In order to navigate shrinking operating margins, financial executives at health systems must institute expense control strategies while also driving consistent revenue growth.
Editor's note: This article is based on a roundtable discussion report sponsored by Bank of America Merrill Lynch. The full report is available as a free download.
Under current market conditions, margins are becoming increasingly tight and revenue sources are not always producing consistently for health systems. For the financial leaders at nonprofit healthcare organizations, implementing effective expense control measures is a key to maintaining financial solvency.
"When it comes to expense control, it should never stop," Rob McMurray, chief financial officer at Christiana Care Health System in Newark, Delaware, says. "We’re in the process of taking out $100 million of cost permanently over a three-year period, and we’re starting it differently than I would say a traditional campaign like this would go. You would think the low-hanging fruit is the easy stuff and you would chunk your largest part in year one. We’re doing it differently."
McMurray continues: "We’re saying there’s a $10 million goal in year one, a $30 million goal in year two, and a $60 million goal in year three. We’ve achieved the year one goal, but it took the organization a while to think about this and what it meant. With 60% of our expenses in labor, the real savings are in becoming more efficient."
While it may be ideal to look at curbing costs and expenses in the short-term, executives must also balance those initiatives with goals that boost the long-term interests of the organization.
"We do what’s called integrated strategic financial planning; it’s a five-year plan, and that’s the guide by which we drive our next budget and subsequent ones," Robert Ehinger, senior vice president of financial operations at Tower Health in West Reading, Pennsylvania, says. "Now, we do an update every year to adjust for the reality versus what you would hope for, and you have to make the adjustments based off of that. With the trust of the departments, we work collaboratively to build the best budgets and financial models possible."
Ehinger adds: "We’ve been diligent about asking when [departments] are doing their budget, “Did you buy anything this year?” Even when we’re approving capital expenditures, make sure you put in your budget that maintenance element for whenever it comes in. Even though it’s going to drive up your cost, we’d rather have it in the budget to know about it than have it pop up. You can see that it starts like a snowball—things start clicking because you’re not adversarial."
One way to expand services for health systems is to break down the traditional barriers to care for patients and increase opportunities for them to receive the care they need.
"The least traditional access point has become an important access point," John P. McGovern, senior vice president of financial planning at Northwell Health in New York City, says. "There will be 55 urgent care centers throughout our market that we’ve developed over the last three to four years in a joint venture. It’s co-branded Northwell Health-GoHealth Urgent Care. Five years ago, urgent care was nowhere near the presence that it is now, where you can’t drive down the street without seeing several. But not to exclusively focus on urgent care, we do have a network of ambulatory surgery centers that we’ve developed over the last several years because that care is moving out of the hospital walls."
McGoven continues: "We are expanding and investing in nontraditional points of access across the spectrum, which relates to value-based payments. We want to have various options to care for our community and do it in low-cost settings. However, the flip side of it is that it doesn’t take away the need to maintain hospitals. That’s the dilemma of being a health system and having to commit the capital to own these expensive and increasingly intensified places of care."
Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.