8 Tips to Improve Your Hospital's Operating Margin

When Mike Tretina arrived at Mary Greeley Medical Center in Ames, Iowa, in 2009 as CFO, the hospital was running on an operating margin of 1.5 percent. All things considered, a 1.5 percent operating margin at a non-profit hospital at the height of a financial crisis was not bad at all, but Mr. Tretina wanted to help the institution grow even more.

In the three years since, MGMC's operating margin has skyrocketed. In MGMC's 2010 fiscal year, the margin jumped to more than 6 percent, and in FY 2011, the operating margin topped 8 percent. For FY 2012, which just ended June 30, 2012, Mr. Tretina expects the operating margin to touch 10 percent.

"It's been pretty good," he says. "It's been one of our best operating years ever in terms of reaching our organizational goals and objectives. We have a great management and senior leadership team here at Mary Greely and have been blessed with outstanding financial performance, as evidenced by 560 days cash on hand and significant increases in unrestricted net assets."

MGMC is a non-profit hospital, but it is also city-owned, meaning its board meetings are broadcast via television, and all of the hospital's finances and plans are readily available for the public to see. "Our board meetings are a public forum, and we're very transparent," Mr. Tretina says. "We have a great board of trustees that is very engaged, and we share a lot of this data and our strategic plan with everybody."

Here, Mr. Tretina gives eight tips for other hospital CFOs on how they can improve their operating margins. If a public hospital has the ability to make this progress, then any hospital does too, he says.

1. Monitor financial metrics closely. Mr. Tretina, the entire hospital executive team and the board of trustees make sure to monitor several metrics every quarter, including debt covenants, debt to capitalization, days cash on hand, cash as a percentage of long-term debt, days in accounts receivable and capital expenditure ratios, among others.

2. Embrace today's new emphasis on quality, safety and service. Mr. Tretina credits MGMC President and CEO Brian Dieter for making patient quality and satisfaction a "call to action," and this will make an even bigger difference when CMS' Value-Based Purchasing program for hospitals goes into effect this October.

Specifically, Mr. Tretina says the executive team and medical staff monitor all quality core measures and their own "preventive harm index," which tracks patient falls, drug errors and other "never events" that could be prevented. "We've seen units go three months without a fall in intense patient areas," Mr. Tretina says. "We are seeing that throughout the hospital. Patient experience, patient satisfaction, our HCAHPS scores — everything is trending very positively."

3. Shore up the coding process. A few years ago, MGMC discovered that they were undercoding significantly, meaning the hospital was leaving revenue on the table. However, Mr. Tretina says this was not a coding problem — it was a documentation problem.

Consequently, MGMC teamed up with a clinical documentation firm and initiated a "compliant documentation management program" that reviewed charts and provided better documentation for complications and co-morbidities. The result? MGMC boosted revenue $3 million annually.

4. Assess programs for employees. As a cost saving measure, Mr. Tretina says MGMC re-evaluated two key components of labor: paid time off and health insurance. The hospital switched insurance carriers and consolidated its employee time off and sick time off into a "PTO" program, which has helped reduce benefit costs. Mr. Tretina says something as simple as looking at the insurance for employees and searching for a better deal with another payor could result in a major cost savings — one that will directly impact the operating margin.

5. Consider new rehab and dialysis measures. Two growing areas within hospitals are rehabilitation services and dialysis. Mr. Tretina and MGMC decided to retool these services by bringing in outside help: The hospital used an independent rehab provider to run the hospital's rehab department, and it started a joint venture with its dialysis center and a dialysis center operator.

"We were able to monetize our outpatient dialysis service line and in essence got value of $11 million," Mr. Tretina says. "The dialysis joint venture is profitable now."

6. Review your chargemaster. Often times, a hospital's chargemaster will sit idly, resulting in mispriced procedures and hits to the operating margin. Reviewing the chargemaster annually, line-by-line, will ensure that codes are accurate and charges properly reflect the norms for the region and elsewhere.

"We had more than 200 charges that weren't even on our chargemaster that should have been," says Mr. Tretina regarding MGMC's chargemaster from several years ago. "We were also charging below what fee schedules were allowing. We fixed that, but we're still not a high-charge facility compared with other bigger hospitals in Des Moines."

7. Integrate an electronic health record system. MGMC recently implemented its Epic EHR system and combined it with the McFarland Clinic PC, the largest physician-owned, multispecialty clinic in central Iowa. Although health IT investments normally eat away at the bottom line early on, the efficiencies gained later through information sharing and better communication will save the hospital time and money.

"That really helps us," Mr. Tretina says. "We share the EHR, and it makes for a better continuum of care and has brought a lot of efficiencies."

8. Ensure projects are executed properly. Ultimately, Mr. Tretina says many hospitals could have sound financial meetings and approaches to improve their operating margin, but the follow-through of those plans must be emphasized from the hospital's CEO, CFO, board of directors and all other stakeholders.

"A lot of folks have good action plans and sound strategies for different types of improvement, but it boils down to execution," Mr. Tretina says. "Leadership really makes a difference."

More Articles on Hospital Finance:

5 Key Points on What Hospital CFOs Can Learn From Corporate CFOs

Physician-Led Changes: How Summa Western Reserve Hospital Went From Red to Rejuvenated

5 Observations on the State of Hospital Credit Markets

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