10 Ways for Hospitals and Health Systems to Increase Profitability in 2012

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To say hospital and health system operating margins are different today than they were a decade ago may be an understatement. Medicare reimbursement reductions, cuts to state Medicaid programs and rising tides of uncompensated care have created an atmosphere where some hospitals, particularly smaller, community hospitals, are simply happy with a break-even balance sheet.

The environment is unlikely to change in the short term. The supercommittee was unable to reach a bipartisan agreement to cut $1.2 trillion over 10 years, and it will cause sequestration cuts of 2 percent to Medicare starting in 2013.

While 2012 may appear to be a grim time for hospitals to keep their finances positive, there are several things hospitals can do to go beyond just maintaining solvency. Hospitals and health systems essentially have two options: They can either cut costs or create new revenue streams. Here, several healthcare leaders share their thoughts on how this can be done and offer one recurring theme: Hospital and healthcare leadership needs to evaluate a multitude of planes rather than relying only on across-the-board savings cuts.

1. Focus on the continuum of care. One of the biggest changes occurring in healthcare is the full-scale shift away from fee-for-service and volume-based measures toward accountable care organizations and quality-based measures. Ann Pumpian, CFO of Sharp Healthcare in San Diego, says hospitals will need to look at the entire continuum of care, regardless if they join an ACO, if they plan to stay profitable in 2012 and beyond. She says the continuum of care hospitals need to focus on includes the initial admission, how services are provided within that admission to create the most efficient process for a quick yet appropriate discharge, a discharge to the appropriate post-acute setting and follow-ups with that discharge.

Pearson Talbert, president of Aegis Health Group, says hospitals can take it one step further by fostering stronger, mutually beneficial relationships with physicians — especially primary care physicians. In addition to quality- and value-based principles, healthcare reform is also centered on preventive care, managing chronic illnesses and keeping people healthy before a hospital trip is required. To do that while staying profitable, Mr. Talbert says hospitals must focus on physician alignment and actively engage with the primary care physicians in their communities. "The primary care physician is the air traffic controller for the patient," he says.

Ms. Pumpian also emphasizes the hospital-physician relationship. Although some states prohibit hospitals from employing physicians, she says hospital efficiency and solvency hinges on a hospital's affiliation and collaboration with physicians. Physicians facilitate patients through the continuum of care, and next year, it will be paramount for hospitals to keep and recruit high-quality physicians who increase a hospital's referral base, have high ratings of patient satisfaction and have the highest commitment to quality patient care. "What is key is to make certain that these physicians and institutions are going in the same direction," Ms. Pumpian says. "Both need to be incented to do the same thing, which is what's best for patient care."

2. Design models to reduce readmissions. Hospitals that realign their goals toward the entire continuum of care can then focus on one of the more pertinent aspects: reducing readmissions. Readmissions negatively impact a hospital's bottom line in several ways, such as the high costs associated with them and scrutiny from private health insurers and patients. Now part of President Barack Obama's healthcare reform, hospitals with high levels of preventable readmissions face the potential of losing a portion of their Medicare, Medicaid or other governmental reimbursements. "If [other hospitals] are not gearing up for that now, they are really behind the eight-ball," Ms. Pumpian says. "They should've been doing this years ago."

She says there are several ways hospitals and their physicians can effectively reduce their readmissions, such as ensuring patients attend post-acute office visits routinely after discharge and overall providing resources to people to ensure they are taking the proper post-discharge steps. "This has proven to be a key indicator to keep readmissions from occurring," Ms. Pumpian adds.

Scott Downing, executive vice president and chief sales and marketing officer at VHA, says a hospital's preparation for the readmission risk is "absolutely critical," and much of the responsibility will fall on a hospital's case management and preventive care staff, who will need to be properly trained and managed to ensure overall readmission rates go down. "A hospital's case management [staff] has to engage in conversations with the patients to help them be compliant with that care path," Mr. Downing said. "There's a wealth of effort and resources that hospitals apply, but they're going to have to become even better at that."

3. Have a good relationship with payors, and renegotiate managed care contracts. While hospitals cannot control the underpayments from Medicare, Medicaid and other governmental payors, they have a semblance of control over one major outlet: commercial and employer-based payors. Mr. Talbert says private insurance carriers comprise, on average, 35 percent of a hospital's revenue.

