Prescription for Hospital Survival is Growth, not Cutbacks

May 24


Scott Hodson

Scott Hodson

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Hospitals cannot continue to slash their way to survival without sacrificing quality and patient services. Traditional cost reduction often leads to a "downward spiral" of additional market share erosion and revenue loss, resulting in the apparent need for more cost reduction. A new survival strategy must be employed.


The United Health Fund recently reported that 13 of 35 non-profit, Prescription for Hospital Survival is Growth, not Cutbacks Articles acute care hospitals in New York City are in such financial distress that their long-term viability is in doubt -- a warning for all health care institutions struggling to survive.

But the “traditional” cost-cutting and layoff prescriptions for health care providers in trouble are not sufficient to solve this growing problem.  Hospitals cannot continue to slash their way to survival without sacrificing quality and patient services.  Traditional cost reduction often leads to additional market share erosion and revenue loss.  As the health care system moves into an environment focusing more on patient/customer satisfaction, the traditional management responses could result in even greater losses for the hospital.   Patients may stop coming because of reduced or non-existent services, the fact that their doctors have gone elsewhere, or the perception that the hospital’s reputation is declining.  Doctors may leave due to declining service quality, experiences with inadequate clinical and support staff, and frustration with outdated equipment and facilities.

Maverick Healthcare Consulting has found that financial difficulties can often be more effectively solved with growth strategies that expand and enhance existing revenue streams, create new sources of revenue and increase market share.  These strategies include investments in enhanced quality to increase patient and physician satisfaction; investments in equipment and staffing that will speed the patient experience, improve convenience and increase patient volume and throughput; and investments in new services that enhance a hospital’s profile and make it much more competitive for market share.

Maverick Healthcare Consulting has had the opportunity to assist a number of Greater New York hospitals in designing and implementing creative approaches towards growing out of the financial doldrums.  Following are some examples of these types of improvements.  In addition to improving quality and service, such actions were instrumental in avoiding layoffs and other sacrifices for the communities they serve, and in creating new employment opportunities as projected revenue streams and services were successfully achieved. 

A New York City community hospital was losing hundreds of thousands of dollars each month and was about to close its doors. Although its cost structure was well below almost any of the other hospitals in the area, it was still suffering financially.  In light of declining reimbursement and patient volume, and with a growing concern regarding continued liquidity, in order to preserve its vital core of services for the community, the hospital turned to the tactic that had helped it avoid past financial difficulties: cost reduction.  However, this time the tactic worked against the hospital.  Having eliminated virtually all of the “fat” from the organization, in desperation, the hospital was left with little to reduce other than the muscle.  To better manage expenditures, the hospital reduced surgical hours of operation, postponed needed investments in the expansion of surgical services, and delayed replenishment of surgical equipment required by many of its surgeons.  This resulted in surgeons beginning to take their patients elsewhere.  Vital patient flow improvements to the emergency department (the major source of admissions for the hospital) were postponed, and increasing overcrowding resulted in more patient “walkouts” and more frequent diversion of ambulance traffic to other hospitals.  Admissions declined, exacerbating the financial crisis.  Vendor payables were stretched to the limit and the hospital began having difficulties receiving shipment of necessary supplies.  The hospital was in a classic downward spiral.

To halt the precipitous decline, the “popular” prescription for a sick hospital was changed, and an entirely different regimen of investment and growth was implemented.   Through a strategic mind-shift, management took a new approach towards the situation. Cost cutting and layoffs were out, and focusing the remaining capital of the institution on investment in growth became the master game plan.  Investments were made in quality and staff education, surgical and emergency services capacity, and in service lines that both fill a vital community health need and produce a positive “bottom line” contribution.  The hospital’s investment orientation, and its careful selection of key productive assets in which to invest, was the fulcrum around which a new team turned itself around and became an inspiration to its community, physicians and employees

The hospital has not lost a cent in the last six months and is well on the road to recovery.

The North Shore/Long Island Jewish Health System on Long Island in New York is another organization that has improved its market position through investment and growth.  North Shore/LIJ is one of the larger not-for-profit health-care systems in the country with 18 hospitals and revenues in excess of $3.2 billion.  The System has a record of stellar growth over the last decade as it came to realize that cutting costs was not the only way to prosper in a competitive New York environment. Instead, the System focused on growth through development of new services for existing markets throughout Long Island, Queens and Brooklyn.

