Million-dollar malpractice settlements. Rising labor costs. Slumping bond ratings. These are certainly trying times for hospital executives struggling to keep their institutions in the black. Yet many hospital executives, having managed to navigate their way through the 1997 Balanced Budget Act, Y2K and the start of HIPAA compliance, are gearing up for major capital outlays. Capital spending is expected to climb 14 percent in each of the next five years. Those hoping to gain access to capital markets, though, must prove that they have strong bottom lines. Those that don't could see the financial markets dry up very quickly. Two areas ripe for expense control are liability insurance and labor. Medical malpractice costs more than doubled between 1993 and 2002. Meanwhile, labor continues to eat up more and more of hospital expenditures; by some estimates it now accounts for 63 cents of every dollar in hospital spending. Some institutions are finding creative ways to bring these cost drivers in line. Hospitals & Health Networks details solutions you can implement right now to put the brakes on accelerated expenses.
by Howard Larkin
In 2001, the outcomes monitoring system at Northern California's Sutter Health turned up seven suicides in psychiatric units. Though the incidents took place at separate facilities and were unrelated, an investigation found many similarities: all the victims were males ages 25 to 30, all were admitted at about the same time of day, all had similar problems and life experiences, and all the suicides took place at about the same time after admission. In total, about a dozen parallels were identified.
"We used the information to develop a screening tool to identify patients at risk," says Michael Evans, senior vice president and chief risk officer at Sutter. The screening protocol was implemented more than a year ago. As of this May, no suicides had been reported at any of the system's 29 hospitals.
While there was no indication that malpractice was involved in any of these cases, Evans believes that Sutter's proactive approach to identifying, responding to and preventing adverse outcomes has significantly reduced the system's liability risk. "When we improve care and outcomes for high-risk patients, we eliminate opportunities for negligence claims," he says. In cases where negligence or system failures are evident, the monitoring system enables Sutter to immediately begin working with injured patients to address their medical and financial needs.
Evans may be onto something. In the 14 years since launching a systemwide incident monitoring and response program, Sutter has settled only two claims for more than $1 million, and has maintained a nearly flat claims experience overall with payouts averaging about $75,000--a remarkable feat considering that the average settlement reported by the Physician Insurers Association of America more than doubled over roughly the same period, from $110,000 in 1987 to $250,000 in 1999.
With the future of tort reform efforts still unclear, prevention, early warning of poor outcomes and talking honestly with injured patients may be the best hope for taming liability costs.
Sutter isn't alone. Health systems and liability insurers across the country are experimenting with similar adverse-outcomes prevention and early intervention strategies with the twin goals of eliminating patient injuries where possible and preventing disputes over injuries that do occur from escalating into expensive legal battles. Among the examples:
"There was initially some concern that approaching patients right away could expose us to more suits," says Richert E. Quinn, M.D., physician risk manager at COPIC. "But that has not been the case at all." COPIC calls it the "Three-R" program, for recognize, respond and resolve. Company officials believe that an analysis of the program, set to take place later this year, will demonstrate significant cost savings compared with a control group.
The couple requested a Suburban SUV to haul equipment needed to support the disabled child. "When the request hit my desk I said, 'All they really need is a minivan,' but we went ahead and gave them what they asked for," Havlisch says. The health system eventually settled the claim for $3 million, but the couple's attorney later told Havlisch that their decision to buy the SUV and other gestures of good will saved the hospital another $3 million in settlement costs.
"My little heart-flutter about spending an extra $5,000 to $10,000 could have cost us a lot more," Havlisch says. "I learned a lesson." Like Sutter, Trinity employs a sophisticated adverse-outcomes tracking system, which Havlisch says has helped the system's Michigan hospitals hold increases in liability losses to about 2 percent annually for the past decade.
Such moves toward monitoring, prevention and early intervention are a "crack" that may be expanded to make a malpractice system that is very resistant to change more responsive to the needs of patients, health systems and society, says Leonard Marcus, director of the health care dispute resolution program at the Harvard School of Public Health.
"By engaging in an early offer initiative, it is often possible to resolve a dispute over an injury before it turns into a legal fight," Marcus says. That not only saves money on administration and attorneys' fees, it ensures that injured patients receive needed treatment, health systems receive valuable process improvement information, and society sees patient safety improve as costs go down.
While the study of early intervention strategies is in its infancy, evidence is growing that quickly addressing patient needs is critical to preventing lawsuits. "People who have bad outcomes sue because they need to, not because they want to. They have ongoing needs that have to be paid for," says attorney Martin J. Hatlie, president of the Partnership for Patient Safety, a nonprofit coalition of consumers and providers. Often, reassuring a patient early that their medical bills will be paid removes that motive and creates a more relaxed atmosphere for working out other issues.
