11 Ways Hospitals and Health Systems Can Increase Profitability in 2013

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For hospital executives who thought 2012 was a tough financial year, 2013 may be even more constricting.

Medicare and Medicaid, two vital programs for hospital solvency, are facing monumental challenges. If President Barack Obama and leaders in Congress cannot agree to a national deficit reduction deal, Medicare will be cut by 2 percent under sequestration. For hospitals and other Medicare providers, that means roughly $11.1 billion will be slashed from their collective coffers in 2013, and they stand to lose $120 billion over the next decade.

Although Medicaid will expand in 2014, leading to new potential revenue that would otherwise be considered uncompensated care, next year will be yet another stop-gap year in which hospitals and health systems grapple with their state's Medicaid funding issues. Commercial payors, which for many hospitals are the source of positive margins, are also changing reimbursement structures with hospitals, which could put further pressure on hospitals' bottom lines.

With all of these financial pressures, managing a hospital's balance sheet has become as challenging as a blindfolded dart game. However, hospitals and health systems are not about to enter a black hole in 2013. There are still several ways organizations can maintain, or increase, profitability next year. As always, it will require diligent attention to detail, hard work and consistent reminders that hospitals really only have two options within their parameters: increase revenue or cut expenses.

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1. Make a concerted effort to revamp the revenue cycle.
Richard Rico, CFO of Sky Lakes Medical Center in Klamath Falls, Ore., arrived at the independent, 176-bed hospital more than three years ago. One of the first things he noticed that was eating away at the hospital's profitability was a lack of attention paid to the revenue cycle. Coding needed improvement; claims were wasting away in accounts receivable; and upfront payments were almost nonexistent. He knew he had to work with the financial team to turn the department around.

"We worked as a team with coding, billing and collections to make sure we are maximizing our net revenues," Mr. Rico says. "Now, we don't get denials because of incorrect coding, and we are collecting at a higher rate on same-dollar gross revenue, so that adds to the bottom line."

The revenue cycle is one of the biggest areas of opportunities for hospital leaders in 2013 because it's completely within their control. If hospital coders and physicians improve their coding and documentation — all while staying in compliance with federal and state guidelines — that immediately results in better reimbursements that actually reflect the value of services provided. Revenue cycle improvements will especially help out hospitals and health systems that are letting their A/R days climb too high.

"The older a claim gets, the less likely it is you'll collect," Mr. Rico says. "That was something that we focused on, and we really have maintained that for the past three years. It's a real profit booster."

2. Add new services if they have a good return. Last year, Larry Moore, CFO of Cumberland Medical Center in Crossville, Tenn., said adding a new service line such as bariatrics or other specialties is the most common way to add revenue to the organization's earnings statement. Adding new service lines remains a valuable tactic for 2013; however, any addition of services requires research of the surrounding population as well as a comparative analysis of service lines offered at competing hospitals and health systems.

Mr. Rico agrees those are important things to consider when exploring the addition of a new service line. Creating new streams of revenue is a big maneuver and cannot be done without the requisite research and planning. However, the time may be ripe for hospitals to add a new service line because the costs associated with the process are fairly low due to the stagnant economy. A growing and aging population on the horizon may also spur hospitals to dip their toes into new services to reach more patients — as long as the return on investment is both immediate and sustainable.

"Sometimes people forget that things that were more expensive years ago may make more sense now, especially if you're a sole community hospital," Mr. Rico says. "Add new services where you can — as long as they have a good ROI."

Ray Alvey is CFO of Saint Louis University Hospital.3. Standardize physician preference items. Enhancing a hospital's supply chain is always considered to be an easy way to improve profitability. Group purchasing organizations help that cause, but Ray Alvey, CFO of Saint Louis University Hospital, says bigger savings can be found in physician preference items.

Implantable devices, especially within orthopedics and cardiology, can be very expensive for hospitals, and not every physician may use the same products for their procedures. Mr. Alvey says executives look to standardize the products for their physicians — but not in an authoritarian manner. The hospital provides physicians with all necessary data from vendors on their procedural items in a transparent process, and through collaboration, the hospital and physicians agree on the preference items that work best for the hospital.

"If you work with physicians, drive utilization and help them buy into [the concept], that is where the bigger savings will be," Mr. Alvey says. "However, if you went in there and said, 'We want the lowest prices," you lose support. You can't nickel and dime them."

Bill Fera, MD, clinical transformation leader for Ernst & Young's Health Care Advisory Services, agrees. He says hospitals that act in a concerted manner to identify the most cost-effective, best-value devices, medications and other physician preference items immediately help out their own profitability prospects. However, it must be done in a thoughtful way, and physician-led "value analysis committees" can make the standardization of these products more efficient.

