At the Margins

Our latest insight into health care margin improvement efforts

Poor surgical planning is costing you—and your patients

John Johnston, CPA, MHA , Sharon Ward, RN, MS, CEN October 10, 2016

With competition for surgical referrals intensifying, many hospitals have streamlined the process of getting patients from the surgeon’s office into the operating room (OR). A reduced lead time may be advantageous for a healthy 25-year-old who schedules elective knee surgery, but not all patients benefit from such a compressed timeframe: An unintended consequence of the well-oiled scheduling system is that it leaves the most complex patients—the elderly or those with chronic conditions—unprepared for surgery and at greater risk for complications, a longer inpatient stay, costly readmissions, and a higher-cost surgical episode.

With rising performance penalties and more payment tied to risk, some hospitals are recognizing the need to create a separate, more involved pathway for those high-needs surgical patients. This model—the perioperative surgical home—is capturing the attention of hospital leaders who are struggling with surgical costs and outcomes and are looking for an innovative approach.

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Why liquidity matters: On bond ratings, borrowing costs, and default risk

Trevor Goldsmith September 30, 2016

Although many hospitals and health systems are struggling with the demands of payment transformation and a rapidly evolving and increasingly consumer-oriented market, aggregate total margins in the hospital industry are in fact at a 20-year high, hitting over 8% in 2014. Plenty of organizations are using the cash to bolster their financial reserves. But hospital executives—often motivated by board members concerned about maximizing their service to their communities—frequently question the necessity of adding to rainy day funds.

So without attempting to settle the question of how much liquidity is enough (it will vary by organization), we’d like to offer some thoughts on why liquidity matters in the first place. To do so, we are going to need to consider the interaction between hospital finances and the credit market.

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Need to cut costs? You may be looking for savings in the wrong places.

by Jenna Koppel September 23, 2016

Hospital and health system leaders are always telling us they need to cut costs. In 2014, nearly 80% of health system executives reported goals to cut costs at their facility by at least 5% across the next three years, and 19% reported they needed to cut at least twice that amount.

Cutting costs is always difficult, but many executives make it even harder by using the wrong approach to identify areas for cost savings. All too often, leaders set targets based on current budget allocations. So, the biggest budget categories are expected to yield the bulk of savings. (For example, if salaries and benefits accounts for 50% of the budget, leaders often expect about 50% of total savings to come from salaries and benefits.) The problem with this approach is that it doesn't provide insight into the opportunity for savings within each category.

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How to build a revenue cycle that works for your patients

James Green August 29, 2016

Let’s think about your hospital’s revenue cycle for a moment. Was it designed to get work done as efficiently and cost-effectively as possible? I suppose most of you would say yes. Would most of you also agree that it was designed with the highest regard for the patient financial experience?

It’s no surprise that most hospitals have designed their revenue cycle to fit their own workflows. But making things easy for ourselves is no longer enough. Patients find our "efficient" workflows frustrating and confusing. In fact, clumsy billing and collections processes may ruin their overall experience, regardless of our clinical excellence.

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Are your surgeons using a $500 item when a $140 item will do?

Rebecca Beattie August 15, 2016

As your hospital faces declining reimbursement and shrinking margins, you can’t afford to waste money buying more expensive supplies that don’t translate to better outcomes.

However, few surgeons even consider costs when selecting preference items, largely because they are unaware what the costs are. A recent survey of orthopedic surgeons found that only 21% were able to estimate their implant costs with +/- 20% accuracy. If your surgeons fall into the “unaware” category, simply sharing cost information with them can be a great place to start.

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The credit ratings factor CFOs often miss

Trevor Goldsmith August 12, 2016

Hospital credit ratings evaluate the likelihood that a hospital will repay its creditors. Maintaining an excellent credit rating is essential for securing access to capital at favorable interest rates.

Most finance executives are already familiar with the quantitative metrics connected to a good credit rating such as days cash on hand and revenue growth rate. But CFOs should also be aware that credit scoring methodology includes qualitative components and that rating analysts exercise an important degree of professional discretion in judging these components. CFOs should prioritize creating healthy and transparent relationships with ratings analysts in order to leverage qualitative factors.

To learn more about the qualitative aspects of the credit rating process, we recently sat down with two leaders who have extensive experience in advising hospitals on debt management: Pierre Bogacz and Bruce Deskin, managing directors at HFA Partners, an independent registered municipal advisory (IRMA) firm for hospitals and health systems. Here are three key lessons we gathered from our conversation.

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Why IT is crucial in managing risk of Medicare Advantage plans

John Kontor, MD August 4, 2016

Provider organizations that take on financial risk know margins depend on accurately accounting for patient complexity. However, monitoring that complexity is starting to play an important role for individuals and organizations with almost any kind of relationship with Medicare.

Skimping on the effort it takes to accurately account for patient complexity leads to what most providers simply can’t afford: inadequate reimbursement for the services they deliver to the sickest patients.

Centers for Medicare and Medicaid Services uses a method of accounting for complexity called Hierarchical Condition Categories (HCC) to adjust payments for services provided to Medicare Advantage (MA) beneficiaries. HCC codes correspond to billed diagnoses and their projected treatment costs.

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How to navigate—and budget for—a new frontier of hospital staffing

John Johnston, CPA, MHA August 1, 2016

There was a time when hospital departments, from the operating room (OR) to intensive care, could follow some basic rules to staff effectively according to industry benchmarks.

But hospitals that have been on workforce “autopilot” these past few years are finding that benchmarks have become more aggressive. Moreover, hospitals are faced with a new set of clinical and administrative roles that simply don’t fit the old model of “worked hours per unit of service.” All of this adds up to new challenges for maintaining a sustainable cost level for a hospital’s biggest expense and most valuable asset.

To get that discipline back and design a labor strategy that accounts for a changing workforce, hospitals should consider the following recommendations.

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