5 Areas Where Hospitals Can Spend Smarter

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With reimbursements from Medicare, Medicaid and commercial payors shrinking, hospitals and health systems are exercising greater prudence on where they are spending their money.

For CFOs and financial departments, this means every purchase and every other fiscal strategy has to pass a stricter test to ensure the hospital is not dumping funds into fruitless projects.

Here are five areas where hospitals can better spend their money and tips on what CFOs and others can do to avoid wasting precious capital and money.

1. Consultants. Healthcare reform has somewhat pushed hospitals and health systems into a corner. The organizations must adapt to the new accountable care-based environment, but they still have to manage their finances along the way. This has opened the door for many consulting firms to help hospitals who may have trouble handling everything.

Dan Moncher is CFO of Firelands Regional Medical Center, a 400-bed academic medical center in Sandusky, Ohio. He says while some consulting firms have the ability to work positively with hospitals in times of financial duress, CFOs must exhibit caution and thoughtful decision making before they make a financial commitment.

"This is a global comment, but every time a new rule or regulation comes out, a lot of money is wasted on consultants," Mr. Moncher says. "Not a day goes by where I don't get a handful of phone calls and emails where someone says, 'I can save you $1 million, and I'm not going to charge you unless it works.' Be wary, with all due respect, on projects that involve new revenue and saving dollars."

2. Vendor contracts.
For Paul Summers, CFO of UHS Delaware Valley Hospital, a 25-bed critical access hospital in Walton, N.Y., hospitals can always improve on their vendor contracts.

UHS Delaware Valley Hospital is part of UHS, a health system with four acute-care hospitals scattered throughout south central New York. Mr. Summers says because his hospital is part of a system, it is able to enjoy bulk purchasing benefits. However, hospitals should not merely be content with their contracts, even if they are in a group purchasing organization. They should routinely stay in contact with vendors to make sure all contract terms are upheld, such as pricing discounts.

"Most of these contracts have built-in escalation clauses based on the consumer price index, so you have to make sure you're checking that," Mr. Summer says. "Make sure vendors are being compliant on their end."

Mr. Summers also recommends hospital CFOs and supply chain managers closely collaborate together during negotiations of new contracts. In today's tough economy, suppliers, vendors and especially those looking to sell expensive capital equipment are eager for any customer, and that puts the ball in the hospital's court.

"When you're conducting upfront negotiations on the price of a piece of capital, it's an opportune time to get concessions from vendors because they are interested in selling that piece of equipment," Mr. Summers says.

3. Real estate.
Marisa Manley, president of Healthcare Real Estate Advisors, has worked with several hospitals and surgery centers over the years on their real estate portfolios — an area she says hospitals can waste significant amounts of money.

"It's important to know 40 percent of hospital assets are tied up in real estate," Ms. Manley says. "That's a significant amount of capital. If hospitals can be more cost-effective in their use of real estate, you can have a significant effect on the bottom line."

She says instead of looking at the problem as one of "wasting money," hospitals should look at it as utilizing their current real estate portfolio more effectively. For instance, hospitals should consider long-term leases of medical office buildings instead of constructing new ones. Two examples of innovative real estate projects include Holy Spirit Hospital in Camp Hill, Pa., and Genesis HealthCare System in Zanesville, Ohio. Earlier this year, Holy Spirit turned one of its properties, a former strip mall, into a data center, and in 2010, Genesis sold the leases of its non-hospital properties to a real estate investment trust to fund its electronic health record system.

"You can save money by strategically managing your entire portfolio," Ms. Manley says. "Look at best practices because you're not reinventing the wheel."

4. Expansion of service lines. For hospitals, expanding service lines may seem like an easy, simple way to boost revenue and profitability, but many times, if not done right, those efforts could be a boondoggle. For example, if a hospital is in an area rich with cardiology services, will it make sense to branch out with a new freestanding heart center, or will it dilute the market?

"There is a lot of waste of capital dollars with people duplicating services," Mr. Moncher of Firelands Regional says. "Where we are located, one freestanding cancer center popped up, and now there is way too much capacity with linear accelerators in our region. It wasn't really necessary."

Instead, Ms. Manley of HREA suggests hospitals take a calculated, strategic approach when they open new lines of service off campus. Look around to see if other ambulatory surgery centers or hospitals already provide the service, and then if the service could be provided, consider reusing or repurposing existing facilities to provide that service.

Mr. Summers agrees that all hospitals, especially smaller community hospitals, cannot be all things to all people. Evaluation, along with valuation, must be conducted.

"Certain service lines just don't have the volume to back [them] up," Mr. Summers says. "So we do a pro forma, profit/loss analysis on any particular service we may want to add. If that service won't yield a return of 10 percent, we won't do it."

However, profitability also needs to be balanced out with the hospital's mission of providing necessary services to the community, and this is especially important for non-profit hospitals and systems.

"It's frustrates you when you know resources are being wasted when [capital] could go to the underinsured or uninsured, or maybe a free clinic could've been built," Mr. Moncher says. "Communities don't need 17 imaging centers. Capital resources can be used in a better way to serve the community, especially if [hospitals] are 501(3)(c) organizations."

5. Electronic health records. EHRs are a major investment for hospitals, usually costing millions of dollars. For large health systems with multiple facilities and physician practices, EHR investments could top eight figures.

Mr. Summers of UHS Delaware Valley Hospital says everyone in the healthcare sector has "jumped on the EHR bandwagon" to meet the government's meaningful use standards, but EHRs are more than just federal incentive dollars. Hospitals must invest in the right EHR because that system will impact the day-to-day activities of physicians, staff and, most importantly, patients.

Currently, UHS Delaware Valley Hospital is on its third EHR vendor in the past eight years, and Mr. Summers says he finally believes the hospital has found the right system. For other organizations, he recommends executives do their homework and go with a health IT vendor that has a credible background and is in the health IT game for the long run.

"Even though it might be an inexpensive EHR, you don't just want to jump for it due to the price," Mr. Summers says. "You want an EHR vendor that's in it for the long haul and can conduct research and development to expand that product."

For CFOs who are unsure of certain projects and whether they will create a batch of red ink for their hospital, there is always a foundational resource — peer networks.

"Utilize your peer networks," Mr. Moncher says. "HFMA, ACHE, the American Hospital Association, your state hospital association — it's the global assumption that they all exist for the greater good in general."

More Articles on Hospital Finance:

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10 Major Takeaways From CMS' FY 2012 Financial Report

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