Are hospitals still feeling the budget crunch?

Written by Jay Freemont

As U.S. hospitals struggle to do more with less, a growing number of these institutions will find themselves in a budget crunch. Complicating the short-term outlook are uncertainties about how and to what extent Obamacare will affect their operations and bottom line.

Although uncertainties abound about the effects of the Affordable Care Act (ACA), one thing seems clear, according to Shelley DuBois, a staff writer for The Tennesseean in Nashville. In an article that appeared in USA Today, DuBois says that hospitals are moving into a new era in which they will be rewarded more for the quality of the care they provide than for the volume of patients that they treat.

Focus on Successful Outcomes

Of this sea-change in the way hospitals are rewarded, DuBois writes: "As this transition occurs, hospitals must live in two worlds -- one where they still earn money per procedure and another that views the treatment of patients in a more holistic way, with successful outcomes the most important measure of a hospital's performance."

One of the yardsticks for determining quality of care is built into the ACA's Readmissions Reduction Program, which will penalize hospitals that have above-average readmission rates for patients treated for heart attack, heart failure, and pneumonia.

Penalty for High Readmissions

According to an article in Gallup Business Journal, penalties for excessive readmissions for fiscal year 2013 involve reductions of 0.01 percent to a maximum of 1.0 percent of a hospital's Medicare reimbursement revenue. Penalties increase to a maximum of 2 percent for FY2014 and 3 percent for FY2015.

These changes will put additional financial stress on hospitals with dangerously thin operating margins and make it more important than ever for them to take steps to cut costs.

In an article written for Time's Health & Family section, Dr. Toby Cosgrove, president and CEO of Cleveland Clinic, said his institution, one of the most respected in America, has found an ingenious way to reduce the cost of its equipment and supplies.

Educating Staff about Costs

While the hospital continues to focus primarily on delivering the highest quality care possible, it has been able to achieve dramatic savings by making its doctors and other hospital personnel more aware of the relative cost of the materials and supplies used in their procedures.

Prior to instituting this in-house program to raise doctors' awareness about price differentials, Cosgrove wrote, "most surgeons never [knew] that the stitch costs $5 and the staple costs $400. Traditionally, knowing the costs of a stitch or a catheter or a bone screw -- or any of the thousands of other supplies used during surgeries -- hasn't been part of many doctors' medical consciousness."

Significant Savings Realized

By asking doctors to better acquaint themselves with the cost of supplies, Cleveland Clinic was able to realize savings of $100 million after 18 months and $155 million after three years, according to Cosgrove.

In an article written for Becker's Hospital Review, Bob Herman detailed some other cost-saving strategies that have worked for hospitals around the country.

On New York's Long Island, South Nassau Communities Hospital of Oceanside was able to cut $75,000 from its annual inbound shipping costs that had previously averaged $500,000 annually. The hospital was able to negotiate more financially beneficial shipping contracts by leveraging its buying power with carriers.

Health Benefits Costs Cut

At California's Community Hospital of the Monterey Peninsula, savings were achieved on the institution's health benefits plan, which was taking a rapidly growing share of the hospital's budget.

The institution moved aggressively to promote the health and welfare of its employees, offering financial incentives to employees who are active participants in the hospital's wellness program or who complete or show improvement in five main wellness categories.

The hospital also instituted programs to help employees with chronic health problems, such as diabetes and asthma, better deal with these conditions to reduce health emergencies.

Beaumont Health System in Royal Oak, Michigan, made changes to its landscaping and irrigation systems that resulted in savings.

Low-flow sprinkler heads were added to the irrigation system, and some plants, particularly those that require high amounts of water, were selectively removed from the landscaping plan.

Beaumont also achieved savings by making changes to its lighting system. Unnecessary lighting in certain areas was removed altogether, the number of bulbs in multi-light fixtures was reduced, and light switches were installed in rooms and areas where lights don't need to be on at all hours.

These are just a few of the ways in which hospitals can reduce overall costs.

Each institution should do a top-to-bottom evaluation of its expenditures to look for areas in which costs can be cut.

About the Author: Jay Fremont is a freelance author who writes extensively about a wide array of business and personal finance topics, including tips on where to access free financial software.