4 Pressing Financial Issues Facing Hospital Executives Today

A recent report from L.E.K. Consulting found that more than 60 percent of hospital executives expect to have higher budgets this year, roughly double the amount from two years ago, but higher budgets do not necessarily lead to easier financial decisions.

Bob Lavoie, vice president of L.E.K. Consulting and head of its New York office, says the study fielded responses from roughly 200 hospital leaders, including CEOs, COOs, CFOs, material managers and purchasing directors. After combing through the results and forecasting pressures over the next 12 to 18 months, he says there are four main financial issues facing hospitals today, ranging from supplier negotiations to health information technology initiatives.

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1. Cost containment.
It's no surprise that respondents ranked reducing costs as the number one most pressing need that is facing their hospitals. Specific cost containment strategies are where hospitals differ from each other, but Mr. Lavoie says there is one strategy that was almost a near-consensus among the surveyed hospital executives: Negotiate more aggressively with vendors and suppliers.

"A couple years ago, hospitals typically thought about [cost management] from managing supplies and reducing the [staff] head count, but now that's eased a little bit," Mr. Lavoie says. "Now, it starts with more aggressive negotiations with their suppliers."

Hospital CFOs and materials management directors are pushing back with suppliers more than ever before because every purchase is more heavily scrutinized. Group purchasing organizations have flourished, especially among smaller hospitals with 150 beds or less, as they allow for standardization of supplies and discounted bulk purchases. "Some of larger hospitals are looking to do direct negotiations with larger suppliers and partners," Mr. Lavoie adds. "A GPO contract is a starting point, and negotiations can work down from there."

Part of working with the supply chain is making sure the hospital inventory is at an appropriate level without wasting supplies. To keep shelves stocked at an optimal level, Mr. Lavoie says hospitals are consolidating inventory sources and working with physicians to standardize their product and implant preferences. "More and more, we see larger hospitals trying to rationalize their costs, and standardization often helps with inventory management," Mr. Lavoie says. "A hospital may have 1,200 suppliers, and want to get it down to 700 by taking seven vendors in one category down to two or three."

2. Improving patient quality. On October 1, the hospital Value-Based Purchasing Program for Medicare will officially go into effect. The VBP Program will dole out roughly $850 million in incentives to hospitals based on their overall performance on quality and patient experience measures in a shift toward pay-for-performance. However, achieving improved quality and patient satisfaction is easier said then done, and it most likely comes at a cost.

Hospitals must increase their quality of care, reduce readmissions and curb medical errors to receive every possible penny of federal reimbursement, and for the hospital executive team, this means investing in quality measures now. "Hospitals are willing to pay a premium for those products that reduce stays and errors," Mr. Lavoie says. "If suppliers can prove they have an immediate impact on patient outcomes, that'll resonate with the C-suite of the hospital."

3. Maintaining reimbursement. Commercial payors have always been the outlet for hospitals looking to offset low Medicare and Medicaid reimbursements, but many commercial payors are now making changes toward value-based reimbursement. For example, several insurers in Massachusetts have struck "Alternative Quality Contracts" with healthcare providers in which reimbursement hinges on quality of care. "Commercial payors continue to put pressure on hospitals, and hospitals are being held more accountable for errors on readmissions," Mr. Lavoie says. "The level of reimbursement from commercial payors is likely to be impacted more and more."

4. Data connectivity. Meaningful use and other health IT initiatives have required hospitals to make costly upgrades to their health IT platforms — electronic health record systems and ICD-10 updates could cost up to tens of millions of dollars, depending on the size of the hospital or health system — and the costs of these upgrades have not always met expectations of health IT interoperability. Hospital executives want the systems to be in place correctly and in a way where the data — the meaningful information where money is truly being invested — is helping the hospital to become more efficient.

"If I'm a hospital CFO, I may have multiple health IT platforms deployed across the hospital, and I'm not getting the full benefit of all these systems," Mr. Lavoie says. "Hospitals are working through to make sure data connectivity is happening. It's not just data, but meaningful information that can be used across the spectrum of care. Hospitals have spent a bunch of money [on health IT systems] but maybe aren't getting a whole lot of meaning out of it."

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