The key factors affecting 2017 hospital budgets from 2 CFOs
Two hospital CFOs discuss the biggest line items in their budget for 2017 and what will have the biggest positive and negative impacts on the bottom line.
Yair Katz, CPA. CFO of Long Beach (Calif.) Memorial, Miller Children's & Women's Hospital Long Beach and Community Hospital Long Beach: For decades, the single largest budget item for hospitals has been labor costs, which can represent as much as 50 percent or more of the expense budget. Over the past several years, we have also experienced a dramatic increase in pharmaceutical costs that are creating even more pressure on the bottom line. We are not alone on this. A recent study showed that overall, hospitals' average annual inpatient drug spending jumped by more than 23 percent between 2013 and 2015.
With our children's hospital being one of the nation's largest, we're also encountering drastically underfunded reimbursement for pediatric outpatient care by Medicaid or Medi-Cal, as it's called in California. At Miller Children's we want to provide more services to the community we serve by creating more access to much-needed pediatric specialists.
That said, our specialty clinics have rapidly declining margins due to the lack of funding. In many cases our clinic operates at negative margins. This creates a significant challenge as we move further into a population health model with more of our bottom line at risk. This is particularly challenging since most often the best setting for chronic disease management is in the outpatient setting — where reimbursement is extremely low.
Therefore, reimbursement needs to become better aligned with the objective of keeping people of all ages more healthy and out of the hospital.
Aaron Coley. CFO of Saddleback Memorial Medical Center (Laguna Hills, Calif.) and Orange Coast Memorial Medical Center (Fountain Valley, Calif.): One of the biggest budgetary challenges for hospital CFOs is the transformation from volume to value, tremendous shift from hospital-based to community-based services, decreased lengths of stay and growing consumerism with patients having more skin in the game. While we embrace these activities as important advances in health and healthcare, they do impact revenue and the bottom line.
We are responding with expanded care options and rigorous cost containment measures as fast as we can. The advent of ACOs and the expansion of Medicaid (called Medi-Cal in California) places hospitals at greater risk for the very few additional dollars that make up already thin operating margins. Medi-Cal is both the fastest growing and lowest performing payer in terms of revenue per patient. While Medi-Cal expansion has provided coverage to many previously uninsured patients, now these same patients are utilizing the delivery system more than ever before — which is straining hospital financial performance.
Additionally, the tremendous shift to community-based centers for surgery, imaging and other services also impacts revenue. That said, the community-based arena is one we fully embrace and moved into aggressively in partnership with our physicians because of MemorialCare Health System's strong commitment to population health and providing the right care at the right place by the right clinician at the right price. Although it results in volume declines for hospitals, it has played out well and been accepted enthusiastically by health plans, employers, physicians and, most importantly, our patients and the communities we serve.
If you would like to share thoughts on the biggest line items for your hospital's 2017 budget, contact Laura Dyrda at firstname.lastname@example.org.
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