"If you can identify high-cost personal preference items that may not have an equivalent advantage, why are you using them?" Dr. Fera says. "But [this process] starts with medical staff leadership. It's not about a relationship with a medical device company or a pharmaceutical company. It's about the physicians' relationship with the hospital where they provide care to patients. This is another step in this pavement that's being laid down for evidence-based care."

4. Conduct rigorous benchmarking of salaries, wages and scheduling. Labor costs, as most know, constitute anywhere from 45 to 60 percent of a hospital's operating budget on average. While layoffs are seen as an immediate short-term gain, they can be a net-negative for hospitals, both financially and from a cultural standpoint.

Instead, hospitals can optimize the labor they do have by investing in the right human resources software and conducting consistent benchmarking of the essential labor metrics.

"One thing I've noticed that is important is paying attention to every detail," SLUH's Mr. Alvey says of managing labor costs. "We conduct daily productive analyses, but we've also standardized pay practices. In nursing department, for example, we ask how many RNs, care partners and others are needed based on average census, and the software helps describe what is optimal staffing."

5. Review all contracts — from big-ticket items down to bottled water. The idiom "A penny saved is a penny earned" rings true for every hospital and health system CFO, and that directly applies to all vendor contracts, in particular.

Mr. Rico says hospital executives must dust-off all of their contracts, no matter how expensive or seemingly trivial, and rethink the value and worth of those contracts. If possible, renegotiate items with vendors, and in some instances, hospitals may be able to drop obsolete contracts altogether.  

"You have to ask yourself, 'Do you really need that service?', even if it's small dollars," Mr. Rico says. "Do you need bottled water? Look at contracts, and see if it is something we can get away with not having. And if you do need it, get a lower rate by talking to vendor."

The suggestion of looking at other vendors, in particular, could spur more effective conversations and lowered contract rates.

"With the economy as bad as it is, companies are hungry," Mr. Rico says. "Even companies that are the current contractors are afraid someone will undercut them. That's one of the few good things about a bad economy."

6. Pay attention to quality incentive programs and other healthcare reform measures. The Patient Protection and Affordable Care Act places most of its emphasis on transitioning from a fee-for-service system to a value-based system — while improving healthcare quality along the way.

For hospitals, this means care must be efficiently delivered at the right place at the right time at a low cost with the highest standards of quality in mind. This also means hospitals will be penalized if, for example, quality lags, patient satisfaction is not up to snuff or readmissions are too high. Hospitals have already started to see financial ramifications of these types of quality and value-based programs, such as Medicare's Readmissions Reduction Program, and there must be a shift in mindset.

"You're not getting a bonus for doing well — you're just not getting cut," Mr. Alvey says. "To maintain those payments, you have to keep quality up. Standardize processes and procedures to meet those targets."

The time is now for hospitals to latch onto these priorities. While adhering to quality programs and shifting to value-based care may not advance profitability, those measures will help maintain it — and it will help improve the U.S. healthcare system, which is notoriously poor among other industrialized nations in terms of quality.

"The stage is really set within healthcare reform to transition in a thoughtful way to quality-based and clinically relevant cost reduction," Dr. Fera of Ernst & Young says. "It's about really taking advantage of existing quality incentives — CMS core measure programs such as SCIP, AMI process measures, as well as other commercial payor quality programs — and having the mentality of going from fee-for-serve to value-based. Pay attention to those programs as you look for stronger incentive alignment, such as accountable care constructs."

7. Invest in electronic health records, and take advantage of meaningful use funds while they still exist. For Medicare-eligible providers, 2013 is the second-to-last year to receive meaningful use funds for certified EHRs, while Medicaid EHRs still have several more years of incentive payments. Mr. Alvey says Saint Louis University Hospital just went live with its EHR system in June, a project he admits was "incredibly expensive." However, his hospital received significant meaningful use funds — although "not anywhere near the total investment" — but he says he does not know if the hospital would have gone live with its EHR system if the incentive program wasn't there.

Time is running out for providers to at least partially offset the costly process of digitizing medical records. Mr. Alvey encourages hospitals to pursue EHRs aggressively in 2013 because they will help hospitals and physicians in the long run.

"There's no question in my mind that portable electronic medical records could save tons of money through access to information, not duplicating tests, the ability of physicians to look at the whole patient record," Mr. Alvey says. "That will be money well-spent in the future."

Dr. Fera concurs, saying hospitals will see future financial gains of EHRs if they rally behind the "spirit" of the government's meaningful use program.

