Hospitals Feeling the Squeeze: 4 CFOs on Today's Most Pressing Financial Issues

Last year, Moody's Investors Service, Standard & Poor's Ratings Services and Fitch Ratings released almost identical reports saying 2014 would be a very challenging year, financially, for hospitals and health systems.

Although many providers have weathered the past few years with solid profitability metrics and strong cash flows, expense growth continues to rise faster than revenue growth. Add in value-based contracting, the evolving rates from health insurance exchanges, the impending two-midnight rule, ICD-10 — and healthcare executives may wonder how they can keep the hospital doors open.

Here, four hospital CFOs from across the country discussed how they are handling the big revenue squeeze, what they are doing to control costs and why layoffs are increasingly becoming part of the healthcare conversation. The four participants are George Eighmy, CFO of Bristol (Conn.) Hospital; Dan Moncher, CFO of Firelands Regional Medical Center in Sandusky, Ohio; Dave Nelson, CFO of two hospitals within the Western Wisconsin Division of Hospital Sisters Health System; and Rich Rico, CFO of Sky Lakes Medical Center in Klamath Falls, Ore.

(Editor's note: Story has been edited for length and clarity.)

Question: Controlling costs is one of the most-heard refrains we hear from hospital and health system executives today to offset stagnant revenue growth. What are some of the biggest cost-controlling strategies being implemented at your organization, and what are the main drivers of those strategies?  Is outsourcing processes, at least those not critical to the hospital's mission, part of the solution?

George EighmyGeorge Eighmy: Healthcare is a rapidly changing and dynamic field. We started using lean technologies and theories to help us with process improvement and to really dissect what employees are doing and cull out the processes they don't need to do anymore. We got rid of the non-value-added processes so we can focus on the value-added services. Labor-related, we need to blow up the old paradigm that jobs are set in stone. Jobs are not set. They have to change and adapt to the new environment. We're a smaller hospital, and we don't have the breadth of expertise in certain areas, and we go out to the market for certain needs. We outsource some coding, revenue cycle components because there are companies that do it better than us. Have we considered outscoring a whole department? No. Some other hospitals in the area here have gone that route and found it doesn't work as well.

Dan Moncher: Cost containment and cost control is the number one priority for us and has been for many years. To say there is only one item — we don't really have that, but we are trying to take a more aggressive look at supply chain. We've done studies and have had consultants help us with physician preference items. We've been down those paths. We've also hired a director of pharmacy to help with that…so we're just really getting started on digging and seeing what we can do on our own at this point. We are a Premier hospital and have been with them for 10 years.

From an employee standpoint, we believe we're pretty well-staffed. We've always taken the attitude where we don't want to have to make significant, difficult decisions, so we scrutinize staffing decisions on an ongoing basis. We've done that for years. We've seen other organizations go through multimillion-dollar layoffs, and we use that as leverage with our management teams to say that's a path we don't want to go down.

We also refinanced our debt in 2012, and we are a self-funded health insurance plan. We are inching up the employee contribution, but it's not quite at 25 percent of cost.

Dave Nelson: We're doing a lot of same things with HealthTrust GPO contracts regarding supply chain and pharmacy. We have a lot of high-cost drugs, especially with our neuro programs. For us, we're also redesigning our entire inventory management system to install barcoding and electronic inventory. At [Sacred Heart Hospital in Eau Claire, Wis., and St. Joseph's Hospital in Chippewa Falls, Wis.], it's a huge process for materials management, running up floors, taking inventory manually — it's a really inefficient system. We're working with [the Hospital Sisters Health System] on a systemwide initiative to streamline and automate the supply chain.

We've also increased [health] premiums to employees. And we've increased deductibles and copays based on utilization history on the several different plans we offer. We are trying to understand what's going on with our health insurance utilization, so we are also initiating wellness programs for employees. A lot of work goes into this process.

One of things we've also really focused on is drilling down and looking at productivity. Our biggest cost is labor, which is about 50 percent of our expenses, so we've put in a daily productivity monitoring system (COGNOS), and our goal for the organization this year is to have all clinical care departments at or better than the 60th percentile [for productivity]. Most are now at the 50th or better. Our basic measure of productivity, is hours per CMI adjusted admission. We're still high, at least in my opinion: as we're at 101 hours per CMI adjusted admission, but last year we were at 108, so we've had a 6 percent improvement this year.

