January 17, 2011

Staying Solvent in a Tight Economy
By David Yeager
For The Record
Vol. 23 No. 1 P. 8

Running a business is never easy, but some businesses are tougher to manage than others. With the economy struggling for the past two years, seemingly every industry has been squeezed—and healthcare has been no exception. For hospital chief financial officers (CFOs), the challenge is twofold: find ways to cut costs while providing the same level of service.

“There are some areas where other firms can simply scale back their costs because demand goes down and they don’t need as many workers,” says George F. Brown, Jr, cofounder and CEO of Blue Canyon Partners, a business-to-business strategy consulting firm. “In the case of hospitals, rarely does the demand go down. The revenues may go down, the paying sources may be under pressure, but the requirements for services are still there.”

Because they have fewer options for cutting costs, hospitals need to keep a sharp eye on revenue and expenditures. Brown says hospitals’ strategies must focus on efficiency. He cites energy use as one area where hospitals have been able to reduce costs in recent years. Although electricity doesn’t cost as much as labor, energy efficiency is a significant source of savings.

Hospitals have also made gains through the use of HIT. Increasingly sophisticated HIT systems have dramatically boosted efficiency over the last 10 years. As a result, quality of care, safety, workflow, and productivity have improved significantly. And there are more potential benefits down the road, in part because of federal incentives for meaningful use but mainly because there are still inefficiencies in the system.

“I think there’s still another significant amount of contribution that can come from creating a more intelligent hospital that integrates the key operations and business systems and, in every way, makes it a more efficient and a more streamlined operation,” says Brown. “I think that many hospitals are clearly alert and attentive to that opportunity in putting the right kinds of adjustments and programs in place to do so.”

One obstacle to making HIT investments right now, however, is the fragile economy. Financial uncertainty makes it harder to find funding for large-capital projects. Brown says many hospitals are taking a wait-and-see approach and putting HIT initiatives on the back burner.

“[The economic climate] kind of works against it right now and, hopefully, as the economy begins to improve and some level of revenue improvement begins to occur, the capital sources—whether they’re donations or borrowing [terms] are a little bit friendlier than they’ve been in the last year and a half—might [become more available to] those programs,” says Brown.

Another area of uncertainty is meaningful use. Although the final rules were released last year, many in the healthcare industry are still trying to digest the changes. Brown cautions that it may take some time before a consensus emerges and allows hospitals to move forward with confidence on HIT implementation.

“Whether you’re talking about hospitals or other categories, such as providers, you’re still looking at a considerable amount of uncertainty as to what are the implications of healthcare reform and the programs that are going to be implemented as elements of that or as changes to that or mandated in the coming political process,” Brown says. “I don’t think I’ve ever heard more statements about uncertainty and looking into the fog and not quite seeing the future very clearly as I’ve heard in the last year in that regard.”

So where should hospitals focus their energy right now? Aside from monitoring meaningful use developments, hospitals need to take a closer look at their customer chain, which, along with patients, includes physicians and payers. Brown believes customer service is going to become more important. He cites the fact that patients are more cognizant than ever of their share of healthcare costs, and they expect to receive value for what they pay. These considerations are already having an effect on markets where hospitals compete with each other. Increasingly, it’s not enough for a hospital to have good doctors; successful hospitals need to position themselves as good firms to do business with.

“Not that any of us are really seeking a trip to the emergency room or to have an operation, but having a positive experience and feeling that you were treated well and it was an efficient operation I think will become more important in the future,” says Brown. “I think you’ll see the same kind of metrics and the same kind of consumer preferences that you’re beginning to see in the nursing home industry, where there’s now publicly reported metrics and a lot of consumer attention to the quality of care being provided.”

To remain financially sound, Brown suggests that CFOs work with their management teams to address two key questions. The first is “what will enable us to make a breakout change to operation costs over the next five years?” Rather than focus on short-term gains, the changes that are likely to have the most benefit will take longer to think through and implement. By breakout change, Brown doesn’t mean shaving half of a percentage point from expenditures; the opportunity exists for much more. If the review is performed methodically and diligently, he’s confident that hospitals will find some opportunities to save money.

The second question that needs to be answered is “what makes a difference to my customers?” Brown says systematically mapping out the customer chain can reveal hidden opportunities. Then assessing how each element of the hospital’s operation affects customer satisfaction can provide the basis for new strategies.

“Thinking through who are your customers, how does each element of the hospital’s operation impact on them, and coming up with a short list of which are the ones that matter and how can we improve them is a good way to gain customer support going into the future,” says Brown.

— David Yeager is a freelance writer and editor based in Royersford, Pa.