Five considerations for improving hospital financial performance

Across the US, hospitals are facing unprecedented financial challenges. In Congressional testimony in April 2023, Ashley Thompson of the American Hospitals Association told lawmakers, “Hospitals’ and health systems’ ability to continue to serve their patients and communities is challenged by substantial resource constraints.”

Thompson further discussed “extraordinary financial pressures continuing to affect hospitals and health systems, as well as access to patient care.” She also provided several sobering data points:

  • Overall, US hospital expenses jumped 17.5% between 2019 and 2022, far outpacing Medicare reimbursement rates, which rose 7.5%.
  • Labor expenses, totaling half the average hospital’s budget, soared 20.8% between 2019 and 2022. Costs for contract labor skyrocketed by 258%.
  • Drug expenses per patient increased by 19.7%.
  • Hospital supply expenses per patient rose 18.5%, outrunning overall inflation rates by nearly 30%.

Not surprisingly, these financial challenges have triggered a seismic wave of closures, shutdowns and bankruptcies nationwide. No region is immune. Cleveland-based St. Vincent Charity Medical Center shut down inpatient and emergency room care. Wellstar Health System ceased operations at its downtown Atlanta Medical Center. El Segundo, Calif.-based Pipeline Health System, which operates seven hospitals in three states, filed for Chapter 11 bankruptcy protection.

But even amid the bad news, there’s hope. Ever since the first US hospital opened in Philadelphia in 1751, our hospital system has shown remarkable resilience through wars, pandemics, the Great Depression, multiple recessions and other setbacks.

Today, hospital leaders (with the help of experienced outside experts) are showing their resilience by becoming more adept at identifying signs of financial stress within their organizations and reacting to them before a worst-case scenario occurs. Recent history has revealed best practices for hospitals and their business partners to carefully consider how to right the ship financially and how to emerge from a challenging situation more robust than ever.

Here are five considerations for improving a hospital’s financial performance and long-term outlook.

1. Perform a bespoke assessment

The first factor to remember is that while many healthcare organizations face similar challenges, there’s no one-size-fits-all approach to addressing these challenges. Every institution is different – even among sister hospitals operating in the same network, each has its own mix of patients, providers and staff, as well as operational and financial idiosyncrasies.

Any hospital leader connecting with outside experts offering a “proven” template for improving performance and optimizing margins should proceed cautiously. In reality, every hospital’s situation is different – and a consultant should approach it as such.

Any engagement should begin with an assessment of the entire operation: clinical, quality, financial and other functions. The goal of this evaluation is twofold: first, to identify the financial drivers of where the hospital has been and where it’s heading, and second, to lay the foundation for a comprehensive plan going forward that aligns key decision-makers on changes and performance improvements that best fit the organization's distinctive needs.

2. Adopt a methodology and set KPIs

As a next step, hospital leaders and their outside consultant must embrace a formal performance improvement (PI) methodology to maximize the potential for sustainable, long-term gains. It’s our experience that most organizations already have a PI methodology in place. Many clinical and/or quality teams may already utilize Agile, Lean, PDSA or similar solutions. The overall performance improvement process can be made much more efficient by adopting the same PI methodology (in a lighter version) for business operations.

Following this decision, the team must clearly define priorities with measurable KPIs. During this process, it’s vital to consider that almost every financial performance improvement plan will require difficult decisions, including (but not limited to) staff reductions or furloughs, reducing or eliminating services and/or divesting assets. Leadership should be clear with outside consultants on its priorities to streamline the process and avoid confusion later. For example, are there any “must haves” that shouldn’t be sacrificed for the hospital’s greater good?

3. Be laser-focused on expense reduction

On the debit side of the ledger, decision-makers and consultants should focus not on quick fixes but on repeatable solutions for reducing expenses. This can begin with finding improvements that cut overhead costs that will quickly drop to the bottom line. For example, a hospital can make capital investments to increase energy efficiency or invest in new technologies. When making investments like these, it’s important to calculate their ROI diligently.

Another tactic to consider is reducing costs for a hospital’s revenue-cycle vendors. An outside consultant can help leaders analyze the entire process to pinpoint where money is being wasted and what can be refined – without compromising vendor performance or their committed resources. This involves examining all vendor relationships, including placement criteria, proposed rates, resources and qualifications to perform tasks and their ability to improve an organization’s clean-claim rate by providing monthly recommendations to improve performance and reduce future placements.

