10 Best Practices for Increasing Hospital Profitability

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Hospitals today face many challenges including an economic recession, increases in uninsured care and growing competition for outpatient services. However, there are still many steps hospitals can take to increase their profitability amid these economic conditions.



Industry experts say that hospitals wishing to increase their profitability can focus on two key areas — reducing costs and increasing reimbursement.  Here are 10 best practices for increasing hospital profitability by reducing costs and increasing revenue and reimbursement.

1. Reduce staffing costs by using data to drive staffing decisions. Because labor is the largest single expense for hospitals, it is critical that hospitals are not over- or under- staffing their facilities.

Hospitals leaders can cosider the use of flexible staffing, such as part-time or hourly employees, and adjust staffing based on patient census data. Leaders should also monitor the efficiency of this staffing by continuously reviewing benchmarking data such as hours worked per case.

Amy Floria, CFO of Goshen (Ind.) Health System, says that her facility monitors patient volume on a daily basis and adjusts staffing accordingly. "We adjust our nursing staffing every eight hours after looking at our inpatient volume and expected discharges and admits," she says.

Kevin Burchill, a director at Beacon Partners, a healthcare management consulting firm, agrees that staffing must be adjusted daily. "The easiest thing that a hospital can do to improve profitability is for the senior management team to assume responsibility for the day-to-day performance of an organization and look at the organization's performance in real time," he says. "You must shift to an emphasis on the day-to-day, not pay-period to pay-period or month-to-month."

It is important that concerns regarding efficient staffing are communicated throughout the organization and that hospital leaders work in collaboration with physicians. Donna Worsham, COO of National Surgical Hospitals, suggests that hospital leaders share staffing efficiency benchmarking data with unit managers and provide feedback regarding the productivity of the unit.

Flexible staffing is especially useful for OR nursing staff. OR managers should review clock-in times versus surgery-start times and determine if their staff is consistently arriving before a surgery actually begins. If this is the case, mangers can utilize flexible staffing to allow nursing staff to arrive later so that when surgeries run over, no overtime expenses are incurred, says Ms. Worsham.

Other facilities are saving in staffing costs by reducing benefits for full-time staff. Goshen Health System, for example, deferred merit increases, reduced paid vacation time and suspended its retirement matching program in response to the current economy, according to Goshen's CEO, Jim Dague. Goshen reduced employee dissatisfaction in response to these cuts by soliciting employee feedback on which benefits to reduce, thereby building organizational support for the changes. In addition, Goshen's executives took a voluntary 20 percent cut in order to help sustain the system through the recession.

Joe Freudenberger, CEO of OakBend Regional Medical Center in Richmond, Texas, agrees that staff must buy in to any reductions in hours and shifts worked that will personally affect them in order for the hospital to remain successful. He says that hospital leaders must communicate the reasoning for these changes to the staff before making them. "If we call off staff, they see it as personally hurting their income when we need to help them understand that it is actually preserving their income by maintaining the financial viability of the hospital," he says. "It may be obvious to us that we're calling them off because we have a significant reduction in patient volume, but we need to communicate that to them for them to understand the financial realties we face."

Although some staffing cuts may be necessary, hospitals should be careful not to take a blanket approach to layoffs or cuts in services. Hospital leaders must take a close look at their business before making cuts.

"Don't make the same mistake everyone else does — don’t look at bottom line, determine that you need to cut $1 million, for example, and then cut 10 percent across the board. Doing so will trim some fat but will cut meat and bone in other areas," says Mr. Burchill. 

He suggests that hospitals assess each program individually and determine which ones are what are winners and losers. "You do not want to cut areas that you should be doing more of or that are already profitable," says Mr. Burchill.

2. Reduce supply costs by better managing vendors. Hospital leaders can reduce supply costs by working with vendors to improve contracts and encouraging physicians to make fiscally responsible supply decisions.

"When it comes to supply costs, you must drive this expense or the vendor will drive it for you," says Ms. Worsham.

Hospital leaders should not shy away from approaching vendors for discounts. Goshen's IT director recently requested a discount on the health system's contract for IT maintenance due to current economic conditions and successfully received a discount that saved the hospital 15 percent on this contract, according to Ms. Floria.

Hospitals can also reduce supply costs be reducing the number of vendors. Goshen, for example, is in the process of reducing the number of vendors in its surgical suite and aims to eventually scale the vendors down to 4-6 companies. "This action is expected to save us at least a million dollars in supply costs," says Mr. Dague.

Another way in which hospitals may reduce supply costs is by requiring vendors to submit purchase orders for any equipment or implants that are not included in a negotiated, written agreement with the facility. "All of our vendors sign agreements that any purchase orders must be submitted at least 24 hours before a procedure and must be approved by the materials manager or the CEO, or it's free," says Ms. Worsham. "If you don't require this, vendors will drop off the invoice for a pricey piece of equipment or implant after the procedure has already taken place and walk out the back door, which can greatly hurt your profitability."

