How long can city hospitals stay a ‘going concern’?
The New York City hospital system could be forced to implement layoffs and draconian service cuts before the end of Bill de Blasio's first term as mayor.
The city's $6.7 billion public health system, which is the largest in the nation and one of the biggest in the world, now faces a "dire fiscal situation" with limited time to fix it, according to its president and an audit conducted for the Health and Hospitals Corporation by the accounting firm KPMG.
Further, there's little the city can do to fix the problems. H.H.C. must instead rely on the state and federal government for billions of dollars if drastic cutbacks are to be avoided.
"Strong and sustained advocacy will be needed in Washington and Albany to achieve our aims ... or New York City will need to be prepared to provide $100s of millions in new subsidies or dramatically reduce services," reads a document prepared for the board by H.H.C.'s chief financial officer.
The prescription for H.H.C. entails nothing less than a complete overhaul of the city system's financial and health care delivery model, to be undertaken as soon as possible.
An auditor from KPMG recently told members of the H.H.C. board that what's needed is a "hard discussion with not only management but the city as to whether or not this organization, from a financial statement presentation perspective, is a going concern. In the past, we always said we were never there, but we were getting closer and closer."
That warning, coming off a year described as the worst financial performance in H.H.C.'s recent history, is based on current cash reserves and where auditors at KPMG believe the health care industry is going in general, said Marlene Zurack, the chief financial officer for H.H.C. and senior vice president for finance and managed care.
It doesn't take an accountant to see the looming problems.
As recently as August, the corporation had only nine days of cash on hand. That number improved, thanks to a $183 million Community Development Block Grant, but even with that infusion of federal money, H.H.C. has less than 30 days of cash on hand.
H.H.C.'s financial statements show its debt doubled between 2010 and 2012, and it is projecting losses of more than $1 billion by 2015.
Much of that is caused by post-retirement obligations, which are paid in the future but sit on the current balance sheet.
Alan Aviles, president and CEO of H.H.C., has been sounding the alarm. At a Crain's health care symposium in October, amid cries of concern for struggling private hospitals in Brooklyn, Aviles reportedly said "there is little appreciation for how endangered H.H.C. is."
And earlier this year, Aviles told the City Council that “our financial outlook worsens considerably in the out years” and that H.H.C. faced a "dire fiscal situation."
In part, that's because the Affordable Care Act is expected to further reduce city hospital revenues in 2014. Along with increasing expenses, largely because of employee pension costs and health benefits, KPMG auditors concluded that “going forward, the financial picture of the Corporation may continue to be one of expenses exceeding revenues.”
These projections represent a substantial challenge for the incoming de Blasio administration, particularly after the mayor-elect campaigned heavily on the promise of fighting to keep city hospitals open, and preserving a crucial access point to the health care system for the city's poorest residents. De Blasio's press office did not respond to repeated requests for comment.
The $6.7 billion system, comprised of 11 acute care hospitals, four skilled nursing facilities, six large diagnostic and treatment centers and more than 70 community based clinics, serves 1.4 million New Yorkers every year, about one-third of whom are uninsured. That percentage is likely to lessen in the coming years because of the Affordable Care Act, but H.H.C. still expects to care for hundreds of thousands of uninsured patients because of the city's large undocumented immigrant population, who are not eligible for health insurance under Obamacare.
"I don't have an easy answer to the question, but I think the problems of H.H.C. and other safety-net hospitals are going to be very much on the minds of those in Albany [next] year," said Assemblyman Richard Gottfried, who chairs the Assembly's health committee.
H.H.C.'s troubles spring from forces largely beyond its control.
The state is making concerted efforts to reduce the amount it spends on Medicaid, which comprises 43 percent of H.H.C. outpatients and 60 percent of H.H.C. inpatients. That's good, and many argue necessary, for the state budget, but it has cost H.H.C. more than $540 million in annualized Medicaid funding.
The Affordable Care Act also sharply reduces a federal subsidy for hospitals that treat low-income populations. The new law cuts the Disproportionate Share Hospital subsidy by 50 percent between 2014 and 2019, which means H.H.C. will receive about $3 billion less from the federal government over the next decade. The Affordable Care Act cuts $500 million from the program in this fiscal year and $18.1 billion over the next six years.
