Proactive healthcare organizations closely monitor operating margins and aggressively address any deterioration to head off serious financial situations. Forward-thinking entities recognize the need to maintain or increase operating margins to deliver on their mission statements. A strong margin allows entities to recruit top administrative and clinical talent, acquire state-of-the-art equipment and facilities and access the debt marketplace.
To keep tabs on the operating margin, an organization must closely monitor a variety of key performance indicators (KPIs) that foreshadow potential operational, clinical and financial concerns. Timely identification of warning signs within these KPIs is essential. Some signs to watch for include lower reimbursement through contract modifications, payer mix changes, reduced volumes through outmigration of services and loss of providers. Increased monetary outlays due to inefficiencies or rising labor costs can also lead to margin deterioration and should be monitored.
Most effective strategy to mitigate margin decline
Not only should organizations look for warning sides, they should aim to uncover the root causes underlying them. Identifying the root causes allows an organization to craft strategic approaches to performance improvement that address systemic issues, which is the most effective strategy for mitigating margin decline.
Successful margin improvement initiatives involve a collaborative and inclusive effort that includes the board of directors, medical staff, administrative and clinical staff and other stakeholders. Such a group can identify and implement initiatives that have a positive effect on clinical outcomes, satisfaction levels and financial performance.
In some cases, organizations may choose to engage a consulting firm to facilitate a margin- improvement initiative. Third-party expertise and available resources can accelerate project goal achievement while allowing organizational resources to focus on their assigned responsibilities. Other times, healthcare organizations use internal resources to design and manage a project. Each approach has strengths and weaknesses, but if the project goals are being achieved, and internal resources aren’t distracted from delivering on their primary responsibilities, either approach can be successful.
Lessons learned from the field
Although organizations might acknowledge the importance of margin control, it may be tough to know how best to approach the effort. Pete Gallagher, senior vice president and CFO at Valley Health in Winchester, Virginia, tackled this question at the recent HFMA Strategic CFO Council meeting in Chicago, offering some lessons learned from a financial improvement project he oversaw in his organization.
View the work from multiple vantage points. Gallagher suggested that successful outcomes are driven by a balanced approach to revenue enhancement and expense reduction. Some of the revenue enhancement opportunities he mentioned included:
- Improving volumes, primarily by shoring up business lost to other healthcare organizations and increasing surgical volume in rural areas
- Looking closely at the self-pay population and using patient navigators to contact eligible patients to get them enrolled in assistance programs
On the expense reduction front, Gallagher advised examining a mix of possible cuts that include labor and supplies. He also noted that cost savings through tighter controls on surgical supplies and group purchasing organization discounts are relatively low-hanging fruit.
Whether staff reductions were worth the negative publicity was another key area of discussion in the council session. Gallagher said his plan eliminated a small number of positions, which unfortunately attracted a disproportionate amount of negative attention in the community. He said the lesson learned was “go deeper or find the money elsewhere.” In the end, his team focused primarily on productivity improvements and better stewardship over positions rather than major FTE reductions. Savings were also made through greater discipline around the use of agency labor and locum positions.
Gallagher noted that his organization avoided pay cuts (and even cutbacks on pay increases) because of the competitive marketplace for labor in his area.
Reimbursement opportunities were also addressed. Gallagher’s team found that achieving rural health clinic status was especially advantageous to his organization where primary care facilities employ doctors in areas designated as medically underserved. He said maximizing opportunities under the 340B drug pricing program is another area to consider.
Track improvements to demonstrate progress. To track performance, Gallagher’s team created a comprehensive project tracking spreadsheet, which incorporated several hundred initiatives that rolled up into four key drivers: volume, payer mix, expenses and joint ventures. Results were tracked on a quality of earnings basis by current month and inception to date. Improvements had to come from reductions in the run rate to ensure sustainability of the savings over time. One of his senior finance leaders volunteered to own the project, and managers had to submit performance data to him prior to the team’s monthly meetings. The spreadsheet also broke out the top 10 positive and top 10 negative variances to show where the main benefits were coming from and where more attention was needed. There was also a CEO top 10 list containing items of special interest to senior leadership.
4 best practices. Gallagher mentioned four factors he felt were critical to his initiative’s success:
- Accountability. Initiatives were organized by business unit with each project led by one of the top 10 executives in the organization.
- Clear targets. Project leaders were given a target number to attain, and it was their responsibility to bring together their respective operating groups and come up with a plan to hit the target. Some systemwide initiatives were parsed out among all the entities but, for the most part, those accountable were given autonomy to develop their program as they saw fit.
- High confidence initiatives. Initiatives selected for the plan had to have at least a 70% or greater confidence level of success. The 70% was a judgmental value thought to be realistic based on past results.
- Aggressive timeline for implementation. Valley Health took about two months to identify, plan and execute the initiatives.
Making the commitment is the first step
The business of healthcare — especially in hospitals — is evolving and becoming more challenging. Tight margin control is a key element to ensure organizations can successfully deliver on their mission statements. For some organizations, a designated turnaround team may be needed to develop and implement a strategic, financial and operational plan. A good plan will aim for high-quality patient care in the lowest possible cost setting and consider both revenue-generating and cost-reducing tactics. By acknowledging the importance of remaining vigilant to the margin and dedicating resources to the work, hospitals can take meaningful steps toward sustainable, mission-driven operations.