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Hospitals are facing unprecedented opportunities (and challenges) on a number of different fronts: rapidly evolving healthcare reform, lifestyle changes of baby boomers and an array of emerging technologies. The explosion of mobile technology, social media, broadband and other technology is transforming the healthcare industry and its customers.

There are no less than 20 financial ratios relating to profit. For the sake of this blog, we are going to focus on operating profit margin which we are defining simply as Operating Revenue minus Operating Expense, divided by Operating Revenue. It is common sense that hospitals have two levers to pull for increasing profit: Maximizing Revenue and Minimizing Expenses.

Let’s take a more careful look at the anatomy of profit. We will begin by dissecting profit, layer by layer, to uncover the specific actions necessary to improve the metrics and reach the desired level.

The list of these “Profit-boosting” initiatives (Marked in Yellow boxes) are not exhaustive but is a decent start for any Hospital/Medical center administrators. We will go through each of the eight levers here. Starting from the “Top Line”, aka Revenue, we can either increase the price or volume, sometimes, both.

• Focusing on higher valued services: For higher values of services, hospitals need to conduct a profitability analysis by procedures, assets, department, treatment codes… Needless to say, one should look at cull the lower valued services and direct resources to higher valued services as the resources in the form of beds, operating theaters, doctors and nurses are limited. Along the same line, one is advised to focused on the profitability rather than just the price for each service as some high priced services may need the support of many resources. One might want to focus on one specialized in and extract value out of the core competency. For example, for many of the outpatient procedures, hospitals, usually specializing in inpatient care, are better off partnering with local surgical center or clinics to provide the outpatient services in the most cost sensible setting.
• Negotiating the best possible Managed Care Contract terms: If the reimbursement target for procedures were below the cost to start with, no matter what one tries, the profitability goal is unattainable. Although the rationale is easy to understand, it is easier said than done as it requires the administration to know the cost by procedures on regular basis. This capability has to be built on a well architected data collection system and process &procedure design that accurately tracking the service cost along the end to end care cycle.
• Introducing new services: To broaden income stream, hospitals should regularly check the local market and overall industry progression to identify new services to be introduced into the repertoire. This initiative is also heavily dependent on data analysis, with a focus on external resources. In addition to obtaining insights from professional associations, hospitals can obtain local market insights from boutique healthcare consultancies with local focus like Medology360.
• Inviting more doctors and expanding alliances: Doctors and the provider network is really the core asset of a hospital. Given the nature of medical services, patients are more loyal to their doctors rather than a hospital. To grow the top line, the hospitals need to attract more doctors. Not only they bring more patient, thus more revenue, they also help to amortize the hospital capital expenditure so that the per case profitability will improve. To attract more doctors, hospitals not only need to compete on facility, financial compensation, but also support for doctors to focus on delivering care to patient, including more research, exchange and shield/minimize from administrative duties, even help enhancing their own career progression. We are talking about well-trained supporting staff, seamless integration of each steps of the care provision, even personal concierge services such as dropping off, picking up laundry and providing child care for doctors who are on duty. The hospitals can learn a lot from other professional service firms in this regard. The newer breed of hospitals vying to “reimaging the healthcare provisioning”, e.g. Walnut Hill Medical Center in Dallas who is already providing concierge services to its patients, might be the earlier adopters of “Concierge for Hospital Staff”, as already a very soughted-after hospital.

For the alliance partners, one needs to focus on how to improve its infrastructure and processes to be “easier to do business with” and “play fair”.

The last four initiatives are associated with cost containment. With mountains of literatures on the overblown Healthcare cost, there are myriads space for “tighten things up”. Starting with variable costs:

• Implementing flexible, real-time driven staff scheduling: As human resources accounts for a major part of the variable costs for a hospital, it shows immediate effect to the bottom line when one starts managing the staffing more “tightly”. Most of hospitals today are equipped with comprehensive patient throughput data, which allows for more accurate predicative analysis for staffing plan. This staffing level optimization has extended from nursing staff to emergency room doctors.
• Outsourcing non-essential services: Many hospitals have outsourced their housekeeping, cafeteria. What we are pushing here is to outsource departments that, according to careful analysis, are not the main revenue generator (or an integral part of a service line) or prohibitively costly on per treatment level. For example, we see hospitals outsourcing their dermatology, psychiatric department when the main focus is on cardiovascular diseases.
• Sharing the cost containment agenda with all staff: As the care for each case is executed by multiple personnel, it is prerogative that management clearly communicate the necessity of minimizing waste at every service points, for the long term sustainable quality, affordable services to the community.
• Utilizing the key assets more efficiently: Another big cost item is the “expensive” equipment such as MRI, and more “expensive” departments, such as Operation Theatres. Similar to the staff scheduling, hospitals can closely monitor the utilization of these “expensive” assets and adjust the schedule more frequently. This initiative also requires the full cooperation from doctors and staff: They need to understand the need to be “punctual” with start and end time for the use of particular asset. However, given the variability of each patient situation, the treatment time may vary. This is where the diligent data collection can help. The estimated session time tend to be closer to actual based on more data.

The list can go on but at the end of the day, the bottom line improvements cannot be achieved consistently with discrete and disconnected initiatives. It calls for streamlined care, improved patient and family satisfaction, simple back office operations via improved clinical documentation and efficient use of resources and assets to reduce variable cost without sacrificing the quality of care.

In conclusion, profit is not a dirty word. Efficient operation management not only saves hospitals profit, thus its longer term sustainability, but also saves more lives with the “freed-up”, “Saved” resources. It warrants the support from all stakeholders, not just the hospital administrators.