Operational changes can improve a hospital’s performance and prospects, but time is of the essence.
The challenges many community hospitals face have become so unrelenting as to threaten long-term financial viability. It’s important that this threat be met with prompt action and operational changes that can improve the immediate situation as well as sustainability. A formal turnaround plan includes analyses and actions, and becomes a roadmap to redirect hospitals and help them stay on track to serve as community resources for years to come.
JK: Leaders from ailing community hospitals sometimes don’t recognize the severity of their problems or that certain indicators call for quick, corrective action. Some common alarm signals that leaders may tune out at first include a downward trend of days cash on hand, shifts in patient volume across the delivery spectrum, medical staff dissatisfaction or defection, and even bond covenant concerns. Recognizing that problems need to be addressed and changes must be made is the first step toward improvement.
JK: Typically, the process starts with an operational assessment to evaluate strategy, operations, supply chain, revenue cycle and leadership with the aim of reducing costs and increasing revenue—the tried-and-true formula for financial solvency. The analysis includes a review of data and documents, as well as interviews with board, executive and physician leaders. The process reveals any organizational problems or vulnerabilities that aren’t immediately apparent, and it forms the basis for a turnaround plan, including a detailed action plan. An open mind and fresh perspective are important to be able to see options to go beyond operations as they have always been.
JK: Almost every hospital has room to improve staff productivity. Labor is a hospital’s greatest expense, so optimizing productivity by having the right number and mix of staff can make a big impact. Community hospitals that do not have a productivity tool to achieve and maintain the right staffing levels can typically find savings of 15 to 20 percent in salaries and benefits by implementing a tool. In those hospitals where there’s already some productivity monitoring, implementing a more effective tool or improving processes can result in 5 to 10 percent savings. After labor, supply costs are the second highest expense for a hospital, so that’s another key focus area for cost reduction and savings. Industry benchmarks show that many community hospitals have an opportunity to reduce supply costs by as much as 20 percent.
Assessing revenue cycle is also imperative to help identify, monitor and collect every dollar a hospital is due. Gains can be made in this area by renegotiating health plan contracts, streamlining billing for faster payment, auditing medical record coding and reviewing the chargemaster.
JK: Hospitals can potentially identify significant cost-saving opportunities by comparing themselves to hospitals of similar size and volume. Comparing clinical, operational and financial data also identifies areas for improvement and where to allocate time and money for improvement initiatives. For example, a CHC-managed hospital that recently underwent a successful turnaround had discovered through benchmarking that its staff ratios were higher and its benefits were more expensive compared to similar hospitals. This information prompted leaders to take a closer look at the hospital’s situation, and they found it made sense from a sustainability perspective to downsize staff and bring benefit packages to competitive levels. These actions slashed the hospital’s annual expenses by $5.3 million.
JK: It’s a collaborative process requiring the participation of the board of trustees, executive leaders, physician leaders, and in many cases an outside management firm to evaluate the situation and develop a specific plan of action. As we discussed, leaders of struggling hospitals usually see the need for improvement but don’t recognize the severity of their situation. Because of that blind spot, it’s often external stakeholders or bondholders who set corrective action in motion by seeking outside assistance.