John P. Ortiz

At a Glance  

  • A hospital that is seeking ways to cut costs without compromising care should resist the temptation to lay off staff and instead make it a priority to improve efficiencies.  
  • This approach requires a formal program to identify and analyze all of the hospital's processes.  
  • The focus of the analysis should be to determine which activities are being performed efficiently, which are being performed inefficiently, and which are unnecessary.  
  • This effort will achieve the greatest success if it is customer-centric.  

Virtually every industry is still feeling the pain of the recession-still cutting costs and making workforce reductions. Yet these cuts often fail to generate real bottom-line results. This situation is all too familiar to the healthcare industry-and to hospitals, in particular. In fact, the Bureau of Labor Statistics (BLS) recently recorded the second highest number of mass-layoffs in hospitals since 2000. Such a trend cannot continue without serious repercussions on quality of care.

The story is the same for hospitals around the country. When finding themselves in financially dire straits, they often yield to their first impulse, which is to lay off staff. On the surface, this solution makes sense. After all, labor is a hospital's number one expense-reflecting 40 to 50 percent of incurred costs. But more often than not, after just a few months, the hospitals pay for the staff layoffs with an epidemic of inefficiency. Remaining staff cannot keep up with key functions, services deteriorate, and patient complaints begin to rise. Then, to overcome dissatisfaction among patients, physicians, and employees alike, hospital managers are compelled to bring in costly temporary or interim help.

Moreover, an organization that goes too far in reducing the work force ignores future costs of "restarting" after economic conditions change, in terms of recruiting, rehiring, and training costs. As economic conditions improve, this organization will have added costs for rebuilding capacity that could leave it behind its competition.

Avoid a Downsizing Disaster

How can a hospital's finance leaders help their organization effectively cut costs without compromising care? Often, the solution begins with advocating a different way of looking at cutting costs. Despite the strong temptation to lay off staff, a reduction in force should actually be the option of last resort. Instead, the priority should be improving efficiencies-establishing a formal program of analyzing everything the hospital does.

For such a program to be effective, it must be given license to take the time necessary to define every activity in every area of the hospital's operation. Only through such a systematic, and ongoing, effort is it possible to pinpoint those activities that are either inefficient or unnecessary. Evaluating, redesigning, and enhancing processes is a sure way to bring labor costs down naturally, in a way that preserves and even improves the delivery of service. It's an approach already being used by other industries, but the healthcare industry has been slow to adopt it.

For most successful businesses, defining, analyzing, and constantly enhancing their activities and business processes is embedded as standard operating procedure. Typically, organizations will adopt a Lean Six Sigma approach, but whatever approach is used, most have as their foundation well-established methodologies such as activity-based costing and activity-based management. The activity methodology is the key to quickly pinpointing opportunities that ultimately translate into improved service delivery and lower cost.

For this type of program to produce results, a hospital can't teeter around the edges. The approach should be adopted enterprisewide to change an organization's culture and operating behavior.

The problem is that hospital leaders know intuitively that they must monitor and manage their organizations' processes and delivery systems, but they don't do it formally. For one thing, such an undertaking is not easy, especially for hospitals with limited resources and reliance on long-established policies and procedures. It requires detailed planning and an organized approach to continually enhancing processes.

Consider an example of the risk inherent in cutting staff. Imagine that a hospital has decided it must cut its workforce by 10 percent. The first place it is likely to look for reductions is in nonclinical positions, because clinical and service staffers are expensive and hard to find. The hospital might decide to reduce emergency department (ED) admitting staff from five people to three, on the premise that they are not highly skilled, not certified, and don't require much training. But with only two people performing admitting, imagine the impact on wait times and the ripple-effect on care. Eroding service levels eventually could affect the hospital's revenue, as dissatisfied physicians and patients opt for other institutions to deliver or receive care.

In another scenario, imagine the hospital opts to eliminate staff who transport patients between departments, leaving patient transport up to nurses-very expensive staff members. A nurse who once had eight patients may now have 10. There is now a risk that while the nurse is transporting one patient, another patient might begin to have a negative episode. If the nurse is not there to help, what might the results be?

Start Now-Define What You Do

These are just some of the potential risks involved with a premature reduction in force. Before cutting staff, hospital leaders should look closely at operations, without waiting for the organization's situation to degrade financially. Finance leaders should generate swift action by calling for and championing process improvement initiatives. Again, the first step in this effort is simply to define what the hospital does in detail, reviewing each of its processes and identifying all of the activities they involve.

