How to Create Sustainable Hospital Financial Improvement: 3 Steps

Tips on how to improve financial performance in any organization are a dime a dozen. Usually, organizations will readjust their focus on cutting costs by quickly glancing at labor expenses, supply chain and real estate — and cutting anything that is nonessential.

Will King, senior manager at HFS Consultants, a healthcare financial consulting firm based in Oakland, Calif., says those strategies may work, but shallow attempts to improve performance with those strategies are rarely sustainable. This is especially true for hospitals and health systems, which are searching for some semblance of financial stability amidst potential Medicare sequestration and healthcare reform funding cuts.

"Anyone can slash-and-burn 5 to 10 percent from their cost structure by telling cost center managers to whack a few people or to stop buying 360-slice CT scanners," Mr. King says. "It takes a patient CFO, COO or CEO to diagnose the problem properly and prescribe a treatment that will work over time — sustainably."

Mr. King, who has worked in the hospital financial field for nearly 20 years, says there are three important steps hospital CFOs should take to find the sustainable financial improvement measures for which they yearn.

1. Use data to identify improvement opportunities, specifically for labor and length of stay. Several states throughout the country require hospitals to file detailed reports on various metrics, beyond what they file for Medicare. In California, Mr. King says hospitals report this data to the Office of Statewide Health Planning and Development. Data include costs, revenues, productivity by cost center, full-time equivalents, productivity by department, length of stay and more.

For states that have these hospital databases, Mr. King says hospital CFOs and other department managers must take advantage of this trove of free, accessible information because it allows for true apples-to-apples comparisons among other hospitals.

"We used to do labor productivity assessments by hand," he says. "Now we have powerful macros that allow us to probe databases for department-by-department benchmarking of, for example, length of stay for certain MS-DRGs compared with other hospitals of a similar size, or where a hospital stands in FTEs per adjusted occupied bed with other hospitals."

Utilizing this data can immediately help guide thoughtful decisions on a hospital's labor force and clinical improvements without arbitrarily hacking away at everything. A more efficient labor force and lower LOS can be had through this method, and it can impact the bottom line in a positive way, he says.

"Instead of cutting 10 percent across the board, use data to see where the real opportunities are. For example, making changes on flexing staff up or down based on volume is when hospitals can make [labor cost cutting] sustainable," Mr. King says. "Anyone can slash-and-burn, but a year later, the problem is back with a vengeance."

"Wise CFOs are increasingly looking to this type of evidence for clues to how they can operate more efficiently from a financial standpoint but also from clinical standpoint," Mr. King adds. "When doing this, no one wants to sacrifice quality or service."

2. Go to accounts payable and the general ledger to find out exactly what is being spent. For some, a hospital's financial system may seem like a landfill — you only want to tread there if you absolutely have to do so.

Mr. King looks at it differently. The general ledger and accounts payable systems provide another source of great data collection because they outline all expenditures and money paid out. Looking back periodically to make sure the organization is spending its money wisely on purchased services, contracts and supplies can be hugely beneficial. While group purchasing organizations are helpful is some areas, they focus mostly on medical and surgical supplies, and not as much on business supplies or clinical and business services.

For example, Mr. King says looking at freight and shipping costs can save a hospital system hundreds of thousands of dollars. Hospital CFOs and other financial executives may not look extensively to see how they are shipping their supplies and which couriers (FedEx, UPS, DHL, etc.) offer better pricing. At one hospital system, Mr. King noticed the organization had certain supplies shipped overnight with next-day arrival by 10 a.m. After interviewing internal customers, he realized those products did not need to be delivered so quickly.

"We found about $600,000 to $800,000 in savings by switching the shipping from next-morning arrival to next-afternoon arrival, with no diminution of quality or service," Mr. King says. "It's just a simple, little business concept that companies do in other industries all the time, but some hospitals haven't deployed those techniques yet."

These types of initiatives may be easier for large health systems that have corporate offices and more resources, but that still is no excuse for small hospitals and health systems to ignore financial statements and, potentially, cost savings. "Go to the data," Mr. King says. "Go to accounts payable and the general ledger, and see who's spending how much on what with whom."

3. Stay diligent on payor contracts. Financial improvements are normally associated with cutting or fine-tuning certain areas within a hospital, but they can also come in another form: renegotiated payor contracts. Payor contracts that have longer terms, commonly known as "evergreen" contracts, can often collect dust, and this could lead to outdated reimbursement rates that leave money on the table.

"This is a really simple one, but you'd be amazed how often hospitals overlook their payor contracts," Mr. King says. "Community hospitals and safety-net hospitals sometimes let their contracts with big health plans just sit. We have a health plan contracts expert who looks at contracts and what payment rates are in the community, and it often happens that payors say they've been waiting for hospitals to come for [budgeted increases]."

Hospitals should talk with their major payors at least once every one or two years to make sure rates are where they should be and to build a better, more constructive relationship.

With these three steps, Mr. Kings says any hospital and health system can build a more sustainable financial structure, which is paramount in almost every healthcare organization today.

"There are opportunities in each of these areas to improve performance by 1 to 3 percent of net patient revenue," Mr. King says. "Implemented together, the impact can be enormous for a hospital with a 3 to 4 percent margin going in. For those doing worse than average, the difference can mean survival."

More Articles on Hospital Financial Improvement:

11 Ways Hospitals and Health Systems Can Increase Profitability in 2013

CFO Kimberly Osborne: Financial Improvement at Eisenhower Medical Center

4 Areas Where Better Documentation Can Improve Hospital Revenue

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