Monday, April 8, 2013

BEWARE of Investing in Hospitals: for CEO’s and CFO’s of Private Equity Firms.

                      The attached Crain's article speaks to the serious cash crunch facing hospitals: CFO’s lament at Healthcare Financial Management Association meeting. As an advocate for financial healthcare, I am disturbed by these voices. 

                Private equity firms should BEWARE of investing in hospitals! Before one single dollar is transferred, investors should first learn where the holes are in 99% of hospital financial statements. Unpaid accounts that should be written off, are kept on the books for years at a time as “projected income”  instead of being listed as projected LOSSES. There are reasons for this: 
                 Particularly with respect to No Fault and Workers Comp receivables,  (notoriously difficult and arduous to collect) unpaid claims are presented to CFO’s as part of a “BUCKET by CARRIER” of money “still outstanding.” Claims reports typically emphasize the most egregious payors, INSTEAD of detailing the seriousness of the individual outstanding claims by each individual dollar amount, corresponding to its date of service and date of payment (or non payment). 
                          CFO’s are not aware of the inaccuracies inherent within the “bucket” practice of course, because they focus on bottom lines: income vs expenses. Traditionally, No Fault and Workers Comp have represented a small part of the asset picture. However, with decreasing Medicare/Medicaid and Commercial Insurance payments besieging Hospital profitability on all fronts, this potential asset or loss should be examined through a much finer lens. 
                            Some hospital finance executives speak of their ability to “drill down” on outstanding aged receivables; but the reality is that 99% of hospitals do NOT have adequate systems or personnel needed to provide this detailed reporting to them, should the CFO’s even know to request it. 
                      I would suggest that going forward, CFO’s obtain monthly analyses of the hospital’s revenue performance that will incorporate true and actual No Fault and Workers Compensation collection data. The information should be sorted by dates of service and payment, per individual claim. This is the ONLY true way to determine the profitability of a hospital’s No Fault and Workers Compensation receivables, and to gain a true picture of its collection performance. Typical hospitals are losing over $5 million dollars annually on this potential asset, but sadly, they are not even aware of it. 

               There are companies available which will provide a cost free analysis of a hospital’s data to help CFO’s obtain true and accurate figures. It would serve private equity firms and hospital administrators well, to take advantage of such programs, instead of “doing it the way we always have.”  The bucket approach does not incentivize executives to improve their overall collection performance, and even more important to investors:  it is misleading.

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