3. Ensure that your OR is utilized by physicians efficiently. All hospitals can benefit from tightening up the efficiency of their operating rooms, but it is especially critical that less busy facilities ensure that their ORs are used as efficiently as possible.

"Hospitals need to review block time utilization," says Ms. Worsham. "Physicians who are assigned more time than they are using are hurting your profitability."

Ms. Worsham suggests that hospital OR managers work directly with physicians to make OR utilization more efficient.

"When physicians' schedules create gaps in the OR schedule, it effects a hospital's ability to staff effectively, which can create significant labor costs for the hospital," says Ms. Worsham.

4. Involve physicians in cost reduction efforts. Hospitals should work to encourage physicians to become more concerned about the costs of supplies and other activities, such as unnecessary tests and inefficient coding processes that may drive up hospital costs.

"Hospitals today have a unique opportunity to leverage physicians' interest in having hospitals help to stabilize their incomes with the hospitals' needs to involve physicians in cutting costs and improving quality," says Nathan Kaufman, managing director of Kaufman Strategic Advisors, a hospital consulting firm.

Hospitals can encourage the use of products from vendors that are cost-effective, but still high quality, especially in areas such as orthopedic implants, which can be considerably costly for hospitals. In addition, experts say the use of protocol-based care can reduce costs associated with unnecessary tests or treatments.

Mr. Freudenberger says that one of the biggest mistakes hospitals make is not engaging medical staff in profitability. "Physicians have a huge role in maintaining hospital profitability, but unless you give them a reason to be concerned with a hospital's profitability, they will make choices in what and to whom they refer services that will not consider the implications to the hospital," says Mr. Freudenberger. "Hospital leaders should work to help medical staff understand the connection of their referrals to the hospital's viability so that their referral decisions reflect the value they place on the hospital."

5. Consider outsourcing the management of some services. During tough economic times, some hospitals may benefit from outsourcing or partnering with other organizations for certain services, such as food and laundry services, and even, in some cases, clinical services.

"Some hospitals see these economic times as an opportunity to outsource unprofitable services," says Mr. Burchill.

By outsourcing certain services to more efficient providers, hospitals can share the savings with the service provider. However, hospitals must be sure to select truly efficient providers.

"Outsourcing is clearly a smart thing to do if an organization can gain greater efficiency through finding a larger-scale operation; however the provider must be more efficient than the hospital," says Kevin Haeberle, executive vice president, HR capital, for Integrated Healthcare Strategies.

Oftentimes, hospitals outsource services such as laundry, food and nutrition, information technology or human resources because they do not have the capital to invest in the equipment upgrades or training that is needed to increase the efficiency of their internal service. In these cases, the decision to outsource may not directly be related to profitability but instead the "lacking of funds for the investment required to make current services viable," says Mr. Haeberle. However, this decision can improve profitability in the long-run by allowing hospitals to use funds for more profitable services.

Some hospitals have also begun to outsource clinical services such as emergency room staffing and anesthesiology in an attempt to become more efficient. Because these staffing groups employ a large number of specialty physicians, they may be able to provide more efficient services, especially in clinical areas that require around-the-clock coverage where the demand for services is high.

Mike Mikhail, MD, vice president of client services for Emergency Physicians Medical Group, says that hiring an emergency department management company can help to improve the profitability of hospitals whose demand for emergency services exceeds its emergency treatment capabilities. "An emergency management group can help make the emergency department more efficient by introducing management oversight and best practices, allowing more patients to be seen and keeping others from leaving to find another hospital," he says. "Because a majority of hospital admits come from emergency walk-ins, driving more patients through an ER will create more admits, and therefore more profit for the hospital."

6. Consider partnering with local physicians to reduce competition for outpatient cases. An increasing number of hospitals are joint venturing with local physicians and surgery center management companies to offer outpatient services through the development of a surgery center.

According to Clete Walker, vice president of development for Surgical Care Affiliates, hospitals are beginning to focus on the need for a comprehensive outpatient strategy and recognizing the need to partner with doctors to effectively execute on this strategy. Mr. Walker reports that he has seen an increased interest from hospitals in joint venture arrangements for outpatient services.

"More and more hospitals are realizing that their core competency is providing inpatient care; their outpatient cases are more costly per case and take up more of the physician's and patient's time than they do at an ASC," he says. "As a result, hospitals are competing with physicians for outpatient cases. Hospitals with joint-venture agreements, however, do not have to compete with the physicians."

Hospitals can leverage their standing in the community to partner with local physicians to share the revenue generated by efficient outpatient cases.

"We are in lean times, and lean times call for us to rethink our strategies," says Mr. Walker. "It's better for physicians, hospitals and other groups to work together to provide an efficient delivery system for patient care than for the groups to compete."

