Negative trending Medicare margins: 4 cost control strategies

As hospitals continue to struggle with eroding Medicare margins, the following approaches promise the most positive results for reducing spending and increasing efficiency as part of efforts to protect these margins, according to Ernst and Young’s "Health Care Industry Report 2014."

1. Cut costs by reducing hospital readmissions. The government interprets high rates of hospital readmissions for patients within 30 days of discharge as symptomatic of inadequate quality of care and uncoordinated systems, and has implemented a sanctions-driven program to improve hospital readmissions rates across the country.

Beginning in Oct. 2012, under the ACA, the Department of Health and Human Services implemented the Hospital Readmissions Reduction Program that imposed an initial penalty of 1 percent of Medicare payments for hospitals' failure to reduce readmissions rates, and the penalty continues to rise. In 2013, CMS reported a cumulative $227 million in penalties from about 2,225 hospitals with excess readmissions.  

Hospital-acquired infections are a leading cause of readmissions. According to the report, many hospitals are implementing automated infection control and patient surveillance systems to prevent patients from getting sick during treatment periods, and studies have shown that 10 to 70 percent of HAIs could be prevented through such systems.

2. Increase patient satisfaction and decrease cost with efficient patient flow. Poor patient flow due to inefficient processes and inadequate care transitions impede hospitals' ability to achieve capacity or to function effectively at capacity, according to Ernst and Young. In addition to the inefficiency and inoperability poor patient flow can cause, patient experiences are often negatively influence by inefficiency and seeming ineptitude. Analyzing workflows to improve efficiency and implementing process changes for discharges and surgical scheduling led to more effective patient flows and the ability to accommodate more patients while reducing costs for many hospitals evaluated, according to the report.

3. Incorporate supply chain strategic initiatives into overall goals. According to Ernst and Young's report, hospital supply chains represent the second-highest factor of operating costs next to the cost of labor. Three hospitals mentioned in the report were able to save millions after implementing supply chain strategic initiatives to their overall goals. Some of these approaches include rightsizing inventory, joining purchasing collaboratives for best-price negotiation, building and automating warehouses and ordering supplies directly from manufacturers. Additionally, the report suggests that the most effective way of reducing the costs of supplies that physicians use the most, such as implants, medical devices and pharmaceuticals, is to include them in the development phases of the cost-saving initiatives.

4. Be proactive, not reactive. The transaction component of healthcare can at once become more satisfying for patients and more financially rewarding for providers by becoming more patient-centric. According to the experiences of three hospitals in the report, healthcare providers can empower their patients by developing self-service tools patients can use for different kinds of communication, such as asking questions and scheduling appointments through patient portals and registration apps. Communicating patients' financial obligations and making the billing process more comprehensible can help healthcare providers smooth the process on both ends. The report emphasizes that creating a positive care experience for each patient is a fundamental part creating sustainable patient relationships, as well as improving a hospital's revenue cycle.

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