The Disclosure Dilemma - Public Disclosure of Financial and Operating Information by Healthcare Providers information - Brief Article

Healthcare Financial Management, May, 2001 by Richard L. Clarke

Given the increasingly uncertain nature of payments to healthcare organizations and the resultant decline in financial performance, there has been an increased focus on "best practices" in disclosure for hospital debt transactions. As an industry, we need to determine how to balance a stakeholder's desire to receive certain types of information concerning an organization's performance against the administrative and legal burdens related to providing that information. When is enough disclosure really enough? That is the disclosure dilemma.

In 1993, HFMA's Principles and Practices Board (P&P Board) issued guidance on the issue of stakeholder disclosure as part of its Statement 18, "Public Disclosure of Financial and Operating Information by Healthcare Providers." (Statement 18 can be found on HFMA's Web site at www.hfma.org/kn/PPBstatementl8.htm) This statement provided the basis for industry practice, and many of the elements of this statement were included in the 1995 amendments to the Securities and Exchange Commission's rules on secondary market disclosure (Rule 15c2-12).

In Statement 18, the P&P Board noted that healthcare organizations have many stakeholders. Stockholders are the primary stakeholders of an investor-owned organization. Elected representatives are the primary stakeholders of governmental organizations, and community members represented by a community board of trustees are the primary stakeholders of not-for-profit community organizations. For each of these organizations, however, there are other stakeholders. These include patients, employees, business partners, regulators, purchasers, bondholders, and so on. What changes may be necessary to current practice that will satisfy the needs of all of these stakeholders without placing undue burdens on healthcare organizations?

In 1999, the National Federation of Municipal Analysts (NFMA) developed Recommended Best Practices in Disclosure for Hospital Debt Transactions because their members believe that current practice is inadequate for the needs of municipal analysts and the individuals they represent. The first draft of their report generated many concerns from healthcare organizations, including HFMA, about the reporting burden the recommendations would impose.

This first draft was modified and a second draft was issued in August 2000. This second draft, reviewed by the P&P Board, eliminated many of the detailed data requirements that "(a) would have been either difficult to accumulate or obtain, or (b) represent information that hospitals typically consider proprietary or confidential." There were several specific comments on the second draft as well.

The issues raised by NFMA, and the concerns expressed by underwriters, attorneys, and others, challenge current industry practice. So, what should be industry practice?

Statement 18 was intentionally broad because it was meant to address the needs of various stakeholders, not just bondholders. The statement, however, does provide the general tenets for best practices, which include disclosing information that is reliable, timely, and useful.

Specifically, Statement 18 calls for disclosing financial and operating information that facilitates an understanding of the financial status of the organization. That information should include financial statements and notes (as defined by the AICPA's audit and accounting guides and that is most appropriate for a specific stakeholder), and management discussion and analysis of financial and operating information. Statement 18 provides a detailed list of items to consider in management's discussion and analysis. The P&P Board believes these items are generally similar to the second draft of "best practices" proposed by NFMA.

Finally, the issue of timeliness also must be addressed. The P&P Board called for healthcare providers to ". . .prepare an annual (or more frequent) report..." Given today's dynamic marketplace, certain stakeholders (such as bondholders) expect, and should receive, more frequent disclosure. Although the P&P Board has not yet made a determination of what changes, if any, should be made to Statement 18, it is clear that more frequent reporting should be considered to "...foster better understanding and trust."

The disclosure dilemma relates to the balance between frequency and content of disclosure and the cost and legal issues related to this disclosure. HFMA will continue to be a leader in describing industry practice intended to solve this dilemma.