Op-Ed: Cost-Reduction Strategies Help Hospitals Weather Economic Uncertainty

David Markoski In today’s current economic climate, many hospitals are reducing staff to cut costs and balance their budgets. An even greater number are trying to reduce administrative costs to save money for the difficult days ahead and retain their employees.While reducing staff may help the bottom line, it may threaten a hospital’s long-term success by jeopardizing quality patient care and its reputation. Cutting non-salary costs, meanwhile, may save as much—or more—while kick-starting organizational recovery when the economy improves. Since these cost reductions do not compromise patient care or the level of support hospitals provide to their physicians, they create long-term efficiencies that will serve the hospitals into the future.Employee compensation accounts for the single largest item on a hospital’s budget, but the aggregated costs of goods and services are greater. These costs represent dozens of money-saving opportunities—from supply chain management and physician-preference items to service contracts and pharmacy—that can impact the bottom line without affecting patient care.

That’s what Washington Hospital Center, a 926-bed private hospital in the nation’s capital, learned when it carved out more than $4 million from its annual supply bill. Tucson Medical Center, the largest provider of heart and stroke care in its market, cut $12 million in non-salary costs over a 15-month period. And University Health Systems of Eastern Carolina, one of the largest providers in North Carolina, saved money in virtually every department, totaling more than $6 million in 18months.Reducing hospital administrative costs makes sense at any time, but the current economic situation creates new urgency. The Healthcare Financial Management Association (HFMA) reported in January that the recession’s double-punch –declining patient volumes and increasing amounts of bad debt and charity care—is hurting operating margins.While the majority of hospitals are being hit, financial officers at larger hospitals have the most to worry about. More than 30 percent of the executives from large hospitals (i.e. 300- to 500-beds) told HFMA they expect an extreme decline in operating margins and total margin.That scenario prompts any corporate executive to consider the need for staff reductions—and in 2008, many hospital leaders did just that. During that year, a record-setting 112 hospitals laid off at least 50 workers during a single cutback. More worrisome, an October 2008 survey of American Hospital Association (AHA) members found that 53 percent of hospitals respondents said their organization was enacting or considering staff cutbacks.But the fuller picture is that total hospital employment in the United States continued its steady upward climb in 2008. By the end of the year, the hospital industry employed a record 4.7 million workers. The AHA survey reported that 59 percent of hospitals are reducing administrative costs, rather than cutting staff, making this the top choice for surviving the recession.Hospitals that look across their organization for ways to cut spending may be surprised to find help right in their own corridors. Hospitals in Alabama, Georgia, Texas and California have closed in recent months, providing a cautionary tale for health care professionals everywhere. Physicians who historically have been unwilling to standardize their preference items may change their mind now, realizing the financial benefits that come from standardization. Likewise, nursing managers, eager to preserve their nursing staffs, may be eager to help identify non-salary reductions.For example, Washington Hospital Center saved $2.3 million annually on items used in its catheterization laboratory and electrophysiology studies. Digging deeper into its supply purchases, the teaching hospital saved $659,000 on supplies used in surgical services, $161,000 in supplies to support interventional radiology and another $161,000 on general medical supplies.Meanwhile, Tucson Medical Center conducted a comprehensive review of its non-salary spending by looking closely at five separate areas: pharmacy, materials management, clinical specialty services, medical/surgical supplies and purchased services. The review found opportunities to save $1.4 million annually on supplies for its orthopedic surgery program, alone. Tucson was able to dramatically reduce supply costs, saving $2.2 million in support services; $2.3 million in surgical services supplies; $1.2 million in cardiac cath lab; and $2 million a year in pharmacy costs.In a January report about the economy’s impact on hospitals, HFMA Chairman Robert Broadway applauded the resilience of the hospital sector in difficult times: “The market challenges of today could lead to efficiencies and investments that enable hospitals to provide more value to their communities in the future,” he said.

David Markoski is senior vice president with VHA Inc.  He has nearly 30 years experience managing quality improvement and cost reduction initiatives for hospitals. VHA delivers industry-leading supply chain management services and enables regional and national member networks to improve clinical and operational performance. Based in Irving, Texas, VHA has 16 local offices serving more than 1,400 hospitals and 21,000 non-acute health care organizations across the United States.

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3 replies »

  1. I think there are opportunities to cut costs on the hospital staffing side without sacrificing quality. Many hospitals have management structures that add costs with questionable benefit. For that same reason, they are often very slow to make important decisions because of the bureaucracy they’ve created. There are savings to be had by reducing the management ranks.

  2. This would be an impressive list of savings if I didn’t know that, nationally, expenditures for hospital care increased by $100 billion between 2007 and 2009, making hospital costs the fastest growing segment of US health care.
    So perhaps Mr. Markoski can tell us how much VHA hospital expenditures increased or decreased in the same period.
    Roger Collier

  3. David,
    well said. Cost cutting by headcount reduction is the easiest and fastest way to show cost reduction. It however has long lasting negative impact.
    As you mentioned, there are betterways to cut cost: eliminating waste, improving processes (clinical, revenye cycle, and other business) and efficiencies, better asset utilization (both human and machines & facilities), improving quality, and so on.
    Simplest and biggest loss I have seen by some in their implementation HIT products. While these products that McKesson, Cerner, and others offer have a long way to go towards userfriendlyness, robustness, and reliability, the preimplementation work and program management could have made the implementation less risky.
    Some people have lost several millions in these before they realize they needed to re-do.
    We have over 400 years of cumulative experience (thank you very much) in making sure these opportunities are taken advantage of. We never believed in layoffs as a cost cutting strategy and we work with people to minimize and help them get the money from other sources.
    I really really am glad that you are giving a voice to this cause.
    thank you.