Shrinking Margins, Shrinking Options?

Margins at U.S. hospitals are declining as the recession and growing unemployment impacts insurance coverage, hospital investments, volumes, and even the health levels of the patients showing up at emergency rooms. Hospital executives are being pressured by their communities to save jobs and provide more community benefit; while at the same time healthcare reform hangs overhead and the media relentlessly pounds out story after story about the high cost of healthcare.

So what's a hospital CXO, or C-level, executive to do? It seems that your mission and reality have irreconcilable differences. At first blush, it seems impossible to balance your priorities and your finances.

Consider the following typical priorities of a hospital CXO:

1. I don't want to lay off caregivers. Nurses, food tray delivery workers, technicians, transporters are the people who deliver my product and give my hospital a face and personality. Not all are highly paid and my community depends on me as an employer.
2. If I can reduce purchased services or the utilization of high-cost and overpriced supplies, that's perfect. But it's not going to be enough. Purchased services and supply utilization are hard to uncover, so perhaps there's something we've missed.
3. Corporate costs need to be rethought, especially if it enables me to preserve caregivers. I know this is the highest growth area of my cost structure, but it's taken a lot to build my team so I hate to go there.
4. Whatever happens, I can't do anything to jeopardize quality. Quality care is our mission and those quality scorecards are everywhere – I can't slip up. Could a quality focus even help my margin? How? I keep being told I can't make cuts if I want to deliver quality care.

To navigate these priorities and at the same time get margins back on track, a CXO needs to know:

1. Where is my potential and how can I measure it objectively and quickly?
2. What's worth going after: agency usage, productivity issues, high cost supplies, purchased services, corporate costs?
3. Where do I have quality problems, what does it cost, and who is responsible?

The good news for hospital CXOs is that there are typically more "pain-free" and "bearable pain" cost-saving changes than appear at the outset. Here's what we see in thousands of assessments with our clients.

Pain-free:
1. Surgical supplies and invasive cardiac supplies: Utilization that is not explained by patient acuity or outcome varies significantly from physician to physician. This is worth taking a hard look at, and since you're comparing you-to-you, the accounting is straightforward, and the barriers to learning are lower. It is difficult to monitor, however, and physicians are not always happy to be scrutinized.

2. Purchased services: Put your vendors on notice and ask for new bids. An examination of purchased services provided by more than one source or with a high frequency can lead to the kinds of savings that supplies provided in the past. Are you using multiple law firms? Consolidate. Wash the outside windows twice a year rather than quarterly.

3. Agency usage: Naturally, agency usage that fills a real staffing shortage is not something that is eliminated easily. More often than not, there are significant productivity gains that can be made across a hospital and agency usage can be reduced with management focus. These are pain-free layoffs.

Bearable Pain:
1. Productivity improvements: When you examine productivity and use fewer labor resources, it's not always true that you're laying off people. Hours may be down and call-ins and overtime are reduced. Productivity is up and the cost position is shored up as well.

2. Program review: Take a hard look at the profitability of your outreach programs. (But why are we just limiting this to outreach programs? Yes, include outreach . . . maybe even start there first. But how about other services as well?) You can't be all things to all people and some of these things cost a lot more than just the people involved in them.

3. Focus on high-cost, poor-quality events: The federal government provides the means to measure inpatient events that "should-not-happen," such as deep vein thrombosis, failure to rescue, and hospital acquired infections. These events correlate very strongly with a hospital's ability to be cost effective. If you want to manage costs effectively, you have to manage these very specific quality issues first. It is entirely possible to compute what they cost and who/what is responsible. Sensitivities around these issues mean it's not pain-free, but a bonus is that it engages clinical staff around their core values and proves that good quality costs less.

Painful but useful: Sometimes a downturn and resulting reassessment provides the impetus to making needed decisions.
1. Span-of-control: A structure that's top-heavy hurts your organization's costs and its ability to make decisions. Your managerial ranks are your top performers at some level, so there is pain associated with reduction in managers and layers. It can be a time, though, to consolidate smaller departments; assess the worst performers and trim appropriately.

2. Corporate costs: Marketing, finance, accounting, telecommunications, and information systems are critical but also have not had the same level of cost scrutiny as facility-based costs. Over time, subsequent mergers mean services are duplicated at the corporate and facility levels. Sharing the margin pain can recalibrate priorities towards caregivers.

Painful and risky:
1. Caregiver layoffs: Enough said.

Closing the margin gap while being true to the priorities you've established is neither hopeless nor pain-free. But pairing your priorities with the levers under your control can get you a lot further along than most executives imagine.