During a recent search on "Definitive Healthcare," 1,957 critical access and short-term acute care hospitals showed an operating loss out of 5,380.
The findings total over one-third of all hospitals. There are many reasons as to why these hospitals are losing money. Payer mix, lowered reimbursement, bad debts and operating physician practices are several explanations. Taking the findings one step further leads to the question, how can a hospital turn a prof
it with all of these contributing factors? Some hospitals explore complicated ways to offset these issues to make their organizations more profitable. Unfortunately, realizing a gain in one area may result in a loss of another. Hospitals need to practice the basic fundamentals to reduce or eliminate these losses and help turn their organizations around.
We see the basics breaking down to just a few key and critical principles. These are strategy, execution and accountability — all with a sense of urgency. While this sounds so simple, actually being able to follow these principles becomes complicated by other influences.
Start with strategy
Strategy sets the direction of an organization. Identifying key organizational goals and sharing those goals with all employees creates a sense of focus for everyone in the organization. Then, try limiting the number of goals to several key areas. Having too many goals creates confusion and possibly conflicting priorities if there is not a clear delineation of responsibility. Responsibility for accomplishing those goals must be evenly balanced amongst an executive team. Without balance, the individual(s) overloaded will have difficulty managing multiple priorities.
Key aspects needed to support this strategy should be a long-term financial plan and an operational plan. The financial plan should support the capital investment required to achieve goals while maintaining or improving the financial stability of an organization. The operational plan should provide the financial outcomes while, at the same time, meeting clinical quality and patient satisfaction expectations.
Difficulties in execution
Execution is the next key principle and often where the most challenges occur. While identifying the strategy set the goals, execution includes the tactics at which those goals will be achieved. So many elements are required to properly execute a good strategy. Therefore, it is difficult to briefly discuss all of them. However, we recognize core elements as the skill set of the team to execute, maintaining focus on key principles, proper prioritization of both key activities and interference as well as project management.
For large organizations, individuals with specific areas of expertise can help bring the skill set needed to execute certain tactics. On the other hand, small organizations are faced with either outsourcing to achieve a skill set or utilizing the talents of a smaller pool of resources. Large organizations can also spread the workload over a larger group of people, while the executive team of small organizations is faced with wearing many hats and balancing oversight with hands-on details.
Even with the proper skill set, maintaining a clear focus on what needs to be accomplished can be a challenge. Outside interference, putting out immediate "fires" and unforeseen barriers create plenty of distraction. Often, these distractions stifle progress. While some of these distractions deserve attention, many low priority ones divert too much attention away from the main goals. Key individuals must maintain focus on key tasks, while others should be used to handle those pesky distractions.
Many organizations lack expertise in project management. Effective project management not only requires a comprehensive action plan, but also a talented project manager. The project manager must be a taskmaster, working to keep individuals focused on deadlines, drive tasks to completion through due dates and reporting results to key leadership. The project manager must have key executive support with executives directly addressing those individuals who are not finishing tasks by assigned deadlines.
Accomplish with accountability
Great results cannot be expected if those expected to achieve those results are not held accountable. Accountability must be both positive and negative, where achieving results (more than the bare minimum) is rewarded and failure to achieve results comes with consequences.
On a recent engagement at a client site, we reviewed areas not meeting operating budget. One client team member stated a particular manager never met his budget. Further, we discovered not only was the manager's missteps not addressed, the manager actually received commendable marks on his evaluation for budget performance. At the same time, there was no incentive plan in place for those who did achieve or exceed budget targets.
While accountability does not always account to terminations or financial rewards, there still must be a few incentives in place. Organizations need to avoid rewarding hard work when results are not achieved on a consistent basis. While hard work is important, if the efforts do not achieve the desired results, the work was not worth the effort in most cases.
Create sense of urgency
A sense of urgency is necessary without a sense of panic. Most often, projects are executed without a given deadline or an unnecessarily longer deadline. The project timeline expands, often resulting in longer periods of undesirable results. Taking longer to execute a cardiology expansion or moving too slow on a quality improvement project are just a few examples of how a lack of urgency harms an organization. These examples cannot only result in lost margin or market share, but also result in poor patient outcomes and even litigation.
Maintaining a sense of urgency can also correlate to accountability. If employees are to be held accountable with both positive and negative reinforcement, projects tend to move quicker — especially when the entire team shares this sense of urgency.
Improve loss leaders
Hospitals experience some areas as their loss leader. Loss leaders can often equate to core services needed, such as providing obstetrics services in a small community. They can also include avenues to more extensive services, such as screenings. However, just because a service is seen as a loss leader, doesn't mean we cannot improve the performance and reduce the losses incurred. Monitoring efficiency and continually performing process improvements helps minimize these losses. When possible, benchmark loss leading services with similar hospitals or even similar departments.
Painful realities
Top performing organizations execute the basic fundamentals well. But the painful reality is we see many organizations struggle with the above key principles we have described. Distractions enter into the picture and interfere with the execution of plans for a variety of reasons. Utilizing the fundamentals of strategy, execution and accountability, along with basic finance fundamentals can help eliminate interferences.
Projects should have a supporting financial plan, including a return on investment calculation. These calculations should include an expected-case scenario and not a best-case scenario. We also need to consider the risk factors and what the impact of the worse-case scenario could result. Avoid the pitfall of moving forward on a project based on gut instinct, emotion or chance without a financial plan — especially where significant dollars could be spent or put at risk.
Project financial plans should contain the following, at a minimum:
- Total capital investment
- Projected impact on volumes
- Projected gross and net revenues
- Projected staffing and salaries (be sure to include benefits)
- Projected other operating costs
- Operating Income(Loss)
- ROI
Impact on quality and patient satisfaction are also critical. When possible, if options are available, explore which option provides the best net present value over an expected period of time (usually 3 – 5 years).
A good plan is not complete unless it considers the risk factors. Projects with lower probability for success must be evaluated based on what the impact to the organization could include. A good example is leasing space versus building new construction. A five-year lease with an option to either buy or extend may cost more in the long run, but if the project is not successful, capital dollars for the future and the headache of holding on to an empty building is saved.
While all of these basic principles seem fundamental, many situations can arise to interfere with the best-made plans. Use the tools available and follow the principals. Create the strategy, support it with financial and operating plans as well as execute with effective project management, accountability and a sense of urgency. Consider the risks and limitations. Most of all, don't be afraid to seek help along the way.
Mark has over 28 years experience in the healthcare field. He has a unique knowledge of both finance and operations, which served him as both a Chief Financial Officer and Chief Operating Officer in a multi-hospital system. Mark is a member of the Healthcare Financial Management Association and the American College of Healthcare Executives.
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