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Weather the Crisis With Creative Cost Control

Mary Ann Holt, for HealthLeaders Media, January 12, 2009

While many hospitals have long operated with slim margins and careful expense management, today's worldwide financial crisis raises the pressures to unprecedented levels. In the long term, hospitals may need to restructure their financing mechanisms and capital plans, but new and creative ways to manage expenses can help to weather the storm. Short-term measures to reduce discretionary and supply spending and closely monitor labor productivity can bring more money to the bottom line, and counteract some of the effects of the tempest brewing around us all.

Approaching the high-water mark

Hospitals already face limited access to and increased costs of capital, along with decreased returns on investments. One of our hospital clients has seen its interest rate on short-term demand notes quadruple, moving from less than 2% to almost 8% in fewer than three weeks. This challenge to financing comes at a time when many hospitals have significant building and renovation projects in process. Acute-care projects, including new hospitals, expansions, and renovations, exceeded $251 billion nationwide last year.

Healthcare providers must also deal with the same declines in investment income that all of us face in our individual portfolios. But given the "trickle down" payment structure of healthcare, many providers must also brace for payment delays from state-funded programs and from insurers seeking to retain short-term cash.

Providers are also concerned about patients delaying treatments and thereby increasing their severity of illness and cost of care. A recent survey of 112 hospitals by Citi Investment Research found September 2008 inpatient hospital admissions to be down by 2% to 3% from 2007. Suppliers are also passing on cost increases, and many hospitals are bracing for a reduction in charitable giving as philanthropies also struggle with a decreased return on investment. But the biggest impact may stem from debt financing bonds, which require that certain performance targets be met. Decreases in revenues and increases in costs may call into play these debt covenant ratios and trigger potentially draconian measures by bondholders to assure financial viability.

Seek new sources of savings, with an eye on productivity

While one obvious solution is to reduce the financial burden by holding off on major capital projects, you might try a creative look at expense and productivity management. In times of struggle, labor costs often take top priority. But a recent analysis of expense data found new and surprising opportunities to save.

We performed a detailed analysis of three years of expense data from recent client engagements to uncover the real trouble spots in expense management. Our analysis showed that salaries, benefits, and supplies, as a proportion of total expenses, decreased or remained steady, while discretionary spending crept upward. When each expense category is reviewed against the number of patient discharges, the compound annual growth rate (CAGR) puts the spotlight again on discretionary spending.

Discretionary spending can represent a "black hole" for hospitals, as data is limited on the exact nature of some expenses. But hospitals that clarify program-specific costs by category find themselves better equipped to determine the strategic importance of each program and their related costs.

Hospitals should trend spending by account over time, determining which accounts have experienced the greatest increases and targeting the understanding of the decisions that drove those increases. In addition, hospitals can review comparative data from hospitals of similar size and complexity, and use this analysis to trigger discussions about the changes needed to reduce costs further.

Supply costs should not be overlooked, even though our analyses showed them to be a steady cost. A client recently achieved $300,000 in savings by eliminating one-time use disposable supplies. While savings was the goal, the staff also appreciated the reduction of the facility's environmental impact.

In addition to expense management, many hospitals have benefited from increased attention to productivity. By monitoring the variable workload standard of each department on a bi-weekly basis, leadership can get a better grasp on demand.

Department managers should be accountable for flexing staffing to meet the variable workload demand, and senior leadership should review all vacant positions with an eye toward eliminating or redistributing the workload.

While the upheaval in the financial markets has created a crisis for hospitals by limiting access to capital, decreasing investment income, and increasing operating costs, hospitals can be equipped to weather the storm. By addressing the full array of operating expenses on the income statements—and looking beyond the usual saving suspects—hospitals can better prepare the bottom line for changes that they cannot control.


Mary Ann Holt, RN, MSN, is a senior partner at IMA Consulting with more than 25 years experience in healthcare management and consulting. She can be reached at maholt@ima-consulting.com.
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