7. Grow case volume by attracting new physicians to your facility.
Identifying and attracting additional physicians to bring cases to your hospital is another way that hospital leaders can increase profits. Physician-owned hospitals can bring in additional physicians as partners, while other types of facilities can recruit new physicians who are willing to perform cases at their hospitals.

"New physicians will bring in more cases and grow your profits," says Ms. Worsham.

Ms. Worsham suggests polling your medical staff for names of local physicians to target and inviting them into the facility. During the visit, Ms. Worsham recommends that hospitals work to "wow" the target physician. "We work tirelessly to promote the services we can offer them," she says.

When a new physician begins performing cases at one of Ms. Worsham's facilities, that physician is assigned a concierge. "We have strong internal programs in place for this first day. A concierge is assigned to each new physician who provides them with a tour facility and walks them through every aspect of their day," says Ms. Worsham.

8. Consider adding profitable service lines. Hospitals may also be able to grow case volume and profits by adding new service lines. However, hospitals need to be careful to do their homework on the expected profitability and ROI for any new lines added, especially in a market where access to the funds required to invest in new service lines may be tight.

"You have to look at what the market needs are and where you're going to get the referrals from," says Ms. Worsham. "Meet with local physicians and interview them about their needs and the number of cases they see that could utilize a new service."

Hospitals should also be sure to examine the competitive landscape for any new service line.

Ms. Worsham reports that her facilities have had great success from adding a hyperbaric service line because few competitor hospitals were offering this service.

9. Consider hiring hospitalists to manage inpatient care. Hospitals that use hospitalists to care for patients can benefit from the more efficient care and better documentation that specialized hospitalists can potentially provide.

"A protocol-based hospitalist program can increase efficiency and help to reduce the length of stay for patients, which can increase case volume without the need for additional beds," says Mr. Kaufman.

Hospitals should consider employing these specialists as a means to improving care and enhancing their bottom lines, according to Mr. Kaufman.

Stephen Houff, MD, president and CEO of Hospitalists Management Group, says that hospitalist groups can provide effective care to patients and possibly increase reimbursement. "Hospitalists may be the most reliable and cost-effective means available for hospital leaders to transform medical delivery in their health system," he says. "Through shared vision, an effective hospitalist team partners with hospital leadership to improve patient safety and access, streamline care, improve patient and family satisfaction, enhance reimbursement via improved clinical documentation and provide seamless transition to post-discharge care."

10. Renegotiate managed care contracts. One of the most important ways that hospitals can improve their profitability is by continually evaluating and renegotiating their managed care contracts.

"Hospitals must demand their fair share of premiums from third-party payors in order to subsidize the underpayment of Medicare and Medicaid," says Mr. Kaufman. "Hospitals need to focus on reducing their cost structure as much as possible to approach breaking even with Medicare reimbursement rates, but that only goes so far."

Mr. Kaufman recommends that hospitals only agree to contracts that reimburse at 130-140 percent of cost. "If a facility is not big enough or strong enough to get these rates, then they should look at merging with a larger facility," says Mr. Kaufman.

Ms. Worsham suggests that hospitals perform a profitability analysis by payor and by procedure in order to determine where a facility is losing money and identify any trends. She also suggests that hospitals evaluate older contracts due to changes in severity-based DRGs and carve out the reimbursement of implants in order to ensure they are reimbursed appropriately for the costs associated with these.

Ms. Worsham also suggests that hospitals evaluate contracts on a quarterly basis, even if the contract is not near expiring. She suggests that hospital leaders examine the contracts with the following questions in mind: 

•    Is revenue where we thought it would be given reimbursement rates and volume of policy holders?
•    Are we being paid as agreed upon in the contract?
•    Are we being paid in a timely manner?

Contracts that are determined to be "high risk" should be renegotiated. Make sure your contracts contains a material harm clause, which will allow you to readdress terms of contracts that have become financially harmful to the facility, according to Ms. Worsham. Renegotiating contracts can be very valuable — one hospital Ms. Worsham advises will gain $500,000 this year due to renegotiations.

Looking forward
Hospitals that focus on enacting these best practices are likely to see improvements in their profitability; however, hospitals can also benefit by using today's economic conditions as an opportunity to improve their overarching approach to business, creating a more sustainable organization in the future.

"When profits were high, hospitals had the luxury of being sloppy in some areas; now we must run a tighter ship," says Ms. Floria. "This will benefit the industry in the long-run."

Hospitals can also use this opportunity to find creative solutions to problems that plague their facilities.

Goshen Health System, for example, recently enacted a program in which the hospital pays the premium required to sustain Cobra benefits for recently laid-off patients seeking care. "We are willing to be creative with our patients," says Ms. Floria. "We pay for benefits when certain patients cannot. The revenue we receive from caring for these patients recoups this cost and provides us with additional cash flows that likely would have been uncollected or written off to charity care or bad debt."

This idea, which was enacted during lean times to improve profitability, will continue to benefit the hospital's bottom line, even when profitable times return.

Contact Lindsey Dunn at lindsey@beckersasc.com.

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