5 Current Pressures That Scare Independent Hospital CFOs the Most

A fear of the unknown is a natural human reaction, mostly because we want to know that we are safe. This especially applies in today's hospitals and health systems, as organizations want to make sure they are safe and stable within their communities.

Small- and medium-sized hospitals, especially those that are independent, may be dealing with a little more trepidation than their larger system counterparts. Healthcare reform is requiring a lot of changes in a set period of time, and financial stability is dependent on how efficient those hospitals can be.

Richard Rico is CFO of Sky Lakes Medical Center, an independent, 176-bed hospital in Klamath Falls, Ore. He says Sky Lakes Medical Center is on solid financial ground, but like any financial leader, he wishes that ground was a little wider. Margins of error have shrunk, and hospital financial leaders have to watch every penny as if it is up for grabs.

Here, Mr. Rico gives five current pressures that scare hospital CFOs the most, especially for those in smaller or medium-sized hospitals.

1. Losing federal healthcare funding.
In September, the Office of Management and Budget released a report that showed hospitals and other providers will lose $11.1 billion in Medicare payments in 2013 from sequestration — and billions more over the next decade — unless Congress can agree to a new deal. Hospitals already have their feet to the fire in terms of Medicare cuts, as value-based purchasing, readmissions reductions, loss of disproportionate share hospital payments and other measures within the Patient Protection and Affordable Care Act will cost hospitals billions more.

Richard Rico is CFO of Sky Lakes Medical Center.Mr. Rico says it is a little overwhelming to have so many federal Medicare payments on the chopping block, especially when several smaller hospitals depend on extra Medicare payments for solvency. "Removing sole community designation, DSH payments, Medicare bad debt, provider-based reimbursement — all of those things are highly critical for us," Mr. Rico says. "To lose one, or all, of them would be horrible for us, and it scares the heck out of me."

2. Medicaid uncertainty. Hospital CFOs can throw a dart at a map of the United States, and odds are, wherever the dart lands, that state is undergoing some type of Medicaid payment reform. Many states are moving toward managed care, and others are outright slashing Medicaid reimbursements to hospitals.

In Oregon, Gov. John Kitzhaber, MD, signed a bill into law that will establish coordinated care organizations — which are coordinated teams of physicians, extenders and other providers — to take care of the state's Medicaid population. The Oregon Health Authority said the new strategy could save roughly $3.2 billion over the next five years, but Mr. Rico and other CFOs with their eyes on Medicaid wonder if hospitals are the biggest targets for Medicaid savings and reimbursement reductions.

"Oregon expects to save money from day one, which I don't think is realistic," Mr. Rico says. "For any program, it takes a while to see results. We may not see any savings for several months to a year out, but we're responsible for saving money from day one. Are we going to get paid less then because we are expected to have savings from day one?"

3. Physician shortages. In August, the Association of American Medical Colleges said the United States currently has more than 15,000 fewer primary care physicians than it currently needs, and by 2025, the physician shortage could reach 130,000. Mr. Rico says a financially stable hospital of the future will have seamless alignment with its physicians — but that also requires having enough physicians to recruit.

"For a community like us, we have tough time recruiting physicians compared with the San Diegos and Seattles of the world because that's where people want to live," Mr. Rico says. "If there are going to be physician shortages, they are going be in rural areas like us."

4. Nursing shortages. Closely related to physician shortages are cyclical shortages of registered nurses. Nurses are the lifeblood of any hospital floor, especially in terms of quality programs and proper staff-to-patient ratios. If a nursing shortage coincides with a physician shortage, hospital labor costs will bear the brunt of lower supply and higher demand.

Mr. Rico says Sky Lakes Medical Center has an ample number of nurses, but the next few years will be critical. "Everyone fights to get nurses, which jacks up the prices and costs you more, if you can even get them," Mr. Rico says. "If a nursing shortage happens again — and I'm sure it will — it will be a negative for us and every hospital."

5. Downward pressure from commercial payors. Sky Lakes Medical Center's payor mix is roughly 50 percent Medicare, 25 percent commercial, 15 percent Medicaid, 5 to 7 percent self-pay, and the rest are various other means. The hospital is also the only hospital in a 10,000-square-mile service area, meaning it has a good payment arrangement with its commercial payors. Roughly 45 percent of Sky Lakes Medical Center's net revenue actually comes from commercial insurers.

However, Mr. Rico says commercial payors have been more aggressive in rate negotiations over the past few years. As hospitals and insurers align their incentives more, sole community providers may not be able to use commercial payors as "cost-shifters" as often, yet hospitals will still have to find ways to cover lower government reimbursements.

"If [commercial payors] start cutting reimbursement, that would be horrible for us," Mr. Rico says. "That would immediately put us in a negative position unless we cut costs more. And there's not a whole lot more we can cut in costs."

More Articles on Hospital CFO Issues:

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7 Projects Hospital CFOs Should Focus on in the Final Months of 2012

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