Health Care Finance Committee
The last financial year has seen the hospital’s operating costs increase. The increase in costs was exacerbated by the country’s budget deficit among other economic challenges. Like many other hospitals in the country, our organization is moving towards a value-based business framework that will be beneficial to the patients. According to Blake, Channon, Grube, and Sussman (2012), the value-based model entails offering quality health care services at the lowest possible cost.
However, this move comes with its own challenges such as limited health care payments while still being expected to improve health care quality, efficiency, and outcomes for the community. For the hospital to be able to deliver quality health care services in this environment, a committee has been set up to identify ways in which the business can reduce costs while at the same time improving the quality of care that we provide. To this end, the committee has come up with cost cutting strategies as well as ways in which the hospital can improve its revenue.
a). Cost-Cutting Strategies
Transforming a hospital’s cost structure entails rigorously managing the costs to reduce the current expenditure, careful analysis of the businesses and services that the hospital offers, as well redesigning the organization’s clinical operations to attain maximum efficiency and effectiveness. Before the committee endeavored to find strategic methods of reducing costs, we had to understand how cost management opportunities could be achieved. The members of the committee found that these cost management opportunities could be found by:
ü Establishing cost-reduction goals based on the organization’s capital shortfall or otherwise.
ü Utilizing internal and external benchmarks to pin-point potential savings
ü Complementing benchmark data with other sources of information as well as other data analyses
ü Possibly streamlining the hospital’s overhead functions
ü Ensuring that the cost-reduction strategies are in line with the organization’s budgets and plans.
ü Carefully analyzing staffing methods to determine if there is any potential financial waste
ü The committee also endeavored to determine the organization’s readiness for cost-reduction strategies and stringent cost management.
From these guidelines, the committee was able to come up with the following five strategic cost-reduction methods.
1) Using Mobile Apps
The hospital’s attempt to reduce cost can be aided through the use of mobile applications. The committee has observed that it makes more sense to engage customers using the branded mobile applications as more than 70% of the population has a smartphone.
One of the major cost drivers for the hospital is repeat admission. The committee has observed that the best way to avoid repeat admission by constantly engaging with the discharged individuals. Branded condition specific applications help reduce cost by enhancing post-discharge communication, symptom trackers, prescription reminders and providing educational content.
The committee also advocates for the hospital’s use of a branded medication-tracking app. Our hospital has not been left behind in readmission penalties. The committee has assessed the situation and discovered that readmission rates are fueled by the patients’ failure to adhere to the regimens for the prescribed medication. A branded medication tracking application will help improve patience health and adherence to the prescribed medication and regimen. The application will set timely reminders for the patients and help them track their medication dosage and intervals.
The hospital way finding app can also be helpful in reducing the hospital’s number of missed appointments or patients arriving late for their appointments. Missed or delayed appointments result in the loss of money and time for the hospital. The way finding app can help patients locate the hospital, make navigating its parking easier, and enable patients to automatically check in or inform the staff that they may not be able to make it for the appointment.
2) Implementing a salary cap
The committee discovered that a salary cap could help improve the bottom line of the organization. This recommendation is in line with analyzing the hospital’s staffing methods to determine if there are any potential wastes. Wages are a recurring expenditure and the committee found that the wages paid to the members of staff was about 29.6% of the hospital’s net revenue. This is above the national benchmark of less than 25% at the time. The committee also discovered that more than half of the employees were earning more than the national average for their positions. This is in addition to the regular raises that the hospital gives to its employees every year.
The committee also looked at the administrative staff and discovered that 14 met the FLSA test. These were granted the status of exempt employees meaning that they were not entitled to overtime pay. With a salary cap, the committee calculated that the company would save more than $105,000 on overtime alone in regards to the administrative staff. The salaries of all the employees should be analyzed to determine if they meet the national benchmarks with respect to their positions. The committee believes that this policy will improve the employees’ welfare as it gives them freedom and exclusivity. Reducing overtime is less alienating than carrying out layoffs. Better employee welfare will translate to better care for the patients.
3) Reducing the company’s overhead costs
The committee identified toner as one of the highest overhead expenses for the hospital in the office supply category. With this in mind, the committee has recommended that the hospital needs to implement a toner reduction method. This can be achieved by setting all the printers in the hospital to draft mode. The print will come out lighter and with a little more grain than usual but it will still be legible. When coming up with this recommendation, the committee realized that more than ¾ of the documents printed in the hospital would only be seen by the hospital staff then filed into records or thrown out. This means that quality of the documents is not a top priority for the hospital. One or two printers can be set with the default settings. These printers will be able to produce high quality documents for the patients and other external parties. This cost reduction method will reduce the cost of toner by nearly half of what the hospital had to spend last year for the same item.
4) Reducing the cost of inventory
The committee concurs with the findings of Shah (2014) that a hospital will invest a lot of funds and time in inventory management. Inventory is one of the hospital’s largest visible assets and poor management can drastically hurt the organization’s revenues and inventory. Reducing the inventory is not a strategic move as the hospital needs to maintain just the right amount of inventory. The right amount of the asset will ensure that there is no loss of sale attributed to stock outs and that the storage space for the inventory is utilized optimally.
The committee observed essential elements of an inventory cost reduction strategy. These include safety stock, supplier lead times, frequency of orders, obsolete stock, and collaboration. Having safety stock is convincing for a hospital that wants to mitigate the risks of a stock-out. However, maintaining an optimum level of safety stock is difficult to carry out because of the presence of so many variables. Low safety stock can jeopardize the safety of the patients, increase customer turnover, and raise the lost sales. On the other hand, too much inventory can increases the holding costs of the inventory, which negatively affects the bottom line. Therefore, an optimum safety stock is critical and can be achieved by considering the number of product damages, product lead-time, and the daily product usage.
