Cost Reduction in Health Systems: Mission Critical
Arnett, Gayle, Frontiers of Health Services Management
COST REDUCTION has been moved to the top of the list of priorities in most healthcare institutions. As Clark, Savitz, and Pingree noted in their feature article, expense management took on a new meaning in late 2008 as patient utilization declined, charity care and bad debt increased at unsustainable rates, and federal and state reimbursements declined. The perfect storm or the "new normal" had arrived.
I am the CEO at a private, not-for-profit, standalone hospital; therefore, my experiences are limited to a single hospital setting. I became a CEO in June 2008. I have been employed at our hospital for 28 years and had been the CFO for 14 years prior to becoming the CEO. In December 2008 two things happened, almost simultaneously. I began to realize that volumes and net revenues were rapidly declining, and I hired our new CFO. We immediately went into cost-reduction mode. We sustained heavy operating losses during the last two months of 2008 and for the first quarter of 2009 before getting the ship turned around. We were able to record positive operating margins in both 2008 and 2009, but 2009 was just at breakeven - an accomplishment that would have seemed abysmal in earlier years. Compared to 2008, projections for 2010 include lower FTEs (by 9 percent) and salaries (by 6 percent). Total operating expenses (excluding bad debt) have been lowered by 4 percent. Bad debt continues to increase. We continue to have a positive (though lower than earlier years) operating margin. We are fortunate to have a senior leadership team that has worked together for many years. Our organization has been committed to a strong budgeting process. Senior leaders are very familiar with each department's operations and FTE budget and we were able work with our management staff to quickly put a plan in place to begin to lower costs. We looked at such things as premium pay and retirement plans. Staffing changes were done thoughtfully and strategically, by not filling open positions, managing staffing on a daily basis, and through attrition. All staff requisitions required CEO approval. Capital expenditures were made for items immediately necessary and for very strategic initiatives. We are fortunate to have a relatively modern physical facility and equipment that has been replaced at regular intervals so we can maintain for the short-term without significant capital equipment outlays. We managed our changes with a financial improvement plan, and reports are provided monthly to our employees and board regarding our progress. Our board, senior leaders, management staff, and employee group have been champions - our people have remained calm and positive and have weathered this perfect storm amazingly well to this point. I am proud of our organization.
During the period of these changes, our board president and I met regularly with individual physicians. We asked each one if the cost-cutting changes that we were making were affecting their ability to care for patients, and each and every one asked said no. This was validation that we had made the cost-cutting changes thoughtfully and strategically.
The feature article by Clark, Savitz, and Pingree focuses on cost cutting without compromising quality care. The authors outline the quality improvement initiatives that their system implemented, and notes that they did so while reducing costs. Quality improvement initiatives are an integral part of healthcare and must be in place. Our hospital uses multidisciplinary teams to address our care processes, and the teams implement evidence-based practices and best practices. We work continuously on the National Patient Safety Goals, the CMS quality indicators, and Joint Commission standards. We use a dashboard reporting process so that progress is tracked quarterly and reported to the board, medical staff, administration, and department directors regularly. We have seen our quality indicators continue to improve during this period of cost reductions. …