Sustainability: How hospitals contribute to the long-term health and success of communities

Sustainability has gained attention in hospitals as changing market dynamics drive hospitals and health systems toward long-term financial strategies.

Although hospitals help maintain the health and well-being of communities, they should also consider their own “health” as they are often not only health care providers but also economic drivers that contribute to the sustainability of a community.

However, hospitals are challenged to balance costs and serve community needs. Moody’s Investor Service recently reported1 non-profit hospital median operating cash flow margin decreased to 8.1 percent in fiscal year 2017, marking the lowest level seen since the 2008 - 2009 recession. And, between 2010 and 2017 alone, 81 rural hospitals2 — roughly 5.3 percent of all rural hospitals in the country — shuttered their doors. In a recent Bank of America Merrill Lynch roundtable, hospital and health system CFOs noted that declining government reimbursement, rising operating costs and shifting financial risk have made it more difficult for providers to generate the capital necessary to cover overhead while focusing on clinical and community services.

Despite these challenges, hospitals can utilize tools and make strategic decisions to prioritize capital investments both inside and outside the hospital setting while meeting the needs of its community. Prioritizing responsible growth is becoming increasingly important and successful healthcare organizations are making sustainability central to their growth strategies. Beyond good corporate citizenship, they are recognizing the intrinsic link between the strength of their organization and that of the communities and economies in which they operate.

Here are some tips to help hospitals succeed in a changing market, keeping in mind the important role these health systems play in creating a sustainable community.

Reconsider Investment Management
Few health system CFOs would consider capital investment a core competency. As hospitals’ margins shrink, however, investment portfolio returns can help bridge operating shortfalls from lower patient volumes and reimbursement cuts. Because of this, some health system executives are turning to investment management companies to manage assets, so CFOs can continue to focus on the care of patients and keeping the community healthy. Engaging outside expertise ensures your investments are in experienced hands. Hospitals are also looking at banks to consolidate and automate accounts receivable and payments posting processes. A financial adviser can help streamline and build efficiencies, saving time and money.

Act as Anchor Institutions to Support Communities
Beyond providing clinical services, many healthcare providers serve as community “anchor institutions.” Hospitals and health systems exist to serve their communities — not only to provide healthcare services, but to bolster the local economy and quality of life by hiring local workers and contractors, buying locally through purchasing agreements and building clinical facilities in neighboring communities.

More than half of U.S. healthcare organizations spent between –five to 10% of total operating expenses on community benefits including, charity care (83%), unreimbursed costs for government programs (74%) and subsidized health services (51%).

Improve Cost Accounting
Assessing the total cost of specific clinical activities is still an unfamiliar practice for many hospitals and health systems. Unlike retail or manufacturing, hospitals’ operating costs can be relatively opaque. CFOs should work to obtain more accurate cost data and evaluate revenue opportunities by department,
treating their health system like the business it is. This can help mitigate risk and buffer hospitals from sudden or unexpected utilization shifts.

Stay Connected
It’s important to communicate amongst geographic networks. To collaborate on care for the same high-risk population, health communities can provide referrals to more in-network care, leverage IT platforms between unaffiliated health systems and facilitate partnerships with behavioral health services. Taking a holistic view of a population serves the community’s health needs and creates efficiencies for the providers.

Hospitals and health system CFOs face the formidable task of balancing their daily operating costs with their long-term sustainability. Despite the unknowns of potential policy changes and economic turns, sound financial strategies can help CFOs protect the needs, and impact long-term performance, of their hospitals and communities.

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1 Moody’s Investor Service Report, April 2018
2 Sheps Center for Health Services Research at the University of North Carolina, 2018

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