Rich Rico: The number one area for cost savings is labor. We're constantly looking at how we can be more lean and efficient in all areas, and [labor] is always somewhere you can get better — and we are doing that for most of our departments. We've got a lot of tools we give directors — benchmarking, looking at full-time equivalent per unit of service with our software, seeing how they are doing per pay period, monthly results — and I think it's something that requires more and more work. We actually have outsourced one department. Sometimes, it actually costs more to outsource, and it depends on the situation.

We are also preparing for the transition to population health management. It's not quite here yet, but we see it on the horizon. We're getting our ducks in a row and getting capitated contracts for population health management. We've started that process even though it's not making us a lot of money right now.

We've also been looking at our infrastructure on water and utilizes, and that's reaping huge benefits for us. We've expanded geothermal, and we've expanded the infrastructure including new cooling towers. That has reduced our energy usage, and that's the gift that keeps on giving for years and years.

Q: Operating margins for many systems, especially smaller hospitals, took a hit in 2013 due to lower admissions, reimbursement cuts and rising expenses. What can hospital CFOs and finance executives do to ensure the operating margin doesn't get too close to the red right now?

GE: That's the $64 million question. Connecticut had a massive cut in Medicaid last year. All the hospitals were desperately trying to make their bottom line. Streamlining the overhead areas was the first step. We can no longer reduce patient care services. Focus on the revenue cycle is critical. We are actively collecting what is owed to us and creating a more efficient revenue cycle. We've invested some money in the revenue cycle to ensure that we can collect every dollar. The executives must work together as a team and focus in the right areas. For example, we spent quite a bit of money on physician acquisitions, and it's worked out well for us. A few specialties — orthopedics, bariatrics — have helped our bottom line significantly. Those were strategic investments that helped us overcome those types of problems.

DanMoncherDM: We did experience lower admissions in 2013, but we were able to keep expenses in line. We're the only hospital in our county, so we have a little bit of a competitive advantage. All of our commercial contracts are favorable. Twenty-eight percent of our business is commercial, so for that chunk we have favorable reimbursements. We tell our management team and our board one of the things we strive to be is a high-performing hospital. The consensus is if you have a 4 percent operating margin, you're high-performing. That always seems to be the number when you're talking to people. We're ecstatic to be at 7 percent, and when we budget, we make sure to get to at least that 4 percent. If we do what we do and do it well, people will continue to come to us, and managed care contracts will continue to give us good rates. We also work very hard with self-pay clients and make sure everyone can get Medicaid if eligible. We try to maximize the government reimbursements that are out there.

DN: Our service area is primarily in the northwest section of Wisconsin. The closest metro area is Minneapolis. It's kind of a far drive but still doable. Employment is really driven by a lot of smaller employers in our markets. Our largest employers are school districts and county governments. Because of that, there really isn't strength of a strong managed care product or managed care in our market. Our market mix is about 35 percent commercial fee-for-service, 53 percent Medicare and the rest falls to self-pay and Medicaid. The commercial business is such that we are able to negotiate good contracts, and that helps drive consistent margins at this time. But I will say this: We know the markets are changing. There's more pressure coming from Minneapolis, just to the west of us, and east of us are Aurora Health Care and Ministry Health Care expansions. As that happens, narrow networks and managed care will be coming into this market.

When we look at the future, we have to get costs down. We've done a lot of education with our staff on how the markets are changing. If you're a high-performing hospital with high margins, people may ask, "If we're doing so well, why do we need to reduce costs and staffing?" To get this challenge to be understood, you have to spend time educating and working with staff so they understand not just what we are doing to reduce costs, but why.

RR: You have to look at your business lines and really drill down and see if it's something you want to [offer] long term. Get rid of business lines that aren't throwing anything to bottom line, especially if someone else in community has it. Home health was an example. We were going to sell our home health because it was in a negative position, but we actually improved it and made it better.

