Is your back office on the back burner? Don't let proven efficiencies languish

Back-office automation and process improvements have rarely been a high priority for U.S. hospitals. Over the past dozen years alone, hospitals and integrated delivery networks (IDNs) have focused on everything from the Y2K problem to primary medical records system overhauls, and now the push for health information exchanges and meaningful use threatens to keep back-office systems squarely on the back burner.

While meaningful use and other priorities established by the American Recovery and Reinvestment Act are unequivocally important, both hospitals and the federal government are banking on electronic health records (EHRs) to create significant health system savings--when back-office processes represent a smaller but surer bet. With back-office improvements, it's a 90 percent certainty that if you make the required investment, the savings will ensue. With EHRs, almost everyone, up to the president, thinks they will result in hefty system savings, but the hard evidence is squishy at best.

Healthcare lags far behind other industries in effective automation and the use of Lean and Six Sigma business management techniques in back-office areas, including supply chain, finance, human resources automation and asset management, according to "Achieving Strategic Cost Advantages by Focusing on Back-Office Efficiency," a study we recently published in the Healthcare Financial Management Association's hfm Magazine.

Just like any other business, hospitals and IDNs have to run efficiently. But repeatedly, projects to improve back-office processes that "don't touch the patient directly" get the budget axe due to "higher priorities." Yet concentrating on those $10 million-and-under issues, where back-office improvements tend to lurk, is exactly what hospitals and IDNs need to do. Even smaller two-to-three-hospital IDNs with $1 billion in annual revenues can reap annual savings of $2 to $10 million from operational efficiencies alone, and back-office savings can top $20 million or more each year if you include such high-dollar areas as contract management and procurement spend.

In supply chain, for example, the average project for a complete automation overhaul generally takes under a year for most IDNs, and the total investment is typically $2 to $3 million, with paybacks on the 4:1 or 5:1 order. So the amount of dedicated capital is limited, particularly compared to an EHR-type investment, and the returns on investment are significant every time.

Last year, roughly one-third of not-for-profit hospitals reported net losses. However, even in good years, the average profit margin is 4 to 6 percent. So for a $1 billion IDN, adding several million dollars in savings straight to the bottom line can literally make the difference between a loss and a gain.

In addition, when you aggregate across the entire U.S. health system, $10 to $15 billion a year is being wasted in the back office. Implementing health reform is expected to cost $900 billion over 10 years. So if we can save $15 billion annually over those 10 years, that's a reasonably good down payment from something we can absolutely fix. We can achieve those ironclad savings and preserve that money for patient care.

In one glaring accounting example: Most other major industries are in the 30 to 50 percent range for electronic invoice transactions--the auto, electronics and aerospace industries have even higher rates. In comparison, our study found the average U.S. hospital is only doing 4 or 5 percent of their invoices electronically. Yet, best-in-class hospitals are processing 25 to 30 percent of invoices electronically, and they process three to four times more invoices per employee, per year than average hospitals.

While other factors contribute to that processing advantage, the most critical difference is how much they do electronically. Best-in-class hospitals don't have employees pushing paper, losing paper and trying to find paper. In the average hospital, electronic order transactions can reduce accounting labor by three or four full-time equivalents (FTEs). If you extrapolate across the health system, a large number of FTEs can be redistributed elsewhere (e.g., revenue cycle, patient care) for more effective use of labor dollars.

The bottom line is: Hospitals and IDNs should dedicate a set portion of their time, attention and budget to back-office infrastructure and process improvements on an ongoing basis. This will help them drive out costs now, as well as allow them to grow more cost-effectively, as most face another wave of merger-and-acquisition activity. Back-office improvements are easy to identify, and the results are predictable and nontrivial. Every dollar the industry can save rooting out pure process inefficiency is a future dollar for critical patient care. There is absolutely no reason not to begin now. - Jim

Editor's note: Jim McDowell is the senior director for healthcare insight and industry strategy at Oracle Corp. in Phoenix, Ariz.