Even before the pandemic, economic sustainability was a challenge for community and rural hospitals, given the operational and financial issues they faced daily. The pandemic’s impact has made it even tougher for many to remain fiscally sound. In this environment, community-based hospitals need to do something different, not just better, to attain long-term sustainability.
According to a January 2021 Center for Healthcare Quality and Payment Reform report, more than 800 rural hospitals, or 40% of all rural hospitals in the U.S., are at risk of closure due to financial woes since the onset of the pandemic. The increased economic challenges came as a result of paying high prices to secure personal protective equipment and other medical supplies, along with lost revenue from canceled or postponed medical procedures. Those expenses were in addition to other hospital operational challenges that occurred prior to the pandemic and that still exist, such as stringent governmental regulations, lower reimbursement rates and a trend of declining populations in rural areas.
Though hospitals recouped some losses through the Coronavirus Aid, Relief, and Economic Security Act, this financial relief isn’t expected to last much longer. That means hospital leaders and board members need to find innovative ways for their hospitals to continuously improve their performance—or face the consequences of inaction.
Community Hospitals Need a Plan
When it comes to maximizing a hospital’s performance, there are no quick and easy solutions. Over the years, some hospitals have sought an elusive “silver bullet” to bolster their sagging performance. Examples include launching services not traditionally associated with community hospitals, such as a drug detoxification or rehabilitation centers or laboratory services for tests performed outside the hospital’s market.
These types of services often fail to live up to their potential due to weak patient demand or payers’ refusal to fully reimburse claims for these services, among other challenges. Some hospitals have closed or are expected to shut their doors because these types of solutions did not pan out. The potential risks associated with these approaches are even higher for rural facilities because their operating margins tend to already be razor thin.
So what can hospitals do to boost performance? One approach that has seen success is deploying an operational assessment and action plan. To achieve sustainability, hospitals can plan to make a steady series of improvements—in small increments. The aim of these improvements is to create stronger and longer-term operational and financial performance, and to maximize existing opportunities. It takes a comprehensive operational assessment and accompanying action plan to improve a hospital’s operations in critical areas such as revenue cycle, supply chain, staffing and leadership.
This operational assessment process helps identify specific areas deemed vulnerable, and provides a road map to financial and operational performance improvement. A third-party adviser can help hospital leaders and boards thoroughly evaluate operations and objectively benchmark performance in a way that may be beyond the ability of the facility’s internal team. (See Page XX for more about the operational assessment process.)
Case Study: A Successful Turnaround
A Texas community hospital serves as a good example of how an operational assessment can benefit ailing healthcare facilities. In this case, the county-owned hospital had accumulated millions of dollars in long-term debt. Selling the hospital was considered, but the opportunity was unfavorable. Instead, an operational assessment was conducted in 2010.
The assessment led to the hospital’s $25 million turnaround, which a major credit rating agency cited as one of the reasons for the hospital’s improved creditworthiness. Following the turnaround, the hospital was sold to a large, national healthcare system in a transaction that retired all of the hospital’s long-term debt and supported a foundation addressing healthcare needs in the community.
An operational assessment was also instrumental in turning around a Mississippi regional medical center that endured further deterioration in its financial performance. The turnaround strategy resulted in the center achieving nearly $10 million in cost reductions and revenue gains.
Strategies for Sustainability
As part of the turnaround process for the ailing community hospital noted above, several steps were taken to boost long-term sustainability. Examples of such steps include:
- Review outsourced contracts. Determine which long-standing outsourced contracts can be renegotiated or eliminated to boost cost-reduction and revenue enhancement strategies.
- Evaluate labor costs. Productivity tools can help manage costs that are controllable by setting volume-based targets and assigning accountability for meeting those targets to control labor expenses.
- Analyze supply costs. With supply spend second only to labor costs, hospitals should consider reviewing whether their group purchasing organization offers geographically diverse resources, innovative sourcing, the best service and competitive pricing. The right GPO relationship can offer supply savings from 10 to 20%.
- Examine revenue cycle management. To improve revenue cycle, keep the chargemaster code compliant and competitively priced, and stay current on each payer’s rates and payment methodology.
- Focus on IT. Rural and community hospitals are highly susceptible to cyberattacks, as they often don’t have the internal expertise or sophisticated security systems needed to thwart attacks. These facilities need to determine their vulnerability to cybercrime and create an implementation plan to increase online security. IT also will increasingly become an important strategic business function for community hospitals seeking to improve overall performance.
As community hospitals grapple with the pandemic’s impact and other challenges, a step-by-step performance enhancement plan can steer them away from problem areas and pave a clear path toward stability and growth.
David Domingue, FACHE, is senior vice president, business development, Community Hospital Corporation, Plano, Texas (ddomingue@communityhospitalcorp.com).
What Areas Does an Operational Assessment Cover?
An operational assessment begins with an extensive review of data and documents and one-on-one interviews with hospital leaders, board members and physicians. The process involves a review of seven key areas:
- Operations and expense management
- Management
- Finance
- Physician clinics (when needed)
- Clinical services
- Medical staff
- IT
The operational assessment process detects challenges and root causes in each of these areas so they can be addressed as part of a step-by-step performance enhancement plan.