Q: You all have mentioned labor in some fashion. Layoffs are undeniably on the rise in healthcare. Do you view this as an essential strategy? Do you foresee more layoffs in the future as hospitals are no longer defined by four walls? Are you being forced to rely on third-party contractors more as a result?

GE: I think we're all under the understanding and expectation that the acute-care side of the healthcare equation is going to be shrinking, and we need to adapt to that. There may be significant closures of hospitals, and people need to be prepared for that. But we all need to shift our resources out of the more expensive inpatient side to the less expensive outpatient side. I don't know if layoffs are the answer, but reallocation of resources to outpatient areas is the best option. There is a lot of competition on inpatient, and that's why being strategic is so important.

DM: We utilize the Premier productivity system. We've been on that for six to seven years. The management team looks at productivity every two weeks, which runs with pay periods. We can pull in staff, and we try to work part-time people up before we give overtime to full-time people to limit overtime expenditures. We don't use agency staffing anywhere, which is obviously a nice cost saving. We have the message out there: We don't want to get to the point where layoffs are necessary. We want to stay efficient. We have a good drive and good attitude, and we are improving patient satisfaction scores as much as possible.

DavidNelsonDN: Layoffs is one of the things none of us want to do. That's why part of it is education for our staff. Productivity is about what's the allowable labor rate (hours per unit of service), and how do you maintain that rate no matter what the census may be? If you are right-staffed and maintain high quality, it will help your business grow, and you won't have to worry about layoffs. The highly fluctuating census has forced a lot of our staff to take a lot of flex time, probably more so than ever before. But, in most cases, they also understand the importance of flexing and why it is important.

It's feast or famine when the census comes in. We staff 280 beds at Sacred Heart, we had a census of 175 for the last two days, but today we're down to 104. When you have these wild swings, that's part of the challenge of how to staff right.

RR: That's a good question. That's hospital-dependent. Some hospitals have no-layoff policies because they are so big. If you're in an area of no growth and you have your costs under control, I can't see any other way [of maintaining profitability] than by reducing services, which may include layoffs. We happen to be in a small growth market — at least we're not shrinking. So fortunately we haven't had to do that. But if we were shrinking, and you asked me that, it's something we'd have to consider. It's never a popular thing as hospitals are a big part of the economy in communities. If we were to do that, it would have horrible implications.

Q: What are some of the biggest revenue cycle and cost accounting challenges on your plate right now?

GE: Payers are always adept at finding ways of not paying. We also went live with our electronic medical record recently, and we are meaningful use stage 2 compliant. When we did that, we had to blow up and reset the revenue cycle. We've developed key metrics and processes to make sure it's working correctly. We did use some outside help, not a lot. It's really an internal focus on what are the key drivers of the revenue cycle. It's a roundabout way of saying, with the advent of new EMR systems, we had to revamp our system. There's a whole host of information in there. We just make sure we find the right information and use it correctly.

DM: For the revenue cycle, our biggest is there are a couple commercial payers who have gotten very aggressive with denials — and unsubstantiated denials. We've talked to our hospital association about this, and they found it to be a statewide issue. We've got the staff and dedicated the horsepower to appeal those and go after them, but sometimes I wonder if colleagues are just rolling over on these and basically giving up and focusing attention on other areas. We're really trying to document right. We say if you didn't document it, you didn't do it. We hammer that message at employee meetings. Yes, collecting money is the billing office's responsibility, but it's all of our responsibility to give them the tools they need to get claims right the first time.

We have some point-of-service initiatives. Those are in their infancy, and we don't know how they will play out in the long term. We've also worked with our local bank, a regional bank, and now we have a loan program with them for people who are making payments and to help them make those payments. We're also dealing with RAC audits, and all those hurt. They take time away from people doing their jobs.

DN: Denials — we're starting to see those grow. We're seeing a push around medical necessity, especially around short stays. That's been driven around the Medicare two-midnight rule. There is still a tremendous amount of confusion for case managers and physicians about what is required for the right documentation. What will CMS RAC audits do three years from now when they may look back on these two-midnight stay criteria? Will these cases be denied later on? There's a lot of uncertainty, and that's probably the largest challenge we have.

