August 03, 2009
This issue of IMA Insights focuses on ways to prepare for the proposed reimbursement reductions for healthcare services, as the push for healthcare reform continues. Planning and taking actions now can forestall the continued erosion of operating margins.
Background Hospitals have a history of thin operating margins. The effect of the global economic downturn has weakened the financial position of many hospitals, particularly those that relied upon non-operating income. In July, the three major associations representing the majority of the country's hospitals, the American Hospital Association, the Federation of American Hospitals, and the Catholic Health Association agreed to support the proposed $155 billion in payment cuts from the federally-funded healthcare programs. Most of the reductions will come through lower Medicare and Medicaid reimbursements. These planned spending cuts will further exacerbate the already tenuous situation. Challenges Despite their recent decline in financial futures, many hospitals continue to require significant capital infusion. Replacement equipment with updated technology requires additional funds. Regeneration of facilities, through either significant renovation or expansion represents a major funding requirement. Growth strategies, whether it be physician practice acquisition, market repositioning, or strategic alliance creation, are a third category of funding requirements. Combined, these present a daunting challenge for hospital leadership teams trying to demonstrate the credit worthiness of their hospitals to banks, financing agencies, and bond insurers.
Hospitals have somewhat limited options available for funding their capital plans. They raise funds through philanthropy and grants, access funds from financial markets, and generate sufficient operating returns.
In many communities, philanthropic contributions have declined due to the regional economic conditions. Similarly, grant funding of projects and programs decreased as agencies saw their financial resources become limited.
The financial markets curtailed access to capital in recent months, as well. Facing their own issues, many agencies limited the issuing of bonds. In addition, many hospitals have experienced downgrading their bond ratings.
Hospitals that relied upon revenues generated from investment income and other operating revenues may face additional challenges. As the global markets continue to fluctuate, predictable returns become elusive. Further, the attainment of those returns remain beyond the influence of the hospital's leadership teams.
To survive and prosper in these times, hospitals require stronger, sustainable margins. Such margins offer direct opportunities for project or program funding. These margins will help to demonstrate credit worthiness to lenders, healthcare financing agencies, and bond insurers, thereby increasing the ability for funding of future projects.
Leadership in the anticipatory period of the coming healthcare reform and its accompanying reduction in reimbursements does not require a new, cutting edge program, initiative, or approach. Effective leadership for this time calls for a return of attention to the basics, an assurance that the hospital's leadership team focuses on the details, and that it executes in a disciplined and consistent manner. Anticipating lower reimbursements allows the team to take steps in reducing the effect of tighter revenue streams on operating performance.
The leadership team can begin by creating a three-year financial forecast of business as usual that incorporates the expected reductions in reimbursement and that assumes no change in the cadre of services provided or the manner in which the hospital delivers those services. The plan should reflect current assumptions for service growth and capital spending, as anticipated in the hospital's existing strategic plan. This forecast will establish two critically important things. First, it should display trajectory of the current business model. Second, it should display the operating margin gap between where the current business model will perform and the level at which the hospital must perform to fund its capital and growth plans.
Once leadership creates the gap analysis, it needs to identify the actions required to close the identified shortfall in operating margins. Actions must exist on both the revenue and expense sides of the income statement to help improve the margin.
Leadership must assure that it captures and receives the revenues justifiably due to the hospital. Doing so requires paying attention to the rigors of the revenue cycle, assuring all portions of it function optimally. From assuring proper preregistration and certification of patients to getting patients to understand and accept their responsibility to pay, to conducting diligent denial management and follow-up.
Those charged with responsibility for the revenue cycle must maximize legitimate opportunities for revenue recovery. Fully-compliant rebilling of appropriate cases can return dollars to the hospital that it wholly deserves.
Aside from enhancing revenue cycle performance, current conditions provide the stimulus to re-evaluate and modify the hospital's cost structure, both across the organization and within functional areas.
At the cost-center level, the hospital can seek opportunities to improve operating efficiencies and to increase productivity. This may require work redesign that results in reduced resource requirements. It may also require changes in departmental scheduling practices, including more effective staff-to-demand approaches, better matching the resources available to the presenting service volumes.
Supply expenses also offer continued opportunity. While most hospitals participate in at least one group purchasing organization (GPO), the degree to which they participate in GPO contracts varies significantly. Increasing contract compliance offers cost savings opportunities. More importantly, examining the impact of product selection and utilization is a potentially fertile field of opportunity. The increasing pressure for cost effectiveness provides the opportunities to engage physicians in collaborative dialogue about ways in which to work collectively to address these issues.
Discretionary expenses (those other than direct labor and supplies) provide opportunity, as well. Typically less variable than either labor or supply expenses, this category often receives less scrutiny, allowing it to increase somewhat unnoticed over time.
An arena warranting special attention are expenses related to those functions that do not have a readily identifiable unit of service. Often those functions experience disproportionate growth in expenses over time.
At a higher level, the changing conditions provide the opportunity to re-evaluate service line profitability. While there once was a time when hospitals could tolerate under-performing service lines, the tightening of revenue, along continually increasing expenses makes it the right time for identifying historic poor performers and for taking action. Rather than wholesale jettisoning of service lines, the examination of those may provide opportunities for mutually beneficial strategic alliances with those whose core competencies lie in providing those services more effectively.
In addition, the emerging conditions call for instituting systems of sustainability into hospitals' revenue and expense management practices. Such systems require the daily vigilance of leadership and management to execute and monitor effectively. Only in this disciplined manner can attention to expense management become ingrained into the organization's culture. Summary While changing conditions facing healthcare leaders present a time for concern, they also present a time filled with opportunity to return to the basics of attention to managing expenses and daily operations that can produce the levels of operating margins necessary to prosper into the future.
We are pleased to have the opportunity to present this information to you. If you have any questions about how to apply these approaches in your facility, please contact me at 484-356-6486.