That's good, because research suggests that anger, not money, fuels many lawsuits. If a provider appears uncaring or unwilling to change its practices, patients will often sue for revenge or to try to force change. "If anger is the motive, an apology or an agreement that the hospital will change its policies so no one else will be hurt can be very effective in settling a claim," Hatlie says.
An editorial in March in the Annals of Internal Medicine says research is beginning to show that for physicians, "ineffective communication is the single largest factor in producing patient litigation" and that "good communication, including effective apologies, can avert or help end a conflict, especially litigation." However, only two states, Colorado and Oregon, now bar expressions of sympathy from being admitted as evidence of guilt in court.
Trinity's Havlisch sees early disclosure of injuries as critical to avoiding the "jackpot" jury verdict. "Juries are incensed when they hear allegations of fraud," she says.
To avoid putting patients and their families through the stress of not knowing what will happen--and possibly developing suspicions that something is not on the level--Trinity immediately reviews all adverse outcomes and prepares clinical and financial plans to address them. "Sooner rather than later we approach the patient and family about the bad outcome, what can be done to mitigate it and, where appropriate, take accountability," Havlisch says. "We believe truth telling is consistent with a Catholic health system's mission, and it builds trust with the patient."
At Sutter, "We try to continue treating the patient as a patient rather than turn them into an adversary," Evans says. "The first thing we look at is the care plan. It helps the family understand and it is a great training opportunity for our staff. You don't throw yourself on the altar and say 'sue us please.' You try to figure out what happened and work it out."
Joint defense arrangements between physicians and hospitals help when making such offers. Often, attempts to resolve cases break down when the separate insurance companies begin squabbling.
"Our goal is to keep the physician-patient relationship intact," says COPIC's Quinn. "If you stop communicating, the patient gets worried and angry, and they go out and hire a lawyer." Risk management staff work with insured physicians and patients to identify immediate medical needs. Up to $25,000 is available for ongoing care and $5,000 for lost wages before an incident must be reported as a claim to the national practitioner data bank. Out of more than 150 cases in which payments have been made, only two have exceeded that limit, Quinn says.
Many in the medical liability field remain wary. "Even if COPIC's experience is good, that's just the beginning of the conversation," says Robert Widi, an underwriter with San Francisco-based OMIC, a physician-owned ophthalmology liability carrier. "It's one geographic area and a relatively short period. What they find may not hold elsewhere."
Howard Larkin is a freelance writer in Chicago.
by Chris Serb
Unemployment is up and wage increases are down throughout the country, but you wouldn't know that from health care. Hourly compensation costs for hospital jobs rose 6.4 percent in 2001, a whopping 10.5 percent in 2002 and another 4.2 percent in 2003.
Because they're so labor-intensive, hospitals are particularly vulnerable to the increases. "The most important point is the amount that's going to labor: 63 percent of every dollar in hospital expenses," says Caroline Sternberg, the AHA's vice president for trends analysis. "Since labor is such a big driver of costs for hospitals, even a relatively small increase will drive down their margins."
The increases are driven largely by the shortage of health care workers, from nurses to lab technicians, pharmacists, medical records coders and others. "Clearly, there are just fewer people going into these professions," says Bradley Strunk, research analyst, Center for Studying Health System Change, Washington, D.C. "There's an increase in competition to recruit these workers, and hospitals have to offer higher wages and better benefits." According to the Philadelphia-based Hay Group's "Hospital Compensation Report 2002," nursing compensation rose 8.3 percent, EKG technicians' pay 6.2 percent and pharmacists' pay 7.3 percent. Raises were smaller in 2003--4.8 percent for nurses, 3.2 percent for EKG technicians and 4.1 percent for pharmacists--but still ahead of inflation, general wages and hospital revenue.
Compounding the problem: Shortages lead to overtime or agency labor, which can cost twice as much as a regular straight-time employee.
Though some indicators show that the rate of increases may be slowing slightly, the worker shortage is expected to be a long-term headache, and many consultants and managers are looking at techniques and strategies to soften the blow. Here are some strategies.
"I think in all departments we have professional employees, people who are licensed or certified and making higher wages, who are doing tasks that can be delegated to lower-paid employees," says Michael Nowicki, a professor of health administration at Texas State University, San Marcos.
That might be particularly true for not-for-profit hospitals, Nowicki says. He compared data from HCA, Tenet Healthcare Corp. and the Almanac of Hospital Indicators, which he says show that total labor costs as a percentage of net revenue runs about 40 percent for for-profit hospitals, 50 percent for not-for-profits and 60 percent for public hospitals. "This leads me to think that for-profit hospitals are delegating certain tasks to lower-wage employees. The savings is considerable," he says.
As an example, Nowicki cites radiology technicians who often escort patients to and from their rooms. "This could often be done by a lower-paid staff member, and the radiology tech could focus on imaging," he says.