According to Kyle Kobe, principal at healthcare consulting firm Equation, hospitals must take the time to understand existing contracts, benchmark managed care contracts against each other, conduct research to know what percentage of the insurer's business comes from the hospital, routinely update stagnant and evergreen contracts and look for carve-out opportunities. Hospitals and their managed care departments must be prepared when renegotiating contracts, but at the same time, a level of respectful dialogue must exist — otherwise, fallouts will occur, leading to costly periods of no reimbursement and a public relations nightmare. "Often times, people don't think about the fact there is a mutual respect that needs to occur with the payor and institution," Ms. Pumpian says. "That is earned over time in a manner that allows you to help collaborate, design and develop the care delivery models and product designs that those payors will ultimately use."

4. Manage new service lines to increase market share. When it comes to "creating new streams of revenue" for hospitals, this most commonly refers to adding new service lines. Larry Moore, CFO of Cumberland Medical Center in Crossville, Tenn., agrees increasing market share through new services is the most effective way to deal with any reduction in net payments.

Hospitals should not merely add any service line — for example, orthopedics — because it is historically profitable. Mr. Moore says hospitals need to conduct research and look at the demographics of their locale to determine which service lines are needed, what competitors in the area offer and what services stand to gain the most referrals. For example, roughly 10,000 baby boomers are becoming eligible for Medicare every day, and Mr. Moore says Cumberland, which has a high Medicare population, has been focusing on cardiovascular services. Additionally, he says the surrounding population tends to have a higher concentration of obese patients, and therefore Cumberland is also focusing on enhancing its orthopedic service line.

Conversely, if hospitals want to become or remain profitable next year, they will have to monitor their service lines to see if any are hemorrhaging money. Jack Lahidjani, president of Mission Community Hospital in Panorama City, Calif., says this is especially important for community hospitals, as community hospitals can't be the healthcare provider for all. "Most community hospitals don't create a differentiation between themselves and a tertiary facility or a teaching facility," Mr. Lahidjani says. "We can't have the same number of programs as a Cedars-Sinai. They can afford to lose money on 10 to 15 programs because they are making money on the other 80. We need to evaluate every program on a quarterly basis and make adjustments accordingly. Hospitals need to be aware of community needs and cater to those needs."

5. Control labor costs with meticulous data collecting. At most hospitals, more than 50 percent of expenses are related to labor costs or labor-related costs, and Mr. Lahidjani says "if you can't control your labor costs, working on anything else almost becomes immaterial."

Mr. Lahidjani, who also used to be CEO of the physician-owned and Los Angeles-based Miracle Mile Medical Center and CFO of Los Angeles-based Alta Healthcare System, says his hospitals hold daily "labor control meetings" for 10 minutes. Every department shows up, goes over their respective staffing metrics and manages their labor on a dollar-per-patient-day level. "If we are overstaffed by one nurse in surgery and understaffed by one nurse in the emergency room, can we move the surgical nurse to the ER?" Mr. Lahidjani says. "This type of communication where every manager and operator in the hospital gets on the same page also creates awareness of what's going on in the other parts of the hospital."

If hospitals do not manage their labor costs or have staff meetings on their labor rolls every day, then he says hospitals should, at the very least, be data-driven on this front on a bi-weekly, monthly, quarterly and annual basis.

6. Reduce supply costs by working with vendors and physicians. After labor costs, supply costs are the second-largest money eater of a hospital's operating budget. Clark Lagemann, vice president of Health Options Worldwide, says hospital leaders can reduce supply costs through two main ways: working with vendors to improve contracts and encouraging physicians to make fiscally responsible supply decisions. "A hospital should not shy away from approaching vendors for discounts," Mr. Lagemann says. "This may help alleviate costs on the purchase product, and in my experience, most vendors are willing to negotiate if the volume of product allows for it." Additionally, approaching physicians and working together to create a more cost-conscious supply plan for every department can help foster a better working relationship with physicians in addition to supply savings.

7. Improve deficiencies in the emergency room and operating room. Many hospitals consider their ERs and ORs to be two of the most important areas of a hospital because they represent a traditional "money loser" and a traditional "money winner."

ERs and trauma areas are vital to any community health system, but hospitals have been facing growing numbers of uninsured patients walking into their ERs. This is leading to high amounts of uncompensated care. However, there are ways hospitals can reduce the large costs and pressures associated with the ER and its high volume of uncompensated care. Phil Lebherz, executive director of the non-profit Foundation for Health Coverage Education, says hospitals must actively use the ER to their advantage, as roughly 80 percent of the uninsured patients who come into the ER are eligible for some type of publically funded program. He says hospitals should make it a priority to help ER patients complete applications for publicly funded health coverage like Medicaid. This could make patients more willing to seek preventive care instead of resorting to last-minute, much-needed and highly expensive ER treatment, and it will also directly reduce a hospital's uncompensated care and bad debt.

