Tips on how to improve financial performance in any
organization are a dime a dozen. Usually, organizations will readjust their
focus on cutting costs by quickly glancing at labor expenses, supply chain and
real estate — and cutting anything that is nonessential.
Will King, senior manager at HFS Consultants, a healthcare
financial consulting firm based in Oakland, Calif., says those strategies may
work, but shallow attempts to improve performance with those strategies are
rarely sustainable. This is especially true for hospitals and health systems,
which are searching for some semblance of financial stability amidst potential
Medicare sequestration and healthcare reform funding cuts.
"Anyone can slash-and-burn 5 to 10 percent from their
cost structure by telling cost center managers to whack a few people or to stop
buying 360-slice CT scanners," Mr. King says. "It takes a patient
CFO, COO or CEO to diagnose the problem properly and prescribe a treatment that
will work over time — sustainably." Mr. King, who has worked in the
hospital financial field for nearly 20 years, says there are three important
steps hospital CFOs should take to find the sustainable financial improvement
measures for which they yearn.
1. Use data to
identify improvement opportunities, specifically for labor and length of stay.
Several states throughout the country require hospitals to file detailed
reports on various metrics, beyond what they file for Medicare. In California,
Mr. King says hospitals report this data to the Office of Statewide Health
Planning and Development. Data include costs, revenues, productivity by cost
center, full-time equivalents, productivity by department, length of stay and
more.
For states that have these hospital databases, Mr. King says
hospital CFOs and other department managers must take advantage of this trove
of free, accessible information because it allows for true apples-to-apples
comparisons among other hospitals.
"We used to do labor productivity assessments by
hand," he says. "Now we have powerful macros that allow us to probe
databases for department-by-department benchmarking of, for example, length of
stay for certain MS-DRGs compared with other hospitals of a similar size, or
where a hospital stands in FTEs per adjusted occupied bed with other
hospitals."
Utilizing this data can immediately help guide thoughtful
decisions on a hospital's labor force and clinical improvements without
arbitrarily hacking away at everything. A more efficient labor force and lower
LOS can be had through this method, and it can impact the bottom line in a
positive way, he says.
"Instead of cutting 10 percent across the board, use
data to see where the real opportunities are. For example, making changes on
flexing staff up or down based on volume is when hospitals can make [labor cost
cutting] sustainable," Mr. King says. "Anyone can slash-and-burn, but
a year later, the problem is back with a vengeance."
"Wise CFOs are increasingly looking to this type of
evidence for clues to how they can operate more efficiently from a financial
standpoint but also from clinical standpoint," Mr. King adds. "When
doing this, no one wants to sacrifice quality or service."
2. Go to accounts
payable and the general ledger to find out exactly what is being spent. For
some, a hospital's financial system may seem like a landfill — you only want to
tread there if you absolutely have to do so. Mr. King looks at it differently.
The general ledger and accounts payable systems provide another source of great
data collection because they outline all expenditures and money paid out.
Looking back periodically to make sure the organization is spending its money
wisely on purchased services, contracts and supplies can be hugely beneficial.
While group purchasing organizations are helpful is some areas, they focus
mostly on medical and surgical supplies, and not as much on business supplies
or clinical and business services.
For example, Mr. King says looking at freight and shipping
costs can save a hospital system hundreds of thousands of dollars. Hospital
CFOs and other financial executives may not look extensively to see how they
are shipping their supplies and which couriers (FedEx, UPS, DHL, etc.) offer
better pricing. At one hospital system, Mr. King noticed the organization had
certain supplies shipped overnight with next-day arrival by 10 a.m. After
interviewing internal customers, he realized those products did not need to be
delivered so quickly.
"We found about $600,000 to $800,000 in savings by
switching the shipping from next-morning arrival to next-afternoon arrival,
with no diminution of quality or service," Mr. King says. "It's just
a simple, little business concept that companies do in other industries all the
time, but some hospitals haven't deployed those techniques yet."
These types of initiatives may be easier for large health
systems that have corporate offices and more resources, but that still is no
excuse for small hospitals and health systems to ignore financial statements
and, potentially, cost savings. "Go to the data," Mr. King says.
"Go to accounts payable and the general ledger, and see who's spending how
much on what with whom."
3. Stay diligent on
payor contracts. Financial improvements are normally associated with
cutting or fine-tuning certain areas within a hospital, but they can also come
in another form: renegotiated payor contracts. Payor contracts that have longer
terms, commonly known as "evergreen" contracts, can often collect
dust, and this could lead to outdated reimbursement rates that leave money on
the table.
"This is a really simple one, but you'd be amazed how
often hospitals overlook their payor contracts," Mr. King says.
"Community hospitals and safety-net hospitals sometimes let their
contracts with big health plans just sit. We have a health plan contracts
expert who looks at contracts and what payment rates are in the community, and
it often happens that payors say they've been waiting for hospitals to come for
[budgeted increases]."
Hospitals should talk with their major payors at least once
every one or two years to make sure rates are where they should be and to build
a better, more constructive relationship.
With these three steps, Mr. Kings says any hospital and
health system can build a more sustainable financial structure, which is paramount
in almost every healthcare organization today.
"There are opportunities in each of these areas to
improve performance by 1 to 3 percent of net patient revenue," Mr. King
says. "Implemented together, the impact can be enormous for a hospital
with a 3 to 4 percent margin going in. For those doing worse than average, the
difference can mean survival."
Source: Becker’s Hospital Review
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