On the other side of the ledger, expenses are expected to rise significantly in the coming years because of employee retirement benefits. Since 2008, pension costs have risen more than 75 percent to $436 million, Zurack said.
This all comes on top of Hurricane Sandy, which had a devastating effect on the system's balance sheet.
"Superstorm Sandy battered several of our facilities, forcing the evacuation of hundreds of patients (some critically ill), and disabling two of our hospitals for an extended period of time,” Aviles wrote in his annual budget report. “With two major facilities closed for many weeks, we suffered staggering revenue losses.”
The storm was a cruel blow to H.H.C., which during the first months of 2012 had made progress toward improving its budget. During the last three years, the workforce has decreased by almost 4,000 employees.
Because of the city's continuing commitment to the hospitals, the system's credit rating has remained stable: Moody's Investors Service, Standard & Poor's Ratings Services, and Fitch Ratings have all given high marks to the corporation's debt.
Still, a critical point could come soon, with expenses outstripping revenues even before the Affordable Care Act cuts take full effect.
The concerns are not new. For years, independent analysts as well as H.H.C. board members have been warily eyeing the trends in the city system and in the health care industry.
The Citizens Budget Commission in 2012 issued a report entitled "A Troubling Prognosis for H.H.C.'s Finances," which explored the fiscal challenges ahead.
Charles Brecher, consulting director of research for the commission, said H.H.C. has so far survived because of a benevolent Bloomberg administration, which has routinely filled in the gaps in their budget. But with deficits growing, that is a policy that he does not seeing being able to continue indefinitely.
"The city has been able to cover for them," Brecher said. "The issue is how long the city will cover them. Will the money and the will be there?"
While de Blasio may believe hospitals are vital to their communities, the mayor-elect could have a difficult time finding room for them in his budget, particularly given some of his other top priorities.
"It's always a tension of things you want to do versus things you can afford to do," Brecher said. "It's not clear he is going to have all the money that is necessary."
Instead, H.H.C. will need some short-term help from the federal government and a long-term shift away from a fee-for-service model toward managed care--the kind of model championed by the Affordable Care Act. Efforts to accomplish both are underway.
Representatives from H.H.C. will be in Washington this week pleading their case. They are hoping to have some of their ambulatory care centers designated as Federally Qualified Health Centers, which would bring in about $30 million a year.
"Those clinics are the front door of health care and their viability is essential to the communities they serve," said LaRay Brown, H.H.C.'s senior vice president for corporate planning and intergovernmental relations.
They will also ask for a substantial share of any Medicaid waiver money the federal government allocates to New York.
The Medicaid waiver is as close to a pot of gold as hospitals can get these days, and New York is looking for about $10 billion from the federal government over a five-year period. The money comes from a portion of the savings generated by Cuomo's Medicaid Redesign Team.
The state and federal government must work out how that money can be allocated, giving every healthcare entity in the state a chance to lobby for their share. H.H.C. would like between 15 and 20 percent of that waiver money, Brown said.
"We would contend that in New York City because we serve more than one million individuals a year and we are the single largest provider of the Medicaid population, the government should care how those dollars are invested, and if they invest with us we will drive those costs down," Brown said.
That money, however, is a short-term fix. To really change the trend lines, H.H.C. needs to change how it delivers care, which is why there is such excitement over the early success of MetroPlus, which provides low or no-cost health insurance to 420,000 city residents. Essentially, the state and federal government pay insurance premiums to H.H.C., which uses the money to finance care for those who have MetroPlus insurance. MetroPlus also offers private insurance plans on the New York State exchange and expects to enroll 40,000 residents through the end of March. Under that system, a healthier population--one with low readmission rate and less time in hospitals--helps the corporation because it profits from the premiums.
"The long-run solution is savings that come about from the restructure of health care, relying much more on good ambulatory care primary care … not having people admitted as much," Brecher said. "MetroPlus can get people to primary care. To the extent there is a solution, it's around having a more sensible health care system."