A hospital's OR is typically one of the most profitable areas of a hospital due to the type of surgeries performed, and Mr. Lagemann says improvements in the OR can help a hospital maintain its levels of profitability. For example, he says future profits lie in new equipment, such as smart ORs and hybrid ORs. Mr. Lagemann adds that new technology, although an investment at first, can eventually lead to higher market share and patient volume, and it can also lower reoperation rates, which could improve reimbursements.

8. Create population health management programs to gather health data analytics on chronic illnesses. The ACO model, or at least its population-health emphasis, is shifting hospitals' thinking of how to be profitable. Mr. Talbert says hospitals are asking themselves if they are in the "healthcare" business or the "sick-care" business, and more often than not, he says they find they are in the "sick-care" business as they wait for patients to become sick before addressing health issues.

To counter this, Mr. Talbert says hospitals will need to create formal population health management programs through which the hospital can reach out and gather health data analytics on its local patients as a way to address potential health problems before they become costly, chronic issues. "If we are going to control costs of healthcare and start bending the curve downward, we have to start looking at things from the perspective of population health management," he adds. If hospitals are able to see data and cost figures associated with chronic diseases — such as diabetes, cardiovascular disease, asthma, hypertension and others — they can reach out to their communities to start chronic care programs to mitigate costly, long-term health problems.

9. Consider outsourcing some services. Outsourcing services at hospitals is nothing new, but Mr. Lahidjani says eliminating the administrative overheard and farming out functions that are better handled on an independent contractor basis will directly result in bottom line savings. Laundry services, housekeeping, food services, facility maintenance and some biomedical and clinical departments are commonly outsourced services. Mr. Lahidjani says his hospital has also experimented with outsourcing its nurse education. Mission Community Hospital did not want to end its nurse education program, but it also did not know if it could continue to incur the program's operating costs. Currently, the outsourced company has individuals that show up two or three times a month to hold its nursing educational seminars. Mr. Lahidjani says their nurses are still getting quality "know-how," but their expenses have since been lowered.

A hospital must be prudent when it decides to outsource a service, though, and it must have a contingency plan if the proposal does not work out. "Whenever you outsource a service, you need to be prepared to bring it back in case the relationship disintegrates or if the third party is not able to provide the level of service we expected or anticipated," Ms. Pumpian says.

10. Revamp the energy cost strategy. "Going green" could be more than just a strategy that positively impacts the environment and reduces reliance on fossil fuels — it could also save on a hospital's bottom line.

Dennis Olson, vice president of facilities at Mayo Clinic Health System in Eau Claire, Wis., says the hospital system has been actively revamping its sustainability and energy cost strategies, and it's led to significant results. One of the larger projects involves the use of geothermal energy at a one of the health system's dialysis centers under construction. Various pieces of equipment run through the ground and can extract heat or cooling from the natural ground water, which is typically around 45 to 50 degrees Fahrenheit. This extracted heating or cooling can be diverted to warm up the building in the winter and cool the building in the summer. He says a geothermal energy project is fairly expensive up front, but the benefits are in the long-term. Hospitals can expect a payback on its investment within seven to eight years, all while the hospital provides its own, truly natural energy. "You're not burning any fuel to get heating and cooling sources such as natural gas or oil, and instead, you're letting the Earth's resources handle that," Mr. Olson said.

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For hospitals that are not quite ready to tackle a project as large as self-sustaining geothermal energy, Mr. Olson says there are smaller things hospitals can do in their energy savings strategies that can pay off immediately or within a couple years. Mayo Clinic Health System has installed automatic faucets to reduce water overuse, and it also has had low-flow waterless urinals for a year. Both of those smaller projects have cut their water bills significantly, he says. Motion sensors for lighting, shifting to LED lighting, vegetative roof gardens, mass-scale recycling efforts and several other small-scale initiatives can also give any hospital the ability to cut back on its energy costs as well as its BTUs per square foot.

Related Articles on Hospital Solvency:

6 Ways Hospitals Can Survive the Onslaught of Medicare Cuts

Is it Time for the Healthcare Industry to Make Cost Management a Priority?

Patient Experience: An Increasingly Critical Hospital Indicator

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