How Did Hospitals Post Positive Fiscal Years in 2012? 5 Hospital CFOs Respond

In fiscal year 2011, the median operating margin for non-profit hospitals, according to Moody's Investors Service, was 2. percent. The Medicare Payment Advisory Commission has posted similar numbers since 1999: Most hospitals lose money on Medicare, and overall margins hover between 3 percent and 5 percent. Compared with most other industries, those are pretty slim margins, and in today's current healthcare environment, attaining those figures is not always a given.

Here, five hospital and health system CFOs from all across the country explain how their organizations fared in FY 2012, what financial challenges they faced and what strategies contributed to their positive bottom lines.

Question: How was your organization able to achieve a profitable and successful 2012, and what were the main issues you worked on diligently?

John Bishop is a CFO within MemorialCare Health System.John Bishop, CFO of Long Beach (Calif.) Memorial Medical Center, Miller Children's Hospital Long Beach and Community Hospital Long Beach: In fiscal year 2012, we had a net income of $42.9 million, which was an operating margin of 4.5 percent. We were able to maintain our bottom line despite shrinking reimbursement through aggressively controlling our expenses, primarily labor, supplies and purchased services. Several years ago, MemorialCare Health System and its six hospitals and outpatient facilities began focusing on four areas to manage our costs. Called PLUC, it stands for productivity and labor management, Lean systems, utilization management, and care model redesign. Our Lean system initiatives, for example, helped us to identify non-value added processes. We also used labor and supply benchmarking tools to help identify opportunities.

An additional area of success is related to our "productivity collaborative." Across MemorialCare, we've asked teams of managers to come together to compare labor cost on a per unit of service basis both internally and compared to other hospitals around the country. We're able to externally benchmark our performance to learn more about our performance. In many cases we are already performing in the highest quartile as measured by the national database. In other areas, we have access to give our leaders context with the best performers in the data set, so they can gather ideas to enhance performance.

Another example has been the work of our VATs, or value-added teams of representatives from throughout the healthcare system, who work with our physicians to further assess and evaluate supply purchases for numerous clinical and support services. Every little, and not so little, bit counts. And that's all without impacting quality, physicians or patients — simply from better purchasing coordination and collaboration.

Mark Bogen is CFO of South Nassau Communities Hospital.Mark Bogen, CFO of South Nassau Communities Hospital in Oceanside, N.Y.: This was a challenging year for the hospital, particularly during the last half of 2012 when inpatient volume dropped off dramatically and the impact of Superstorm Sandy was felt.  The operating profit, which included investment income of $8.1 million, was approximately $4 million. Inpatient volume declined by approximately 2 percent from 2011, although this performance needs to be put in perspective in that in all Nassau County, N.Y.-based hospitals — where South Nassau is located — showed a decline in inpatient volume of approximately 5.9 percent in 2012 compared to 2011.

Uncompensated care was over budget by $3.5 million. The hospital experienced a significant increase in the amount of uninsured and underinsured patients seeking services with several specific outpatient areas — ambulatory surgery, emergency room and private ambulatory — incurring sharp increases in the number of charity care transactions.

The hospital successfully launched phase one of our electronic medical record, which consisted of computerized physician order entry, at the end of June. [We] qualified for stage 1 meaningful use for Medicare and recorded approximately $5.3 million in other revenue. However, operating expenses related to the post-activation implementation costs and other infrastructure expenses totaled in excess of $7.2 million, thereby creating an approximate $1.9 million shortfall in operations.

Finally, Superstorm Sandy dealt a significant blow to our outpatient volumes. Most significantly, our ambulatory renal dialysis center located approximately two miles south of the main hospital campus was destroyed and left approximately 140 dialysis patients without a home. We were able to place approximately 20 to 25 patients in our hospital-based dialysis unit but needed to transfer the remaining patients to other neighboring freestanding centers in various communities surrounding the hospital. This loss of revenue for November and December totaled approximately $1 million.