Early on, the Glen Cove Community hospital joined the North Shore /LIJ System. Glen Cove was a very traditional community hospital facing an increasingly hostile competitive environment.  Its board realized that if things continued the way they were going, the hospital would soon deplete its reserves.   A new direction was needed.  So it joined the North Shore/LIJ Health System.

The North Shore at Glen Cove growth plan began with the development of a patient rehabilitation program.  Once this program took hold and was successful,  a second phase of growth was started. A surgical services program was created and an orthopedic surgeon employed.  As a result, this 250-bed community hospital is financially solvent and a successful member of the North Shore/LIJ Health System.

North Shore applied this successful formula in several other institutions on Long Island, including, for example, Syossett, Plainview, and Forest Hills – all of which are successful organizations and prospering from investments in growth initiatives.

Additionally, early in its formation, the System invested in a rigorous quality management system that has shown its worth through the introduction of common policies and procedures geared towards the measurement and production of higher quality outcomes.  Working in concert with the medical staffs of each of its member hospitals, the System has been able to raise the standard of care for all patients and the expectations of its medical staff to levels not previously available on Long Island.  A direct result of these activities is the designation by AARP of the North Shore University Hospital in Manhasset as the Best Hospital in America for customer service by its membership.

Obviously, not all hospitals and health systems have the resources, stamina, desire or know-how to implement a successful growth strategy similar to NSLIJ’s.  In fact, some have determined that in light of the risk and challenges associated with a merger/acquisition oriented expansion strategy (despite NSLIJ’s success, there have been many other publicly discussed merger/acquisition failures), they would be better served to invest in quality of service and throughput improvements in their core facility.  The University Hospital in Newark, associated with the University of Medicine and Dentistry of New Jersey, presents an example of a hospital that has done this last approach extremely well. 

Like most other large academic hospitals, years of continuing governmental and commercial reimbursement reductions, deferring investment in aging plant and equipment, increasing indigent volume and escalating costs of labor and materials had taken their toll on University Hospital.  To break the downward spiral, University Hospital leadership developed a multi-tiered growth plan.  The first tier of the plan focused on the financial stabilization to stop the spiral.  The organization focused the talent of hundreds of skilled employees and physicians on the design of dozens of Strategic Work Group (SWG) initiatives to improve the core operational and financial process effectiveness of the hospital.  SWG success provided investment capital to fund the second tier of activity: Strategic Growth.  University Hospital invested in the renovation and enlargement of its trauma center, the enhancement of staffing and equipment, and in the redesign of dozens of cross-departmental processes that had previously created barriers to entry in the ED.  Similarly intense investment and improvement efforts focused on the Operating Room.  Key ancillary and support departments such as the Laboratory, Radiology, Admitting, Discharge Planning, Environmental Services and Transport were redesigned and “beefed up” to support an increased volume of patients.  At the same time, improved contracting and physician services brought more throughput to revenue generating centers such as the OR, ED and Patient Care beds.  The leadership’s insight and courage produced results: hospital revenues, cash and volumes increased dramatically, and in 2003 the hospital experienced its first positive operating margin in many years.

These experiences are just a few examples of why growth in times of crisis – as opposed to layoffs and cutbacks – can be exactly the prescription to a hospital’s illness.

Moreover, the impact of such growth strategies can be optimized when an organization establishes aggressive goals in each of its functional areas; selects a measurable approach, monitors activity, and addresses underlying process and workflow redesign resulting in positive and lasting change; allocates sufficient resources to achieve growth; and measures progress against objectives making necessary modifications along the way.

In place of cutbacks and layoffs, hospitals should be thinking about the following strategies to preclude or overcome financial instability:

·         Increasing quality, capacity and patient flow in areas that produce revenue

·         Producing new business from new patient bases

·         Expanding revenue-producing areas

·         Improving medical research and grants management.

To build the revenue base and increase market share, health-care organizations should also consider:

·         New program development

·         New ambulatory services strategies

·         New provider/payer network planning

·         New mergers and acquisitions

·         Increasing quality of care, patient safety and satisfaction

·         Increasing physicians’ job satisfaction.

The winds of change continue to blow throughout the health-care system, scattering old ideas and failed solutions.  But one major change is long overdue: struggling hospitals must begin to choose growth over decline. From better access management to improved staff scheduling and patient care, to the development of new businesses and markets, a turnaround action plan can be implemented without cutbacks and layoffs.  It is one medicine with very pleasant side effects.