-insured and fully-insured products- approximately 3 million lives.
Caljouw then discussed the details of how they calculate how much to hold in their reserves (including compliance with NAIC, state law and BCBS Association membership). He emphasized that despite this level of reserves the economic downturn has hindered their ability to grow their reserves. Like many businesses and consumers, their investment income has gone down over the last several quarters. BCBSMA usually relies on investment income to bolster their reserves and without that additional income, it is a challenge to make sure they are maintained.
Caljouw also discussed the impact of the overall health care market in Massachusetts and their ability to maintain financial solvency. The requirements of guaranteed issue as well as the merged individual and small group market have increased the risk borne by insurers. The continued focus on the affordability of health insurance ensures that carriers’ margins are “razor thin.”
He also noted that as a not-for-profit, BCBSMA is not able to access as much of the financial market as for-profit insurers because they can not generate funds through stock options. They do not have access to capital at the same rate or volume as a for-profit insurer. Not-for-profits can access debt-capital, but BCBAMA does not think that is not a sound business model.
Caljouw also discussed the benefits they give to Massachusetts including payment of taxes upwards of $130 million annually. Caljouw’s homework is to provide details on what types of taxes they are paying and also povide BCBSMA’s contingency plans for a pandemic.
Next up was John Erwin from the Council of Boston Teaching Hospitals. He started off by discussing the differences between hospitals and insurers. Hospitals have substantial infrastructure needs. Additionally, hospitals have unpredictable revenues in the form of government reimbursements through Medicare and Medicaid. Finally, hospitals have generous charitable policies that benefit their patients. Erwan also distinguishes between the reserves and the endowments of hospitals. Each fund provides resources for different hospital needs.
Hospital reserves exist to enable them to modernize their facilities, invest in new technologies and adhere to their missions. Hospitals frequently take losses in some areas that are core to their mission and rely on reserves and revenues from other areas to cross-subsidize.
Like insurer investments, hospital investments have taken a significant downturn in the local economy. And like not-for-profit insurers, it is a challenge for not-for-profit hospitals to generate capital.
There were several questions related to the cross-subsidization that occurs in hospitals, their liquidity on the bond market and their ability to generate capital. His homework: to provide detail on the jobs and related costs in the hospitals, provide more detail on the relationship between reserves/endowments and the charitable giving of a hospital and provide information on board requirements for reserves/endowments.
Joe Kirkpatrick from Mass. Hospital Association spoke next. Kirkpatrick reiterated the distinctions between insurers and hospitals and echoed Erwan’s description of why hospitals need reserves and endowments. A hospital’s mission is to provide health care to the community- all that come through the door. “They provider 24-7 back-up to the entire community.” Hospitals provide primary care to those who need it. Their role is so critical to the community that they should be treated very differently than the health insurers.
Hospitals are only able to be there when needed because they have appropriate fiscal means to maintain their operations. The reserves are necessary to maintain physical plant, equipment, and activities. Hospitals also have a substantial workforce, with approximately 1/3 of their workers on fixed pensions. The pension money comes out of their reserves. Finally, he discussed the charitable work done by hospitals including delivery of mental health services, which are completely under-funded by the current payment model.
The economic crisis and lowered reimbursements by public payers has had a devastating effect on hospitals in Massachusetts. There has been a substantial deterioration in their ability to maintain and grow their reserves and endowments. Over half of the hospitals in the commonwealth are currently operating on a negative margin and drawing down on reserves. The average days’ cash on hand has fallen from 86 to 66.7 days. This means that, on average, a Massachusetts’ hospital could run for just over two months without any additional revenue or payments. Kirkpatrick attributed much of this loss to pension fund allocations and loss of investments in the financial market.
Kirkpatrick’s homework is to bring back information on the different types of physicians they have in the hospitals and break it out by specialty as well as answer all of the questions asked of Erwan. Kevin Beagan of DOI also asked that they provide the highest days’ cash on hand ever recorded so they can compare with the current status.
Health Care For All then testified (click here for our testimony). We emphasize the need for transparency of all of this financial information so that there can be an open public discourse about how our health care dollars are being spent. Our homework is to try and find any precedent for data collection in other states.
Eric Linzer from Mass. Assn of Health Plans was next. Linzer echoed the need for insurer reserves as described by Caljouw. He said that in Massachusetts’ the insurers spend, on average, nearly 90% of health care premiums on medical expenses. He said that in 2007 and 2008 respectively only 1.3% and 1.2% of the premium dollars went to reserves. He reiterated the state and NAIC requirements on maintenance of reserves for an insurer’s solvency.
Linzer also mentioned that the restricted premiums payments they obtain through Medicare Advantage plans are a hindrance on their ability to maintain their reserves. He said that medical costs have risen over 50% in this decade due to rising provider payments. And emphasized the effect of the overall instability of the economy on insurers’ ability to maintain reserves. He said that MAHP is willing to discuss the option of a state-held insurer guaranty fund.
Linzer’s homework is similar to Caljouw’s: what are their contingency plans for a pandemic and how many days claims can they pay?
Joe Casey, CFO of Sturdy Memorial Hospital came up next. His perspective, from a smaller stand-alone hospital, emphasizes that they just don’t have the same resources as the three largest hospital networks in the state. They need to do the same capital improvements, but are drawing from a much smaller base. He has grave concerns over using historical data for any reviews since the economic times are so different now than they were just a few months ago.
He said that physician practices have become a financial drain on many hospitals, but are necessary to provide the proper care to the community. It is a challenge to balance this cost with all of the other rising costs for a small hospital.
Tufts Health Plan spoke last. Tufts echoed the sentiments of MAHP and BCBSMA. They explained that for them there are two sources of funding for their surplus: investment income and profits from operational costs. Tufts surpluses grew from 2003-2008 due to higher investment income. However, now that the investment income is reduced, Tufts’ surpluses are not growing as much. Therefore they are very concerned about their ability to maintain and grow reserves without increasing operational costs (ie. increased premiums). They will also seriously consider an insurer guarantee fund.
DHCFP and DOI are taking their legislative charge very seriously- and so are we. We eagerly anticipate the July 1st report (as well as the answers to the questions raised today).