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Benchmarking for Beleaguered Budgets

Karen Minich-Pourshadi, for HealthLeaders Magazine, March 8, 2010
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After the quick cuts, finance leaders looking for deeper savings have found success with benchmarking.

When there's no more low-hanging fruit to capture with cost cutting, CFOs must look to their largest line item—generally staff—for ways to save. It's a notion that most employees fear because that can translate into layoffs. However, taking an ax to this line item can leave the hospital understaffed and morale badly damaged, threatening other key hospital initiatives like patient satisfaction and quality. Nevertheless, when the budget is stretched and you need to cut more, financial leaders' instincts to look for savings in labor are dead-on—but there are better approaches than layoffs that may yield even greater returns for the hospital.

When hunting for opportunities to improve financial performance, benchmarking may not immediately spring to mind as a cost-cutting measure; however, financial leaders who use benchmarking techniques to enhance the fiscal well-being of their institutions have found it to be invaluable. Benchmarking allows each department or hospital within a system to demonstrate the distinct nature of its function, and that can be compared month over month, year over year, or against peers at a neighboring hospital (if that data is available).

Back in balance
In February 2008, the 185-bed MedWest Health System, formerly Haywood Regional Medical Center in Clyde, NC, was struggling, not only due to the economy, but also due to some inefficient management. The hospital had been decertified for Medicare and Medicaid, and although certification was restored just five months later, the hospital still lost $13 million and saw its inpatient numbers dwindle to single digits. The facility had drained its reserves and saw the resignation of nearly all its top executives as well as the board chair. Group all that with one of the worst economic recessions, and the circumstances weren't exactly ideal for the newly hired MedWest President and CEO Mike Poore.

"We had to act swiftly. Our costs had outstripped our revenue and we needed to make some changes," says Poore, the 22-year healthcare veteran brought onboard in October 2008. Like most leaders grappling with runaway costs and declining revenue, his first step was to find the easy wins: carefully controlling costs and making sure the hospital was collecting every cent it was owed.

That meant collecting copays in the emergency department—a simple policy change that garnered the facility an average of $100,000 per month. Next, it eliminated traveling nurses, which was costing between $150,000 and $170,000 per month, and then it implemented a hiring freeze for non-critical positions. As with so many other facilities, MedWest also froze spending for education and travel. In short, MedWest did exactly what most finance leaders did in 2009: It cut costs in the most efficient ways possible.

"I was looking for ways to putty the holes for revenue and enhancements. We got more aggressive in getting copays and gave prompt pay discounts," explains Poore.

Once these quick fixes took hold, it was time to dig deeper. Poore turned his attention to his labor budget. The hospital had no productivity statistics or benchmarks in place, which made determining the level of staff and the overall need for specific services difficult. Recognizing the need to put in place a hospitalwide productivity system, Poore brought in the Charlotte, NC-based Premier Healthcare Alliance.

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