Department of Health Recommendations on Hospital Financial Transparency

Department of Health Recommendations on Hospital Financial Transparency

August 13, 2014

The New Jersey Health Care Facilities Financing Authority (“Authority”) acted as a moderator at a May 29, 2014 meeting that was held “in furtherance of P.L. 2013, c.195, signed January 17, 2014, which instructs the Commissioner of Health, Mary O’Dowd, to “undertake a review of New Jersey’s hospital financial reporting requirements and…report any findings and recommendations directly to the Governor no later than six months from enactment.’ The law further instructs the Commissioner to ‘examine the impact of, and make recommendations on, the following areas for all entities receiving Health Care Subsidy Fund payments from the State: Internal Revenue Service filings, Securities and Exchange Commission filings, and audited financial statements.’” Following the meeting, the State of New Jersey Department of Health (“Department”) issued a 24 page report on July 19, 2014 entitled “Hospital Financial Transparency – Department of Health Recommendation on Hospital Financial Transparency” (“Report”). In this Report, Commissioner O’Dowd recommends that New Jersey require all hospitals, both for-profit and not-for-profit, be required to disclose additional financial information at certain intervals during the year. As a result of the significant amount of income provided from state programs to hospitals the government has the ability to request such information.

BACKGROUND

As outlined in our August 29, 2012 tax tip entitled “Governor Christie Vetoes Bill Requiring New Jersey For-Profit Hospitals to Increase Transparency in Financial Reporting”; on August 8, 2012, Governor Christie conditionally vetoed Senate No. S-782 (“Bill S-782”). This bill, as reported in our April 18, 2012 tax tip, would have required for-profit hospitals to disclose certain information similar to that of not for-profit hospitals in order to be eligible to receive charity care payments from the State of New Jersey.

On March 15, 2012, the Senate and General Assembly of the State of New Jersey passed the New Jersey Hospital Disclosure and Public Resource Protection Act (“Act”) with a vote of 32 to 4. The Act would have required for-profit hospitals in the state to increase the disclosure of their financial reporting so as to increase transparency and allow for a better comparison to tax-exempt hospitals. The Act had specifically outlined twelve factors, such as funding sources and revenues, expenditures, vendor information and a list of compensation paid to each board member and officer of the hospital, that a licensed general hospital that is owned or managed by a for-profit entity, including an entity that has a majority ownership interest in the hospital, would be required to report to the Department of Health and Senior Services and to post on its website. The new reporting requirements had been introduced to ensure that both for-profit and tax-exempt hospitals disclose similar type data for purposes of transparency and uniformity. There are many correlations between the Act and the required reporting that tax-exempt organizations must comply with on Federal Form 990, Return of Organization Exempt from Income Tax. Governor Christie conditionally vetoed Bill S-782 to allow Mary O’Dowd six months to study the issue and recommend what information should be required to be disclosed by for-profit hospitals. In his veto, Governor Christie said “I believe this bill fails to address the need for greater public access to the practices of all health care providers that benefit from state funding. The changes proposed by this bill require careful consideration to prevent the state from over-reaching into the business arena, while still acknowledging the importance of transparency for institutions receiving state funds”.

The New Jersey Hospital Association, wanting not to dissuade for-profit companies from purchasing hospital facilities in the state, believes that Governor Christie was correct in conditionally vetoing Bill S-782 allowing for the six-month study period. On the other hand, Senate Majority Leader, Loretta Weinberg, a Democrat from Bergen and the sponsor of Bill S-782, is strongly opposed to Governor Christie’s veto claiming that the bill is necessary to require for-profit hospitals to disclose similar information to that of a not for-profit hospital in order to receive state charity care funding. “I believe that if a hospital is going to apply for millions of dollars in charity care payments, then the public deserves to know that the money being spent is going into the operating room, and not the board room. We should not be using public dollars to subsidize private hospitals’ profit margins.”

THE DEPARTMENT’S REPORT

One of the main areas emphasized in the Report is on the transparency, or lack thereof, that for-profit hospitals are currently being required to disclose with respect to financial reporting. Accordingly, this is raising concerns about their financial viability and the potential impact that their financial health could have on the cost of, access to, and quality of healthcare. The meeting attendees included eight staff members of the Department and six staff members from the Authority including stakeholders of at least one representative from each of the following: five hospital trade organizations, three unions representing hospital employees, three community action groups, a publicly traded for-profit hospital, the trade association for health insurers and the trade association for nursing homes. A representative from Senator Loretta Weinberg’s office attended the meeting as an observer. A complete listing of the attendees may be found in Appendix A of the Report.

