Cost efficiency and reductions top the priorities list of nearly every financial leader in healthcare. But is the cost-cutting tunnel vision too narrow? Or are there better options for boosting the bottom line?
In a recent survey of the HealthLeaders Media CFO Exchange, the number one priority anticipated by CFOs for the next three years is cost reductions. Yet maximizing revenue came in eighth on this list of nine priorities. I find this one-sided view interesting.
Every financial leader has heard the expression “you cannot cut your way to prosperity,” yet with all the concerns over Medicare reimbursement decreases, what you know you should be doing versus what you are doing don’t always jibe. I’m not suggesting CFOs stop looking for ways to reduce costs, but as our survey results suggest, you may want to concentrate equally on protecting and improving the top line.
Here are four opportunities beyond cost-cutting for your hospital or health system to enrich its financial picture:
1. Physician retention: It’s not enough to recruit the best doctors for your hospital – you also have to keep them, or you are essentially throwing thousands of dollars out the front door. Physician recruitment dollars are the subject of more than a few healthcare conferences, yet physician retention is rarely mentioned by financial leaders.
In June I wrote about how J. Gregory Stovall, MD, senior vice president of medical affairs for Trinity Mother Frances Hospitals and Clinics in Tyler, TX, crunched the health system’s recruitment and retention numbers for his CFO.
Stovall discovered that the group was spending $250,000 to $300,000 per physician on recruitment but zilch on retention.
This lopsided approach to physician employment resulted in a 14% physician turnover rate – far above the current industry average of 6.1%. The remedy was the creation of a $100,000 budget to improve retention rates (averaging just $300 per physician), which succeeded in lowering the system’s turnover rate to 4% and saving approximately $1 million per physician who stayed.
2. Process improvement: Lean and Six Sigma methods are ways to improve your processes that bear financial fruit. I’ve written a number of columns and magazine articles on this topic. Creating this type of cultural mindset change requires only a modest up-front investment, depending on how many “black belts” you want to train to get the ball rolling. It’s estimated that 53% of hospitals apply some type of Lean process initiative and 42% use Six Sigma methods, which leaves a lot of room for improvement, quite literally.
My favorite example of why healthcare leaders should implement an enterprise-wide process improvement initiative comes from Seattle Children's Hospital. When this 250-bed hospital began planning a new outpatient facility in late 2007 to expand its capacity, however, it followed the standard “reduce variation” approach to the design of the facility. Just a few months later, however, the tanking economy forced hospital executives to figure out how to reduce the scale and cost of the project without sacrificing the goals for the facility.
Seattle Children’s Hospital management applied a modified version of the Toyota Lean Process Improvement process, called Continuous Performance Improvement, to the entire design process.
The result: a 30% reduction in square footage, from 110,000 to 75,000 square feet, without any loss to the intended number of workspaces or programs. In essence, they cut out the fat. The project was completed on time and within the $75 million budget.
3. Bye-bye bad debt: The days are gone when patients had no clue how much their care cost and how much insurance companies paid for it. Insurance deductibles and co-pays are on the rise, and more uninsured or underinsured patients are paying medical costs out of pocket.
Naturally that means financial leaders are seeing bad debt continue to rise. Nearly 90% of organizations in an American Hospital Association survey reported increased bad debt and charity care as a percentage of gross revenue in 2010. This trend is unlikely to ease anytime soon, with healthcare reform introducing 20 million to 40 million new patients into the healthcare system.
Getting your up-front collections process in order and collecting every dollar possible from your self-pay patients is essential. Yet when was the last time you quantified your true self-pay collection rate?
Centura Health, Colorado's largest healthcare provider, set up a progressive incentive structure for its customer-facing staff to improve up-front collections. A team of financial counselors helps customers complete insurance verifications and authorizations before scheduled procedures, reminds patients of any past-due balances, and determines the patient's portion of the bill due at time of service. Through this effort, Centura Health collected about $1.5 million at the point of service in 2010, more than triple what it brought in two years prior.
4. Mergers and acquisitions: Growth may be good, but it doesn’t come cheap or easy. Because recruiting individual physicians is time-consuming and costly, merger with or acquisition of a group practice is an increasingly popular shortcut to market share.
These days, though, getting the capital together to purchase another organization isn’t easy, which is one reason that private equity firms are entering the healthcare sector. A Pepperdine University survey of private equity executives at the end of 2010 found that 11% planned to invest in healthcare – more than double the response just six months prior (4.8%).
Because most healthcare companies are too small to be publicly traded, private equity can be a conduit to funding for M&As. But it isn’t the only avenue, of course. I discussed private equity and other funding paths in the special report, Hospital Mergers & Acquisitions: Opportunities and Challenges.
Certainly cost reductions will never be out of vogue for healthcare CFOs. But top-line growth, efficiencies, and funding must take equal if not greater priority in the coming years. With the prospect of declining reimbursements, finding ways to shore up your balance sheet is a must.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
