Hospitals will have to engage in major expense reduction for financial success

Despite relatively dramatic growth in hospital spending over the past year and the expansion of health insurance coverage to millions of Americans as a result of the Affordable Care Act (ACA), acute care facilities still struggle with eroding margins.

Many hospitals were put in a tough place as a result of the Great Recession; many had weaker finances before the crisis and had a tough time recovering after it. And even though Medicaid expansion under the ACA has helped hospitals with their bad debt, it has done little to boost revenue or margins.

As a result, "declining margins coupled with increased demand and utilization have compelled hospitals to implement major cost-reduction programs with ambitious targets," according to a new report by Navigant Healthcare. The report noted that hospitals not only juggle the transition from volume to value-based care, their chief financial officers face mounting expenses while revenue growth is squeezed.

"The highway from volume to value will find many unable to traverse the tough terrain. Transformational cost reduction, therefore, is agenda item #1 in every hospital," the report concluded.

Indeed, Navigant has said such cost-reduction initiatives would be "radical" in nature. A successful cost-reduction program requires leaders to: 

  • Measure total costs for delivering care.

  • Build consensus among old-guard medical staff and employees.

  • Aggressively manage the supply chain by eliminating "physician-preference-driven purchases that might be the result of agreements between physicians and device manufacturers. The recent regulatory crackdown on inappropriate business relationships for implantable devices, stents and others is a wakeup call."

  • Eliminate clinical variation and unnecessary care.

Other industry observers say hospitals will also have to better manage outpatient care because more of its business will be coming through this avenue, and it tends to pay far less than inpatient care.

To learn more:
- read the Navigant report (.pdf)

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