The Report outlines recommendations but is silent as to an implementation date of such recommendations. The Report states that “The following recommendations are made keeping in mind the careful balance between the unique and important nature of health care services, the significant amount of public funds hospitals receive and the need to prevent imposing too steep a burden on health care providers. These recommendations focus primarily on enhancing the Department’s access to information in its role as a regulator protecting the public’s interest and access to health care while also providing additional information to the public so that it can raise concerns if it believes the hospital is not being a good steward of public funds”.

The Department provided specific recommendation related to the following areas:

• Audited Financial Statements must be provided to the Department and conspicuously published on the hospital’s website within 180 days of close of hospital’s fiscal year (rather than the current July 1st). If the hospital is part of a multiple hospital system, the audited financial statements should include both the system’s audited annual financial information and a breakdown for each New Jersey hospital owned or operated by the system. Additionally, copies would need to be available for review by the public at the hospital’s annual public meeting, which should be within sixty days of publishing their audited annual financial statements.
• Quarterly Unaudited Financial Statements should be provided to the Department within 45 days of the end of each quarter and made public on the hospitals website within 60 days of end of the quarter. These should be prepared in accordance with Generally Accepted Accounting Principles (GAAP) and contain the same four financial statements included in the audited financial statements for each New Jersey hospital.
• Contracts with Related Parties. There should be standardization of the disclosure of related party transactions for both for-profit and not-for-profit hospitals, to the extent permitted by law.
• Names of Owners, Board Members and Officers – Board Accountability. The names of the owners of five percent or more of the corporation should be reported to the Department as part of the annual license renewal process as well as names of board members and officers. Currently, N.J.A.C. 8:43G-5.1(b) requires that a hospital provide, with a license application or annual renewal, the names of each member of the hospital’s governing body and the names of the chairperson of the governing body and the chief executive officer. Information similar to this is required to be submitted annually by all domestic and foreign corporations doing business in New Jersey as for-profit corporations.
• Hospital Charges. The requirement of the Centers for Medicare & Medicaid Services effective for all discharges on or after October 1, 2014 requiring hospitals to make available a list of the standard charges for items and services provided on the hospital website or in another reasonably available manner sufficiently addresses this issue.
• Insurance Networks and Out-of-Network Services. Each hospital should make the information available to patients regarding network coverage in a form allowing the patients to understand the insurance information and services and use the available data in in order to facilitate making appropriate decisions.
• Sale-Leaseback Arrangements. A form of notice should be filed with the Department prior to an agreement entered into by a hospital with respect to any sale-leaseback arrangements. Additionally, these transactions should be reported at the hospital’s annual public meeting. Any arrangement of this type should be contingent upon the continuance of an established and functioning governing body responsible for institutional management and planning.
• Financial Reporting of Other Entities. Broad public policy decisions on healthcare transparency should be considered for all parts of the delivery system

Additional items of disclosure were reviewed and deemed to either not be beneficial in providing the Department with information germane to maintaining access to quality healthcare services or noted that the information was already required to be made available to the State. For example, the disclosure of compensation of board members, officers and highly compensated employees was not seen as a significant area requiring a specific recommendation. Commissioner O’Dowd stated in the Report that this type of information “does not provide the Department with information that is helpful for this purpose assuming other financial information recommended herein is provided.” Another example of this would be payments to the highest paid independent contractors. Commissioner O’Dowd recommended that having to provide this type of information would place an undue burden on the hospitals and that this information should only be required if it is also required by the Internal Revenue Service, Securities and Exchange Commission or another governmental entity.

CONCLUSION

The proposed reporting requirements have been introduced to ensure that both for-profit and tax-exempt hospitals disclose similar type data for transparency and uniformity purposes. With the recent increase in the number of for-profit hospitals in the State (a number that is expected to grow), the proposed reporting requirements would allow for an easier comparison of for-profit and tax-exempt hospitals. This would require increased work, both internally and externally, but would be a beneficial step towards transparency amongst all hospitals and uniform reporting in the State of New Jersey. Mary O’Dowd has stated that if hospitals do not voluntarily follow her recommendations that her department can issue rules requiring this amplified level of reporting if the recommendations do take effect. The Report also requested penalties to be consistently applied to hospitals that do not timely comply with reporting requirements.

A copy of the Report can be accessed at the below link.

Department of Health Recommendation on Hospital Financial Transparency

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