Hospitals look for ways to reduce expenses

As hospitals and health systems continue to struggle with staffing shortages, lower patient volumes, and increasing expenses, many are searching for ways to cut costs in non-clinical areas.

According to a recent study in the  Journal of General Internal Medicine, hospitals' administrative expenses grew at a faster rate than clinical costs during the pandemic. Between 2019 and 2020, median administrative expenses increased by 6.2%, while clinical expenses saw only a 0.6% increase. This rise in administrative costs may have been due to operational efforts during the pandemic or inefficient cost management.

Ge Bai, an accounting and health policy professor at Johns Hopkins University and one of the study's authors, said, "[Health systems] got some cushion from federal relief, but now that that's gone, they have to rely on their operations to earn money."

Although hospitals are seeing their patient volumes recover in 2023, this revenue is often not enough to compete with growing expenses.

"Hospital margins are near zero," said Lori Kalic, a healthcare senior analyst at professional services firm RSM US. "They're dipping into their reserves to pay their bills. … I think many hospitals needed to do some quick layoffs in the administrative levels — because there's still clearly clinical need — in order to keep their doors open."

Currently, health systems are investing in digital capabilities to automate mundane tasks and help employees focus on core operations. Some of these new technologies include data analytics-driven programs and artificial intelligence, which allow staff to devote more time to higher-level skills.

According to Kalic, as healthcare executives work to enhance their core operations, they must also prepare for the market-share pressure from retail disruptors like Walmart, Walgreens, and CVS Health.

"The more and more success [retailers] have, I think it's going to resonate, and I think folks are going to respond," Kalic said. "I do think that the way that we have been traditionally served will change."

"If the right decisions are made, the right strategic decisions, I think that the strong hospitals will make it through," she added.

How health systems are streamlining their operations

Last week, Monument Health, which is based in Rapid City, South Dakota, laid off 80 employees, or around 1.5% of its workforce. Most of these employees were in corporate service roles such as billing, marketing, and human resources. According to the health system, rising costs in medical supplies and staffing, as well as low reimbursement rates from payers were some of the drivers of the recent decision.

"Our goal is to always be good stewards of resources," said a Monument spokesperson. "This is why we continue to take thoughtful actions to ensure we are providing quality care, achieving our budget goals and positioning ourselves for future growth and success."

In Washington state, Providence restructured its operations by consolidating its seven regional divisions to three last year. It also eliminated some executive leadership positions and revised its shared services model to better support the consolidated operations.

As a part of the consolidation, Providence reduced duplicate operations and eliminated of some day-to-day tasks for its employees. Overall, the restructure aimed to reduce overhead costs and allocate more resources to frontline workers.

"It's essential that we look at every opportunity to create streamlined systems, so that we can have speed to execution," said Providence COO Erik Wexler. "And, in our case, some of these decisions resulted in not only efficiencies, but allowed us to keep caregivers at the bedside."

"Just believing we can continue to do everything that we were doing before and do it effectively with less people is not realistic," he added.

Jefferson Health, a Philadelphia-based nonprofit system, is also planning to restructure its organization. Earlier this year, the health system announced it plans to consolidate its five divisions into three, with a president overseeing each one.

In a statement, a Jefferson spokesperson said the change would "streamline processes and optimize our health system," but declined to comment on any potential layoffs due to the decision. (Hudson, Modern Healthcare, 5/10)

For more than two years, we built out Antares, a model organization that illustrates the effects that different market trends and strategies have on hospitals' and health systems' financial sustainability. Read on to see what we found — and how to make it work for you.