Reshaping work processes can significantly affect staffing costs. "You can control your cost per unit with better management, and the way to control that first and foremost is to measure it," says Paul Stevenson, a principal with ECG Management Consultants, Arlington, Va. "And that's where the industry is in a sorry state."
Stevenson says many hospitals lack the flexibility to staff down in times of low volume or patient acuity, or staff up when demand is high. Regular staffers might waste several hours a shift in slow times, and premium labor must be used when a unit is busy. "Managers don't have a clear understanding of how their decisions impact costs," Stevenson says. "You've got to have an automated tool to give managers an idea of what the impact of their decisions is going to be. You can't fill this out on the back of an envelope."
Nowicki notes that most hospitals already generate reports that compare budgeted hours to actual hours on floor. However, while most for-profits produce the reports by shift, not-for-profits tend to do so by pay period or even monthly. "If you do it every two weeks, you're doing it after the fact," he says. "The more sophisticated systems do it by shift." If the shift report shows that you're overstaffed on one floor, the manager has the ability to either send the part-timers and contract workers home or not call them in to begin with.
CFOs may cringe at the thought of outsourcing to reduce labor costs. But hospitals can lose less money than normal by taking an coordinated approach.
For instance, "hospitals treat [nurse] agency hiring like a spur-of-the-moment decision, but they're really using the agencies for a significant portion of their labor," Stevenson says. He advises soliciting bids from agencies on a hospitalwide rather than a unitwide basis, using a "tiering" method that would fill higher-paying slots with staff nurses and less expensive ones with agency hires.
"Most vendors are willing to take less profit per nurse in exchange for guaranteed volume," Stevenson says.
Another option involves outsourcing whole clinical departments. Gordon Hawthorne, health care practice leader with the Hay Group, notes that most hospitals already outsource such ancillary departments as food service with good outcomes, so it might be worth trying on the clinical side.
"We're already doing it piecemeal--a unit staffed partly with FTEs, partly with agency hires, partly with contracted technical workers, and you end up with no team synergy," he says. "Doing this across a whole unit can lead to longer-term contracts, teamwork, consistency and quality." Hawthorne says emergency departments might be one area ripe for outsourcing.
On the other hand, in some cases it pays to turn outsource and contract employees, particularly agency nurses, into regular staff members. That involves spending money up front to save money down the road.
The Methodist Hospital, Houston, used to spend over $1 million per month for agency nurses at the 1,000-bed facility. The problem went beyond the balance sheet. "We saw this was a big issue not only financially, but clinically," says Alicia Scala, R.N., then the hospital's director of nursing support systems. "Patient satisfaction was down, physicians were disgruntled. Our quality indicators were OK, but we knew we could do better."
In April 2002, Methodist set out to eliminate agency hirings by year-end. The hospital boosted wage rates for a "flex team" of nurses who could move between multiple units depending on the hospital's staffing needs; paid bonuses to staffers willing to work overtime; and made it clear that agency nurses would no longer be welcome after the end of the year. Either you were "in" or you were "out."
Labor costs rose during the transition year, but decreased slightly last year. "I don't know if we can attribute all of that to eliminating agency nurses, or that we can prove this had a large financial impact," Scala says. "But our costs didn't increase from 2002 to 2003, and that's pretty good, especially when you consider what other hospitals have faced."
Like any marketplace with labor shortages, hospital employees have many opportunities to leave for higher pay or better work environments. Human resources departments then have to scramble to replace workers.
"There are big costs to acquiring labor; replacing an RN can cost anywhere from $50,000 to $100,000," Hawthorne says. That includes the cost of recruiting, cash bonuses for new sign-ons, orientation and training for a new nurse, and the use of premium labor while a position is vacant.
Improving work environments, making employees feel like part of a team, and some financial incentives will achieve staff continuity, and will prove a lot cheaper than trying to constantly replace employees. "The real challenge is to reduce attrition," Hawthorne says. "Hold on to the people you have."
Chris Serb is a freelance writer in Chicago.
|All hospital jobs||4.2%||6.7%||4.1%|
|Level 1 Nurse||4.6%||8.3%||4.8%|
|Medical Records Coder||6.2%||7.1%||3.7%|
A random sampling of large metropolitan areas shows significant variations in labor costs. The charts below show the percentage change in hourly compensation for health-related occupations, by metropolitan statistical area.
|NEW YORK CITY||WASHINGTON, D.C.||LOS ANGELES||DALLAS||ST. LOUIS|
Source: U.S. Department of Labor, Bureau of Labor Statistics
by Richard Haugh
Many hospitals have an appetite for capital that far exceeds their ability to access it--and that is one of the most significant long-term challenges facing the field.
