Becker's Hospital Review

Save the date! CEO Roundtable + CFO/CIO Roundtable — November 18-19, 2015 — Chicago. Please call 800-417-2035 to register. 10 Challenge 2: Understanding the cost of care Understanding cost is a problem plaguing the entire healthcare industry, but it is an especially burdensome issue for cash-strapped community hospitals. The migration toward value-based care has accelerated the need for hospitals to understand their costs. However, even in a fee-for-service world, it is vital that hospitals have a deep understanding of cost information. All hospitals have cost information, but it is in the general ledger and it is not manageable to look at. For instance, when looking at the information in the general ledger, hospitals cannot determine whether a service line is profitable or whether one physician is higher cost than another. To take a deeper dive into cost information, hospitals need a cost accounting department or cost accounting tools that allow them to look at the informa- tion on a more granular level. Addressing the cost of care issue Implementing a cost accounting system is expensive, and doing so may seem out of reach for many community hospitals, according to Ms. Arduino. How- ever, this investment should be a top priority, as it could make the difference between a hospital staying financially viable or having to close its doors. Looking at the cost of each component of patient care is necessary for insurer negotiations. "Negotiating with payers is a daunting task for community hos- pitals," says Ms. Arduino, but with accurate cost information these facilities have more clout at the negotiating table. Cost information is not only needed in dealings with payers, but it is also necessary for hospitals to carry out successful cost-cutting plans. To have constant access to this information, community hospitals need to implement tools that allow them to monitor their costs in real time on a daily basis. To stay financially viable, hospitals must "tightly control" cost per day or case or visit, according to Kanner Tillman, PhD, CFO of Sherman Oaks (Calif.) Hospital & Encino Hospital Medical Center. If the resources are absolutely not available to update IT systems, there are other less-costly options, such as outsourcing. However, there is some hesi- tancy for hospitals to outsource, according to Ms. Arduino. When hospitals outsource, they give up a level of control in the process. Challenge 3: Significant capital expenditures With the financial pressures community hospitals are up against, investments needed to stay competitive and compliant with federal regulations can be a tremendous burden. There are significant technology investments hospital needs to make — from implementing or updating an EHR system to upgrading a revenue cycle sys- tem. Even with the federal government offering several special avenues of support for small and rural hospitals in purchasing health IT products, in- cluding grants from the Health Resource and Services Administration and other agencies, community hospitals are shifting their capital expenditures from infrastructure to technology. For instance, Shenandoah (Iowa) Medical Center CFO Matt Sells recently said more than 75 percent of his hospital's capital allocation for 2015 has been set for technology. Although 75 percent of the capital budget devoted to IT is a one-year item for Shenandoah Medical Center, as the hospital is implementing a new sys- tem this year, the continued investment needed to maintain and update the system in future years will encompass a very significant continued invest- ment in IT, which is certainly fiscally burdensome for community hospitals, according to Mr. Sells. Unfortunately, with such a high percentage of their capital allocation going to- ward technology, some community hospitals are delaying clinical investments. Addressing the problem of sizable capital expendi- tures Outside of technology upgrades that are required by regulations, commu- nity hospitals should prioritize technology investments based on bottom line impact. For instance, if a hospital's revenue cycle management system is so dated it is impairing bottom line performance, that upgrade should be a top priority. For independent community hospitals that do not have the means to finance these crucial investments, joining forces with a larger system for access to more capital resources is an option. These partnerships can take a variety of forms, from mergers that involve a larger system acquiring the hospital's as- sets to an affiliation, which provides community hospitals with the benefits of sharing resources, while avoiding some of the pitfalls of a merger, includ- ing significant legal costs and losing local control. Key considerations for community hospitals looking to merge If a hospital is considering a merger, the first step in the process is determin- ing whether there is a larger system in the area the community hospital wants to join forces with. "There are areas in the country where they don't have forward-thinking larg- er systems," says Ms. Arduino. In those areas, a community hospital may be better off staying independent. Community hospitals should only team up with systems that have a vision for providing care in their region, because even when partnering with a national system, community hospitals must still serve their local markets. To avoid losing touch with the communities they serve after joining forces with a larger system, community hospitals need to ensure the needs of their markets are still considered after the deal. First, the hospital needs to make sure the system structures the board in a way that allows it to maintain some power. Second, the community hospital needs to ensure there are open lines of com- munication. "If there's no mechanism of communication from the community level to the upper level or the communication is ignored, then the community hospital board is definitely disenfranchised," says Ms. Arduino. There are a few other key considerations when partnering with a larger system, such as which services to keep local. "It is important to keep core services such as emergency care, urgent care and obstetrics local," says Mr. Charleston. "The larger health system can provide specialty acute services such as oncology and neurology." Is affiliation a better option? By providing a low level of integration, affiliations are a viable option for community hospitals. Through affiliation with a larger system, a community hospital can gain access to capital resources, enhance the services it offers and preserve its connection with local residents. When considering an affiliation, not just any system will do. For instance, if a community hospital is thinking about affiliating because its IT systems are outdated, the hospital should look for a partner that has access to the IT capabilities the hospital is seeking. As with any form of partnership, when considering an affiliation, community hospitals should also look for a partner that has a similar culture, as culture can affect every aspect of a business from financial performance to employee engagement. Challenge 4: High levels of bad debt Bad debt consists of services for which hospitals anticipated but did not re- ceive payment for. The increasing popularity of high-deducible health plans and newly insured patients going to the emergency department for care that could be provided in a less-costly setting are causing bad debt to remain a major concern for healthcare providers, including community hospitals. One factor causing bad debt to rise is the underinsured problem in the U.S. In a Commonwealth Fund survey of approximately 3,000 adults ages 19 to 64 who had at least one full year of insurance coverage, 23 percent were found to be underinsured. The Commonwealth Fund considers underinsured Ameri- cans those who spent 10 percent or more of their household income on medical bills in the past year or had a deductible of at least 5 percent of their income. When patients can't afford to pay for their portion of the medical services they receive, that leads to more bad debt for community hospitals.

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