However, South Nassau was successful in expense management related to salary expense. The hospital was under budget by approximately $2.5 million as it continued to closely monitor staffing and the controlling of unnecessary overtime (nursing OT fell by $420,000 from 2011).

Patricia Gavis is CFO of Ellenville Regional Hospital.Patricia Gavis, CFO of Ellenville (N.Y.) Regional Hospital: Like most hospitals, Ellenville Regional Hospital is managing the challenges presented by historic changes in our industry as we work to provide quality care and improve financial performance.

Among our key priorities in 2012 was a continued focus on delivering quality patient care and implementing technological advances to meet meaningful use requirements under the HITECH Act by implementing a hospital-wide electronic health record. At the same time, we worked to ensure the accuracy and completeness of EHR data as it translates into charges. As such, in 2011, we worked with Craneware to automate our chargemaster management processes and were able to increase charge accuracy by 80 percent in the first month of implementation, helping us to meet revenue and compliance goals.

In 2012, we successfully completed a full hospital system conversion, including the implementation of an EHR and attestation for stage 1 meaningful use 117 days after going live. Ellenville has accomplished significant improvement over the years, going from a hospital on the verge of closure in 2003, to a financially stable and successful hospital by the end of 2012. Our successful improvements in patient safety and quality were also exemplified, as we became the only hospital to be awarded the Northern Metropolitan Hospital Association Quality and Patient Safety Award for a second time.

Dan Harris is CFO of Swedish Health Services.Dan Harris, CFO of Swedish Health Services in Seattle: When I got here in February 2012, Swedish had a $16.7 million loss from operations through the first two months. We forecasted Swedish was on track to lose $7.5 million per month for the rest of the year. Nothing like a crisis for a CFO to get someone's attention. That was where we were at, but we ended the year with a $40 million profit. We forecasted a $90 million loss but actually made $40 million, a difference of $130 million.

We created an operations improvement plan and got leadership buy-in. Swedish runs five hospitals with almost 10,000 employees. It's a big organization. For us, it was about creating a plan that people can buy into, support and then execute.

Our operations improvement plan [last year] was probably more cost reduction and also process improvement along with some growth initiatives and revenue enhancement projects. The big three, though, are revenue cycle, supply chain and productivity. The filler is volumes, and there are programs that are growing. This was a process that we borrowed from Providence, and at Swedish, we created our own [vision].

Ted Sirotta is CFO of Northwestern Medical Center.Ted Sirotta, CFO of Northwestern Medical Center in St. Albans, Vt.: We are proud of our financial performance in 2012. We achieved a 16 percent year-over-year increase in net revenues, and our total margin was 13.7 percent. Our financial success was driven in large part by our acute admissions, births and Medicare case mix all running higher than budgeted. Because our hospital is managed by Quorum Health Resources, we are able to participate in a large group purchasing organization. Combined with reasonably good cost control, we were able to carefully manage all costs within the organization.  

Attention to detail is a must in today's environment, and we feel even a savings opportunity as small as $1,000 is worth pursuing. To help us manage costs, our senior leadership closely reviews all capital and personnel requests to ensure need. Separately, our cost accounting system helped us identify opportunities to reduce costs and negotiate insurance contracts, and stock market returns on our investments helped drive our total margin.

We cannot achieve the financial success we have had without outstanding patient satisfaction and quality. For example, in 2012, our hospital was recognized for the fifth year in a row with a national special achievement award in patient satisfaction from Avatar. In addition, Northwestern Medical Center was recognized by The Joint Commission as a top performer in the nation for pneumonia care, one of The Joint Commission's key quality measures.     

More Articles on Hospital Finance:

Becoming a Modern Hospital Financial Leader: Q&A With Methodist Dallas Medical Center VP of Finance Sarah Choi
10 Overlooked Opportunities for Hospital Cost Savings
Creating Regional Health Networks: Q&A With LifePoint Hospitals CFO Jeff Sherman

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