One of things we are doing to address denials and revenue cycle issues, was to start a revenue integrity committee. Once a month, this multidisciplinary committee that is led by the director of patient financial services, and includes our directors of case management, health information management, managed care, information systems, and several ancillary directors, work through many of billing issues associated with denials, coding and other issues identified as a result of internal audits. This is something we've really worked on to establish this year.

RichRicoRR: In the revenue cycle, it's the ever-changing rules of Medicare. No matter how well you bill or code, you're going to get less reimbursement. But if you bill the old way, it'll be considered incorrect. You have to quantify that and adjust your budget accordingly. For cost accounting, we're too small to have full-blown cost accounting system. We have a hybrid system. It's critical to know your costs and know where you're making money on certain DRGs. Most hospitals need to break even on Medicare today. When commercial insurers start paying less and less, you're not going to be around [without breaking even on Medicare].

Q: On the supply side, what are some of the more innovative and effective measures? How do physician preference items, vendor credentialing and other areas fit in?

GE: Three years ago, we exited from one healthcare system for our purchasing and supply chain. We had to rebuild it. We then signed an agreement with Yale New Haven (Conn.) Health System where we utilize their supply chain services. We have access to Yale's pricing now. We're a $160 million organization, and that's a $2 billion system. So we've realized $1 million or more in savings on that piece alone.

We have a lot of service and vendor contracts. I went through and renegotiated every material contract. I said you have to cut what we're paying. We got about 75 percent of vendors that came back with price cuts. We leveraged the changes in healthcare and cuts in government reimbursement.

DN: We're probably a little more fortunate, as we are part of a system. Within our GPO, our physicians get to be consultants on the selection committees. So we get one to two physicians from our hospital to look at and evaluate supplies and implants before they are mandated for the facility. That's a big plus, and this physician inclusion hasn't been happening in past. We also have a local facility fiscal responsibility committee that gets together on a monthly basis to review all new products. This committee is a multidisciplinary committee of all our major clinical care directors, to look at new supplies, surgical packs, etc. Then we take their feedback back to vendors under the GPO to make sure they meet the needs and quality.

With physician credentialing, every hospital within our system has done their own credentialing with its medical staff in the past. We are currently putting together a central credentialing office. I'm in western Wisconsin with two facilities here. The eastern division has three other facilities. We're going to consolidate the credentialing process so we have a central office for all our facilities with a standardized process. We will still have an FTE onsite at each facility because you have to have interactions with physicians.

RR: We actually are part of an informal consortium of hospitals, even though we're independent. The independent hospitals in Oregon have gotten together and specifically have gotten together to look at physician preference items. That tends to work really well for implants. The hardest thing, though, is to make sure your physicians don't feel like they are getting dictated to. If you can show them [items are] clinically the same and that outcomes are better or as good as what they had, they are generally pretty interested and wiling to help. They are cooperative and know they are not here if we are not here. This has helped because vendors don't care about one hospital as much as seven or so hospitals coming together. It's pretty unique and pretty cool how we've all come together and share our information for the good of the whole. It's not easy, but if you keep at it, you can achieve substantial savings.

Q: How do you plan on handling the increasing budgetary and regulatory compliance pressures? For example, how do you ensure savings in staff credentialing, staff training and visitor management delivers without compromising those processes?

GE: We understand the nature of compliance, quality and education, and we still allocate a portion of the budget to those areas. We can't go back and let staff and providers lose ground and become ineffective or dangerous. It's something that we don't cut. We try to manage it and are doing it appropriately. We still think it's vitally important we stay up on new regulations, technologies and therapies, because that's what makes us good.

DN: Staff credentialing is handled by our HR department. From a staff training perspective, we have brought in some key clinical and compliance instructors. This allows us to train nurses and staff without a lot of additional travel costs. Because we're close enough to the Twin Cities, we are fortunate to get instructors to make that hour drive and provide these types of services, as we have had to tighten down the budget on travel and education expenses.

RR: We have trouble with that being a smaller hospital. We don't have a lot of overhead, and thus everybody helps in the compliance area. We aren't part of chain where we can call corporate to deal with compliance. We try to do it more by committee, help each other out and farm it out when necessary. I don't know if that's typical, but I think smaller places have to do it that way.

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