Written by Rod Moore

Hospitals face a tight labor market and operating expenses outgrew operating revenue for the second year in a row, according to a recent Moody's Investors Service report. The average operating cash flow margin fell to 8.1 percent last year, down from 9.5 percent a year earlier, according to the report. What makes these narrowing hospital margins even more challenging is most of the low-hanging fruit already has been picked from the savings tree.

Sometimes out of necessity, leaders are pushing their staff to identify cost savings quickly, such as when Lindsey Bradley, CEO of what was formerly Trinity Mother Frances Hospitals and Clinics (now part of CHRISTUS Health) issued a challenge to find $25 million in 10 days. The staff sprang into action and met the challenge through a combination of savings found from renegotiated contracts, reduced length of stay, supply controls and labor management.

The effort would not have happened without a strong partnership with physicians, said Paul Generale, executive vice president & chief strategy and health network officer at CHRISTUS Health.

“The difference was we really embraced the concept of physician leadership,” said Generale. “I really think it's both how you use evidence-based medicine and also the right culture with your physicians, whether they are employed or independent, to create some sort of dyad leadership model.”

Beyond Traditional Categories of Savings

Executives tend to focus their initial efforts to achieve savings on four categories: labor management, supply chains, contract negotiation and patient utilization. However, once those categories are exhausted, hospitals have to enhance revenue in more proactive and diverse ways.

Some hospitals are turning to outside consultants and third parties to find lost revenue or to capture additional savings. For instance, CollectRx, a Maryland-based company, specializes in collecting out-ofnetwork reimbursements on behalf of hospitals. John Bartos, CollectRX CEO, said most hospitals have an opportunity to benefit from aggressively collecting payments for out-of-network care.

“If we're able to improve a hospital’s margins by even one half of one percent, which is the typical opportunity for our customers, overall that's a 25 percent increase in operating margins,”

Bartos said. Another third-party provider targets improved efficiency through better use of electronic medical records data. Care Logistics, an Atlanta-based company specializing in hospital operating systems, optimizes efficiency and builds staffing based on demand.

Samantha Platzke, senior vice president of system performance and chief financial officer said hospitals on average, have realized annual financial improvement of $19 million using its system. “Depending on the size of the hospital, improvement could range from $6 million to as high as $55 million per year,” Platzke said.

Generale said CHRISTUS has found success with many of their third-party vendors, but he warns that progress does not come quickly. “You have to do something other than cutting supplies and labor or purchased services or re-doing housekeeping and EDS,” Generale said. “If you don't have that culture already, it's not going to happen overnight. But I do think they add value.”

Market Forces Necessitate Creative Solutions

With shrinking reimbursements, hospital leadership is increasingly being asked to find new ways to address financial constraints by eliminating inefficiencies and finding lost revenue opportunities. Since pursuing new revenue sources is not always realistic, this process can be rewarding despite the difficulty. Phyllis Cowling, FHFMA, president and CEO of United Regional Health Care System, Wichita Falls, and chair of the THA board of trustees, said paying close attention to further disruptors will be a critical component to maximizing revenue in the future. “I think we have to be very alert to what is happening in some of the disruptive technologies and the new entrants into the health care field that can do some things more efficiently than we can,” Cowling said.

While hospitals have begun pursuing potential partnerships, other hospitals are investing in extended outpatient care to capture additional revenue. Expansion into outpatient care has been a response by some hospitals seeking to capture more revenue.

However, Cowling said individual markets influence what kind of approach is needed because of the entry of more non-hospital participants. “In Texas for example, we have independently owned free standing emergency departments that we have to figure out how to compete with and I think that's more prevalent in urban areas,” Cowling said.

In order to compete, hospitals are rethinking the who and where of health care delivery. The result is creative solutions to gain back lost revenue that can help keep necessary services in Texas communities – both large and small.

For instance, Brownwood Regional Medical Center established a mobile cardiac catheter laboratory in 2016 to treat cardiac patients effectively. The lower-cost service established the case for a more permanent in-house solution

Generale said rural hospitals are more receptive to satellite services since their facilities often are not as extensive as larger hospitals in service lines such as cardiology or urology, for example.

“In Northeast Texas we're talking to two or three rural hospitals since we have a large cardiology program to allow us to rotate a satellite there,”

Generale said. “It’s not to steal those patients, but because (those hospitals) need to maintain cardiology. We do a lot of outreach with rural hospitals because it doesn't matter how effective operators they are, based on reimbursement and payer mix, it's often difficult to stay open.”

Integrating physicians into hospitalwide cost-savings measures takes patience and establishing a culture of collaboration, said Generale.

Ultimately, Generale said, meeting the needs of the community takes precedence over cutting service lines to boost profit margins. “We look at the service lines in the contribution margin and we know which areas may not be doing well, but if there's a community need, we're not going to cut it because it's telling us in some way, shape or form that we have to be here.”

United Regional also benefited from taking a co-management approach with its hospitalists and subspecialists in both surgery and cardiology, but its decision emerged from close data analysis.

“The areas where we worked with our existing physicians to really expand the product line, we didn't do that indiscriminately,” Cowling said. “We looked at the volumes that were exiting our community and going to the Dallas-Fort Worth area — about two hours away. Basically our revenue approach was, ‘Let's recapture what is exiting our market.’”

Generale sees the same potential for synergy with physician-owned ambulatory surgery centers. “If you have an ambulatory surgery center across the street, since a lot of them are physician owned, maybe start there because that is going to improve quality, and increase profitability. It's amazing how physicians get aligned around those,” Generale said. “Then see what you're able to take from your ambulatory services and place into your inpatient or hospital.”