The supplier lead times need to be decreased to reduce inventory-holding stocks and free up inventory holding space.
The committee also advocates for the hospital to negotiate on minimum order quantities with its suppliers. The minimum order quantities should match the quantity demanded. The committee has realized that the hospital is ordering more units of supplies than the actual demand for the product. This has led to organization’s space, money, and resources being tied to unwanted products. Ordering the minimum order quantities will help in the reduction of the inventory holding costs and improving the productivity of the hospital’s inventory.
In addition, the hospital needs to develop a system for removing obsolete stock. There is a lot of redundant stock in the hospital, which has led to the overburdening of the hospital’s space and finances. The management should stop deferring on decisions regarding the processing of obsolete stock.
5) Outsourcing services to maximize efficiency
Outsourcing some essential services is a cost reduction strategy for the hospital. For instance, the committee recommends that the hospital outsource its medical laboratory services to improve efficiency and reduce on costs. These services should be outsourced to professional clinical labs. These labs have the required expertise, their equipment is specialized, and they have access to the latest technology (Barnet, 2015). The clinical laboratories will be able to carry out the medical laboratory services at a cheaper price than if those same services were carried out in-house. The labs will also ensure that quality is given precedence in the provision of medical laboratory services.
b). Ideas on how to increase revenue or reimbursement
Other than cutting down on costs or cost-reduction strategies, the committee has also looked into ways of increasing the hospital’s revenue and reimbursement. Declining reimbursements from Medicare is a major headache for any hospital regardless of size. This is coupled by the reduction in state Medicaid programs and a rise in incidences of uncompensated care. The following are some of the ways that the hospital can increase its overall revenue.
i. Decreasing supplier lead time
As Shah (2014) points out, the lead-time refers to the time between when an order is made and when it is delivered. When a supplier delays in delivering the products, then the hospital is forced to hold more inventory to avoid a stock out. The additional holding time translates into more loss sales. To increase sales and overall revenue, the committee recommends the hospital should negotiate for shorter lead times with its suppliers. This will result in an increase in storage space that could be used for storing productive inventory thereby increasing the hospital’s revenues. Sales will increase due to the reduction in loss of sales.
ii. Implementing an internet marketing strategy
For many years, the health care sector was reluctant to embrace marketing tools because we believed that the patients needed us more than we need them so there was no reason for an integrated marketing approach. This might be true; the patients need a hospital. However, unlike before, when hospitals were the only authority on provision of medical care, nowadays people have access to hospital alternatives like never before. The hospital has to initiate a strategic and comprehensive marketing scheme to ensure that our pool of patients continues to rise.
One of the main ways that the hospital can implement such a strategy is through the use of the internet. In this day and age, a business cannot survive without the use of the internet. Therefore, the committee recommends that the hospital create a new, more comprehensive website, and get rid of the older one. The website needs to be engaging, beautiful, and creates a positive user experience for the website visitors. We also have to utilize search engine optimization so that the patients can find it easily. The marketing campaign will enable the hospital to attract more customers thereby increasing its revenue.
iii. Optimize the revenue from physician referrals
The hospital needs to make it cheaper, convenient, faster, and easier for independent physicians to refer their patients to our hospital as well as to convince them to order their tests and procedures from our facility. This will make it easier for independent physicians to carry out business with our hospital. The goal here is to practically ‘own’ the source of future patient revenues. The committee has recognized this particular weakness in our hospital. It recommends that the hospital should take steps to restructure its referral program. A web-based application can also help the hospital manage its referral program.
iv. Reducing out-of-network revenue leakage
Like most hospitals, ours has become over-burdened with incremental salaries and infrastructure expenses incurred in a bid to hire and retain more physicians that are qualified. Many hospitals have not set up out-of network referrals and this has led to a reduction in efficiency and revenues. The committee has identified that the hospital lacks the capabilities to coordinate care across a network that includes referrals. The hospital is unable to shape referral and ordering patterns, which results in a loss of revenue from the front end. There are web-based applications that are able to capture patient visits that are being lost to other hospitals and similar institutions in real time.
v. Developing a relationship with payors and renegotiating managed care contracts
The hospital is unable to control the underpayments by Medicaid, Medicare and other public payors. However, we do have some control over employer-based and commercial payors. From the committee’s analyses, we found that 32% of the hospital’s revenues emerge from the private insurance carriers/companies. Contracts should be constantly renegotiated and benchmarked against each other. The stagnant contracts should be updated and the hospital should constantly be looking out for carve-out opportunities especially from evergreen contracts. Dialogue is always essential between the hospital and the institution. This will bring in a sense of respect between the two parties and thoroughly increase the revenue for the company.
Finally, the committee recommends that the hospital hold regular meetings with members of staff to identify any other cost reduction strategies or ways to increase revenue for the hospital. The physicians and other medical staff might have some insight into how the financial health of the organization can improve as they have more contact with their peers from other hospitals. They are also the ones constantly doing rounds in the hospital and might have observed how the organization is wasting some valuable resource that the management might not be aware of.
Barnet, S. (2015, March 13th). 3 cost-cutting strategies hospitals should consider. Retrieved on 29/11/2015 from http://www.beckershospitalreview.com/finance/3-cost-cutting-strategies-hospitals-should-consider.html
Blake, J., Channon, B., Grube, M., and Sussman, J. (2012). A guide to strategic cost transformation in hospitals and health systems. Health Research and Educational Trust and Kaufman, Hall & Associates, Inc.
Shah, B. (2014, Nov 1st). Five critical ingredients of inventory cost reduction strategy for hospitals. Retrieved on 29/11/2015 from http://www.z5inventory.com/5-critical-ingredients-of-inventory-cost-reduction-strategy-for-hospitals.html