"If you do meaningful use correctly, you're setting yourself up to do better reporting and analytics where you track patients and manage transitions of care better," Dr. Fera says. "To be successful, you have to go beyond the letter of the law and get into the spirit of the program. You're making money now for the qualifying incentives, but you'll set yourself up for future success, too."

8. Invest in "green" projects and sustainability measures for energy savings. If there were ever a time for a hospital to start going "green," 2013 would be it. Becoming an environmentally friendly organization has the obvious perks of cultural sustainability and a community-centric focus. Hospital CFOs should also realize going green directly saves money on the bottom line.

Gundersen Lutheran Health System in La Crosse, Wis., is one example of a health system that is formulating a new, progressive sustainability plan. For the past four years, the health system has implemented a program called Envision, which will eventually put Gundersen Lutheran at 100 percent energy independence by 2014 — meaning it will be completely self-sufficient on all energy needs.

Mr. Rico says Sky Lakes Medical Center has also implemented some simple energy savings projects through retrocommissioning lighting fixtures and altering electricity and water usage. Hospitals can also look into other green initiatives such as waste reduction and reprocessing of operating room supplies, and the long-term gains can greatly outweigh the short-term investments.

Richard Rico is CFO of Sky Lakes Medical Center."It's a savings item where you'll get paid back in five to seven years, for example, but then it's all gravy because you'll use less power, water, etc.," Mr. Rico says.

9. Look within the operating room, emergency room and home health arenas for throughput issues. A financially strong hospital is one that wastes little to no resources. The OR, ER and home health areas are havens for inefficiency due to varying factors such as missed appointments, mismanaged scheduling, poor capacity management and other throughput issues.

Mr. Rico recommends hospitals conduct internal analyses of those areas, which are typically expensive service lines within a hospital, to find out where the kinks are in the continuum of care.

"Get experts to review those areas on how other people are doing it better," Mr. Rico says. "We're doing an analysis in the OR to find out: Here's how you should do a case and handle throughput, here's where logjams are and here's how you can streamline it. Over time, it saves labor, and it makes it more efficient for OR physicians."

10. Review drug costs. As mentioned earlier, physician preference items are a huge opportunity area for hospitals looking for new ways to achieve profitability, and managing the costs of pharmaceuticals is an important branch of that tree.

Mr. Rico says at Sky Lakes Medical Center, there is an ongoing dialogue between pharmacists and physicians to figure out which drugs are the most effective for clinical purposes and if there is any overlap with generics.

"We have our pharmacists talking to physicians to utilize cheaper drugs," Mr. Rico says. "For example, oncology has very expensive drugs, and we make sure that drugs A, B and C are all equivalent. Go for generics if they do the same thing clinically. But there has to be that clinical-to-clinical discussion between pharmacists and physicians."

Dr. Fera of Ernst & Young points to a recent example of this at Memorial Sloan-Kettering Cancer Center in New York City. He says oncologists there made a decision to not give patients a new cancer drug, Zaltrap, because its clinical effects were no different than similar medicine despite the fact Zaltrap's cost — roughly $11,000 per month on average — was more than twice as high as the similar medicine.

11. Consider affiliations or more concrete transactions — even with payors. Mr. Alvey's organization, Saint Louis University Hospital, is part of Dallas-based Tenet Healthcare. He says because SLUH is part of such a larger health system, he immediately sees economical benefits through economies of scale. For example, Tenet is able to negotiate rates on payor contracts and technology equipment in a more effective manner because it is buying for more entities, which results in discounts.

Standalone hospitals today face pressures beyond what system hospitals may be experiencing. In 2013, hospital CFOs and other executives may need to consider loose affiliations and partnerships, even in single service lines, to protect their hospitals' financial future. Affiliations should not be restricted to other hospitals and health systems, either, especially as payors are looking to enter the provider world, Dr. Fera says.

The overaching point for hospital executives? Keep an open mind when it comes to the M&A world, especially in 2013.

"When I look at hospitals and health systems and the ability to compete on a cost basis, I can't imagine how difficult it must be for a standalone hospital to do that these days," Mr. Alvey says. "Being part of a system allows you to use technology and cost savings and then share best practices [within the system]. It can also be used with the payor side on quality metrics. I can't imagine doing that as a standalone hospital."

More Articles on Hospital Profitability:

Sifting Through the Data: 5 Things to Decipher From S&P's 2011 Hospital Medians

Hospital and Health System Strategy in 2012: 6 Key Initiatives

Why Cash is King: Q&A With Dawn Javersack, CFO of Boca Raton Regional Hospital

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