by Frank Brady
Significant financial opportunities are available for hospitals that reorganize business lines and organizational structure. Today’s revenue and expense trends make this critically important.
Outpatient revenue has been growing for decades. Among our clients, as a percentage of total revenue the range runs from about 50% in larger hospitals to 90% and more in rural and critical access hospitals. Outpatient revenue is at risk of loss to a growing array of non-hospital providers. These include imaging centers, surgery centers, outpatient rehab centers, urgent care centers, and rapidly multiplying retail walk-in clinics such as those operated by Walmart, Walgreens, and CVS. Retail clinics pose a direct threat to the physician practices that hospitals have been rapidly acquiring. The shift of insurance costs from employers to employees, increased out-of-pocket costs, and mandated price transparency create a competitive disadvantage for hospitals, accelerating the loss of primary care revenue.
Hospitals must act to resolve legacy-based competitive impediments.
- Span of Control: The hospital should be structured around span-of-control principles. Managers should be responsible for about 6 to 8 key result areas. A span of control that is too wide produces burnout and inadequate management. A span of control that is too narrow produces micromanagement and under-utilization of expensive management talent.
- Structural Tiers: Flatten the organization’s structure. Too many layers will fragment service delivery, impair communication, obstruct feedback loops, and spawn information silos
- Functional Fragmentation: Unnecessary specialization fragments the management process.
- Corporate Structure: Many hospitals are organized as Section 501(c)(3) charitable organizations under the Internal Revenue Code. Hospitals are generally bound by state licensure requirements which vary from state to state. Finally, many voluntarily participate in programs offered by the JCAHO, CAP and other accrediting organizations. All of these factors add to service costs and reduce options.
- Third Party Payer Participation: Forty percent of hospital charges result from participation in the Third Party Payer System as is a significant portion of operating expense. Non-hospital organizations offer services at lower prices because they are sheltered from these factors.
The proliferation of non-hospital competitors proves that it is not necessary to be a hospital to provide a growing menu of outpatient services. Nothing prevents most hospitals from spinning off corporate entities unencumbered by the hospital’s cost and pricing structures. Opportunities will vary, but many existing and new services can potentially be outsourced to those entities at competitive costs. Of course, the net benefit of any proposed new structure must be carefully evaluated in advance.
Many hospitals are operating with legacy structures that were established years ago and haven’t been modified. As a result of PPACA, related mandates, and a resulting need to upgrade information systems, management teams have calendars that are impossibly full of “must do” initiatives. Notwithstanding those demands on time, the potential for significant bottom line impact should move structural planning to the top of the hospital’s financial priority list.
Mr. Brady is President of Brady & Associates. Read his bio here: http://www.bradyinc.com/about-us/