Once current processes have been defined, the next step is to analyze the activities to determine which ones are being performed efficiently, which are being performed inefficiently, and which are altogether unnecessary. Using tools such as activity-based management and Six Sigma, it is possible to create a much clearer picture of these activities and improve the hospital's operations across the board.

If dramatic improvements in efficiency are needed, this process should be mandated across the enterprise rather than isolated in certain areas of the hospital's operations. It should be driven by the board and CEO. Small process improvement projects here and there may provide quick improvements, but they often don't translate into significant bottom-line results.

That this should be an organizationwide effort, with a thorough examination of how things work from top to bottom, cannot be overstated. After all, many inefficiencies actually stem from handoffs from one department to another. Because these handoffs often are not analyzed, they tend to be where the greatest opportunities for improvement reside.

One hospital found such an opportunity through an analysis of its admitting process. The problem was simply that the admitting department lacked a fax machine. To receive orders from physicians, eight or nine times a day, staff would take an elevator up four floors, pull off orders from the nursing unit's fax machine, and then go back downstairs to preregister patients-a massive inefficiency that was easily remedied.

Become Customer-Centric

A critical success factor in improving processes is to have a broad focus. Instead of viewing operations from a bottom-line only perspective, they should be viewed from the customer's perspective. For instance, some hospitals complain about crowded ED conditions and spend money expanding their EDs. A hospital might find that such a step is unnecessary if it simply looked at how it could serve patients differently.

It is important to consider, without judgment, what patients experience from the time they enter your hospital through the time care is complete. Such insight can reveal the greatest opportunities for improvement.

Consider a typical ED visit. For a patient, it involves a significant investment of time. After sitting in a waiting room, the patient proceeds to the ED, only to continue to wait for service. When the service is finally delivered, the patient waits still longer to be discharged. Of all the hours spent in the ED, during how much of that time did the patient actually receive services? In the time the patient occupied the ED room, couldn't several more patients have been helped?

Another common, yet often-overlooked patient complaint is the requirement to reregister in every department. Although hospitals do need to confirm patient identity at every step, they sometimes repeat admissions because their systems are not integrated. Even hospitals that have integrated systems may have antiquated procedures-for example, steps performed before automation was installed that continue even after automation has become habitual. This is the type of inefficiency that drives up the hospital's cost structure.

Obtain Expert Analysis

The stark reality is that most healthcare organizations lack the people with the necessary skills or capacity to do this type of analysis effectively. It requires rigor and a high-level of skill. After all, defining and enhancing what a hospital does goes well beyond simply drawing a map of its processes. For many hospitals, an important option to consider might be to look to an outside resource-an interim executive who can supplement the hospital's executive team with the right level of expertise, without adding a permanent executive to their staff. Such interim leaders, if appropriately qualified, can garner significant results in a relatively short period of time with a rapid, targeted analysis.

There are countless success stories of hospitals being able to cut costs without cutting staff. Hospitals that step back and examine their processes can realize staggering savings and improvements to their bottom line. So before becoming caught up in a misplaced emphasis on staff cuts, hospital finance leaders should take the time to look deeper. In adapting to today's changing environment and looking for new ways of doing business, it's important to remember that quality is not only free-it also actually saves money. A hospital's greatest opportunities for bottom-line benefits and improved care may well be in improving the quality of its processes.

John P. Ortiz is a partner and practice leader, performance management practice, Tatum, Marietta, Ga., and a member of HFMA's Georgia Chapter (


A Case for Interim Expertise  

A university hospital system was adding staff to its central business operation due to an increasing volume of billed cases. However, accounts receivable were rising, along with write-offs and denials. A thorough revenue cycle process review disclosed tremendous inefficiencies.

For example, whenever an insurance company requested additional information for claims, it always had been contacting the billing office, which in turn emailed the appropriate department. Emails were often ignored or delayed, causing an average 60-day turnaround to fulfill the request. During that time, accounts receivable were also stalled.

By simply examining its process, the hospital system found that 96 percent of requests were for information that was already available in one of 26 different computer systems. A new capability was designed for the business office to access all 26 systems, reducing reporting time.

Nearly 100 other wasteful, inefficient activities were identified. After consideration, some activities were eliminated and others were redesigned. Accounts receivable were reduced from 55 days to 37 days in four months. Bad debt also dropped from 3 percent to 0.5 percent, accompanied by $9 million in improved cash flow. And patient satisfaction rose from the 50th percentile to the 90th.  

Publication Date: Monday, October 03, 2011

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead