Becker's Hospital Review

12 L ast year, Moody's Investors Service, Standard & Poor's Ratings Services and Fitch Ratings released almost identical reports saying 2014 would be a very challenging year, financially, for hospitals and health systems. Although many providers have weathered the past few years with solid profitability metrics and strong cash flows, expense growth continues to rise faster than revenue growth. Add in value-based contracting, the evolv- ing rates from health insurance exchanges, the impending two-midnight rule, ICD-10 — and healthcare executives may wonder how they can keep the hospital doors open. Here, four hospital CFOs from across the country discussed how they are handling the big revenue squeeze, what they are doing to control costs and why layoffs are increasingly becoming part of the healthcare conversation. The four participants are George Eighmy, CFO of Bristol (Conn.) Hospital; Dan Moncher, CFO of Firelands Regional Medical Center in Sandusky, Ohio; Dave Nelson, CFO of two hospitals within the Western Wisconsin Division of Hospital Sisters Health System; and Rich Rico, CFO of Sky Lakes Medical Center in Klamath Falls, Ore. (Editor's note: Story has been edited for length and clarity.) Question: Today, controlling costs is one of the most-heard refrains from hospital and health system executives trying to offset stagnant revenue growth. What are some of the biggest cost-controlling strategies being implemented at your organiza- tion, and what are the main drivers of those strategies? Is out- sourcing processes, at least those not critical to the hospital's mission, part of the solution? George Eighmy: Healthcare is a rapidly changing and dynamic field. We started using lean technologies and theories to help us with process improve- ment and to really dissect what employees are doing and cull out the pro- cesses they don't need to do anymore. We got rid of the non-value-added processes so we can focus on the value-added services. Labor-related, we need to blow up the old paradigm that jobs are set in stone. Jobs are not set. They have to change and adapt to the new environment. We're a smaller hospital, and we don't have the breadth of expertise in certain areas, and we go out to the market for certain needs. We outsource some coding, revenue cycle components because there are companies that do it better than us. Have we considered outscoring a whole department? No. Some other hospitals in the area here have gone that route and found it doesn't work as well. Dan Moncher: Cost containment and cost control is the number one priority for us and has been for many years. To say there is only one item — we don't really have that, but we are trying to take a more aggressive look at supply chain. We've done studies and have had consultants help us with physician preference items. We've been down those paths. We've also hired a director of pharmacy to help with that…so we're just really getting started on digging and seeing what we can do on our own at this point. We are a Premier hospi- tal and have been with them for 10 years. From an employee standpoint, we believe we're pretty well-staffed. We've al- ways taken the attitude where we don't want to have to make significant, dif- ficult decisions, so we scrutinize staffing decisions on an ongoing basis. We've done that for years. We've seen other organizations go through multimillion- dollar layoffs, and we use that as leverage with our management teams to say that's a path we don't want to go down. We also refinanced our debt in 2012, and we are a self-funded health insur- ance plan. We are inching up the employee contribution, but it's not quite at 25 percent of cost. Dave Nelson: We're doing a lot of same things with GPO contracts, supply chain, pharmacy. We have a lot of high-cost drugs, especially with our neuro programs. For us, we're also redesigning our entire inventory management system to put it in more of an electronic format. At [Sacred Heart Hospital in Eau Claire, Wis.], it's a huge process for materials management, running up floors, taking inventory manually — it's a really inefficient system. We're working with [the Hospital Sisters Health System] systemwide initiative at how we can streamline the supply chain. We've also raised [health] premiums to employees. We've raised deductibles and copays based on several different plans we offer, and we are trying to gauge what's going on with insurance utilization. A lot of work goes into that process. One of things we've also really focused on here is really drilling down and looking at productivity. The biggest cost is staff and labor costs, which is about 50 percent of revenue, so we've put in a couple things…our goal for the organization we've set this year is all nursing care departments have to be at or better than the 60th percentile [for quality and productivity]. Most are at the 50th and below. Our basic measure of productivity is what all people use, FTEs per occupied bed, but we try to look at CMI discharge hours per service, too. We're still high, at least in my opinion: We're at 101 hours per CMI adjusted admission, but last year we were at 108, so we've had an 8 per- cent improvement this year. Rich Rico: The number one area for cost savings is labor. We're constantly looking at how we can be more lean and efficient in all areas, and [labor] is always somewhere you can get better — and we are doing that for most of our departments. We've got a lot of tools we give directors — benchmarking, looking at full-time equivalent per unit of service with our software, seeing how they are doing per pay period, monthly results — and I think it's some- thing that requires more and more work. We actually have outsourced one department. Sometimes, it actually costs more to outsource, and it depends on the situation. We are also preparing for the transition to population health management. It's not quite here yet, but we see it on the horizon. We're getting our ducks in a row and getting capitated contracts of population health management. We've started that process even though it's not making us a lot of money right now. We've also been looking at our infrastructure on water and utilizes, and that's reaping huge benefits for us. We've expanded geothermal, and we've expand the infrastructure for cooling towers. That has reduced our energy usage, and that's the gift that keeps on giving for years and years. Q: Operating margins for many systems, especially smaller hos- pitals, took a hit in 2013 due to lower admissions, reimburse- ment cuts and rising expenses. What can hospital CFOs and fi- nance executives do to ensure the operating margin doesn't get too close to the red right now? GE: That's the $64 million question. Connecticut had a massive cut in Med- icaid last year. All the hospitals were desperately trying to make their bottom line. Streamlining the overhead areas was the first step. We can no longer reduce patient care services. "We scrutinize staffing decisions on an ongoing basis. We've done that for years. We've seen other organizations go through multimillion-dollar layoffs, and we use that as leverage with our management teams to say that's a path we don't want to go down." — Dan Moncher, CFO of Firelands Regional Medical Center

• Cover