VideoTexas Children's has the luxury of a $650 million endowment, though, and a matchless brand identity as one of the premier pediatric hospitals in the world. Still, Nelson watches the cost side of the equation carefully. In fact, she credits the managed-care companies for forcing her, and all hospital CFOs, to manage expenses more aggressively. With 40 percent of the patients at Texas Children's now insured by managed-care companies, Nelson has squeezed costs from both administrative and clinical processes to preserve margins.
On the mission side, Nelson recently spearheaded the hospital's largest capital-investment project since it opened in 1954: a 1.5 million-square-foot, 15-story addition to the original 4-story building, along with a 16-story outpatient clinical-care center. To manage the expansion, she brought hospital trustees, community leaders, and physicians on board early, along with the Baylor College of Medicine, which uses the hospital as a teaching facility. She also sold the plan to credit analysts, securing a AA/Aa2 Standard & Poor's Corp. rating — the highest for any Texas hospital.
What the Community Needs
For other nonprofits, like Boston Medical Center (BMC), the pressure to contain costs is far more intense. The 547-bed acute-care facility, formed by the 1996 merger of two money-losing nonprofits, originally was given long odds in its overcrowded market. But despite continued operating deficits, BMC still serves as a safety-net hospital for many of Boston's poorest residents.
"About 75 percent of our patients are still either insured by the government or underinsured," says CFO Ron Bartlett proudly. Last year, BMC provided $166 million in charitable care, most of which went unreimbursed. One of Bartlett's jobs is to find ways to continue funding services like neonatal intensive care, which will never be profitable for the hospital. "We wouldn't do it from a profit perspective," says Bartlett, "but our community requires it."
Those services get funded, in large part, by cutting costs elsewhere. Since the merger in 1996 (Bartlett arrived two years later), BMC has reduced the number of beds by about 20 percent, and has consolidated back-office functions like billing and payroll, and lab services for physicians. Bartlett also instituted a just-in-time inventory system, using outside vendors to supply logistical support, and hired pharmacy benefit managers to help control costs for prescription drugs not covered by government insurance.
The number of full-time equivalent workers at BMC has remained flat, despite increased hospital admissions. Labor accounts for more than 60 percent of a typical hospital's expenses, and virtually all hospitals have been increasing the workloads of their existing staffs. (Indeed, the war on costs over the last decade has had the unintended effect of driving nurses, pharmacists, and other lower-paid technical workers out of the industry. Many analysts believe that the resulting shortage of nurses, especially, will continue to hurt hospitals financially.)
Bartlett and BMC are not yet out of the woods. "I spend 20 percent of my day thinking about how we're going to survive," he says. Without a bond rating, because of its continued operating deficits, BMC hasn't issued any debt since 1998. And private donations, which amounted to $10 million last year, aren't enough to fund future investments. "We're going to have to spend between $150 million and $200 million over the next eight years," says Bartlett, "and I don't know where the money will come from."
This kind of financial pressure has in part encouraged some fundamental changes in the way hospitals provide services. Thanks to more-effective drug therapies and less-invasive treatment options, for example, 60 percent of surgical procedures are now performed on an outpatient basis, with little or no hospitalization, according to the AHA. At New York Health and Hospitals Corp., the largest municipally owned health system in the country, the average length of stay per admission has dropped by 35 percent over the past seven years, to 5.3 days, says CFO Rick Langfelder. "Prior to 1994, AIDS and tuberculosis were inpatient conditions for us," he says. "Now we treat them on an outpatient basis."
While hospitals generally receive lower reimbursements for outpatient care from Medicare and managed-care payers, their costs to provide such services are much lower. At New York Health and Hospitals, for example, revenues have fallen from $4.5 billion in 1996 to $4.2 billion last year, but lower costs have enabled it to post operating gains in all five years. The huge health- care system has cut its full-time workforce by 11,000 people over the past six years, and has reduced the number of hospital beds in its 11 acute-care facilities by more than 3,200.
The trend toward less-expensive outpatient care doesn't reduce the overall demand for hospital services, though. The number of hospital visits connected with outpatient care has more than doubled since 1980, and after 15 years of declines reflecting the outpatient trend, hospital admissions have been rising again since 1994.
The Power of Flexibility
For investor-owned hospitals, those trends, combined with the aging of the baby boomers, have created a profit environment that analysts say could hardly be healthier. "Commercial and Medicare reimbursement rates are both going up, and demand for services is increasing," says Kemp Dolliver of S.G. Cowen Securities, who has strong buy recommendations on the shares of Tenet, Triad, and Lifepoint.
Reader Comments» Post a comment