Nearly 72 percent of chief financial officers expect their capital spending to increase during the next five years, with increases averaging 14 percent per year, according to research by the Healthcare Financial Management Association and PricewaterhouseCoopers. That compares with an average 1 percent increase per year between 1997 and 2001. Yet 25 percent of hospital CFOs believe they've already reached their debt capacity, and another 7 percent aren't sure.
"For 'have' hospitals, the cost of and access to a certain level of debt should remain reasonable," Richard Clarke, HFMA's president and chief executive officer, told attendees at the fifth annual Non-Profit Health Care Investor Conference in New York City in May. "For the 'have-not' hospitals, though, even the availability of tax-exempt debt financing is in question."
Digital radiology systems, computerized physician order entry systems, broad-based IT systems and renovations to emergency and surgery departments head the wish list of capital projects. Typical of hospitals' capital needs is Children's Healthcare of Atlanta. The Georgia hospital told investors of $182.2 million in planned projects at its Egleston campus, including doubling the size of its emergency department and enlarging its neonatal intensive care unit, adding 36 beds, and enlarging its lab; and $117.2 million in planned projects at its Scottish Rite campus, expanding its emergency department by two-thirds and adding room for surgical services, and 55 beds.
The so-called capital gap was a theme echoed in nearly three dozen presentations at the New York conference, as some of the nation's largest hospital systems met with the people who invest in their bonds. A record 520 health systems, investors and bond raters registered for the event, where 32 health systems presented their financial performance and plans for the future to 60 bond issuers, investment bankers and bond rating agencies. The event was co-sponsored by the American Hospital Association, Health Forum, the Healthcare Financial Management Association and Citigroup.
As in past years, the conference was a "who's who" of top-tier health care organizations--a group that largely has unfettered access to capital, so-called "broad access" hospitals. In a continuing study of access to capital, HFMA found that such hospitals had:
Not all hospitals are in dire straits. Indeed, most hospitals that presented at the conference are top-rated health care systems with little trouble accessing capital. AA-rated Advocate HealthCare, Oak Brook, Ill., is a good example. This year, the system will spend $257.5 million on capital projects and has committed to $325.3 million in new projects, including $204 million for a new hospital. "We have a voracious appetite for capital--and we do have a capital gap," says James Skogsbergh, Advocate's CEO.
But unlike most hospitals in the country, Advocate and others at the conference can feed their capital appetites. Advocate executives told investors that it ended 2003 with net income of $123.6 million, and this year it is on track to post nearly a 5 percent net margin.
Besides operating margins, at the end of the first quarter the 10-hospital system had a debt-to-capitalization ratio under 30 percent and $1.4 billion of cash on hand, enough to pay its debt nearly five times over.
Others aren't so lucky. And Fitch Ratings says the tight capital market is not likely to loosen any time soon. In 2003, Fitch began tracking hospitals' capital expenditures as a percentage of depreciation expense. While this indicator increased to 133.4 percent in 2002 from 125 percent in 2001, the prior two years showed a downward trend. Health care debt issuance increased to $28 billion in 2003 from $26.2 billion in 2002--only 7.3 percent of total municipal issuance, identical to 2002, the lowest level in the past 15 years.
"These indicators point to a decline in spending, possibly brought on by tighter capital access," Fitch noted in a January report about the credit outlook for 2004.
Also contributing to greater limits on capital access is the continued conservative posture of investors and letter-of-credit and liquidity providers, Fitch Ratings says. Investors continue to demand higher yields and stricter covenants, while letter-of-credit and liquidity providers have also increased their control through tighter covenants, routinely demanding higher fees and generally being more selective.
In response to tightening credit, HFMA research shows that in coming years CFOs plan to fund their sharp increases in spending primarily by using cash from operations. Eighty-one percent of CFOs say they now depend on cash from operations for at least 25 percent of their capital funds, and 61 percent say they depend on internal operations for 50 percent or more of capital funds. Moreover, 63 percent of CFOs say they would depend even more on cash from operations for future spending. With margins under pressure, whether that plan is realistic is an open question, Clarke says.
Dallas-based Christus Health is one such facility. The Catholic health system with 40 hospitals and long-term care facilities benefits from setting aside money in advance for its capital projects. When it was founded five years ago, it had about $300 million in capital projects in the works that it had to go back and pay for. Now, it calculates capital needs into its targeted operating margin. Its goal is 6 percent to 8 percent, which it calculates it will reach by June 2006. Now it is about 3 percent.
Yet not all think hospitals have a hard time accessing capital. For those with solid financial credentials, the funding tap is wide open, investors told hospitals. In a panel session in which investors took questions from hospitals, David King said he doesn't think there's a capital gap.
"The real issue is credit quality," said King, senior vice president of Putnam Investments, an investment fund with a large hospital bond holding. "It's that straightforward. If a hospital can't present a solid credit story, maybe they shouldn't have access to capital."
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