One pitfall hospitals must beware of is outsourcing “smaller-dollar” bills (typically in the range of $2,000 to $3,000). Some organizations automatically outsource these without considering the clean-claim rate for these vendors. As a result, vendors often enjoy a monthly revenue stream without applying any resources to these accounts for the first 45 days. In addition, some vendors charge high contingency rates, when, in reality, they may not even be addressing the majority of these smaller-dollar cases because they self-resolve.

In today’s economic environment, high labor costs are another factor that bears analysis – requiring hospitals to be more strategic than ever about staffing. Any reductions should be performed with a scalpel, not a sledgehammer. If an organization and consultant plan to trim labor costs that reduce specific patient services, they should first ensure this move will not cost the hospital a market position that could potentially be more profitable.  

That said, many hospitals also need to tamp down their desire to be all things to all people in their community. Instead, it’s vital to look at long-term trends in healthcare. Increasing competition for some services will continue to squeeze margins and make them unprofitable. For instance, disruptors have eaten into margins for many cases of hospital-based lab work. Leaders should respond by evaluating whether or not they’re supporting a larger on-site lab staff and environment than needed to meet demand.

4. Drive revenue through smart investing

Cutting back isn’t the only path to improving financial performance. On the credit side of the ledger, improved revenues can result from investing where it makes the most sense strategically. Experienced outside experts can pinpoint where to find that right balance.

For example, some hospitals and consultants have found that adding case management staff to departments can help simplify admissions and expedite discharge planning. This strategy can also improve patient throughput, often leading to more efficient staffing and higher net revenues via better documentation and fewer denials by payors.

Another common strategy for optimizing revenue is ensuring certain charge-capture information is collected upfront and accurately – because the lack of authorization can severely impact revenue. For instance, charges being recorded by the clinician may not align with the charge master’s information on the back end, resulting in inaccurate billing for services rendered or devices distributed to patients.

Outside experts can determine the types of coding and billing problems that staff are experiencing, and thus pinpoint the root causes of these financial issues. Best practices to solve this challenge include deploying solutions such as easy-to-use templates for clinicians to ensure information is recorded correctly on the front end.

Overall, a careful review of clinical documentation integrity (CDI) performance can help eliminate detrimental behavior patterns. For example, clinicians failing to respond quickly to queries or an individual who consistently declines to accept queries when clarification would yield a higher rate. Moreover, it’s important to make certain CDI metrics include the entire inpatient population so that the case mix index is accurate. This also will improve severity-of-illness reporting, which often aligns with the quality department's goals.

5. Underscore the importance of accountability from the top

Even the best strategic performance improvement plan will never achieve maximum impact unless the impetus to change “business as usual” comes from the top of the organization. The C-suite must buy into this evolution and hold each other and their managers accountable. The best outside consultants can act as mentors, coaches, analysts and idea generators. But the hospital must ultimately own these changes, starting at the executive level, because these leaders are the ones who must implement the changes. They’re the ones who should be hardwiring these improvements into the organization so that people don’t revert to prior behaviors.

One approach that tends to work well for many hospitals when it comes to keeping frontline managers answerable is a “tight-loose-tight” framework. The first “tight” requirement involves executive performance-improvement champions setting measurable quarterly goals – reducing billing errors by 10%, for example. The “loose” component refers to educating and reminding managers that they’ve been given the tools to reach these goals, while also allowing them the freedom to implement changes and document them in ways that best fit with how their function operates. The second “tight” factor obligates leaders to validate progress toward performance improvement with complex data and repeatable analyses.

Final thoughts

It’s an undisputed fact that the level of losses being experienced by many hospitals and health systems today is unprecedented. Stopping the hemorrhaging, stabilizing the patient and getting them back on their feet won’t be easy.

Fortunately, many leaders have already embraced this most difficult of cases. They’re working diligently with experienced consultants to design and implement PI plans with an eye toward not only lessening the financial pain, but finding ways to be more efficient and effective that will eventually result in a US healthcare system that’s healthier than ever.

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The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.

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