Contract management companies can make a hospital more efficient, but it may take at least two years.
That's the conclusion of the new national study "Are Contract-managed Hospitals More Efficient?" by HHS' Agency for Health Care Policy and Research. The study, which uses 1987 data from the American Hospital Association, is the most comprehensiveContract management
study of contract-managed hospitals in 10 years.
Contract-managed hospitals represented 12.4% of the nation's 7,000 hospitals in 1987, up from 10.4% in 1982, according to the AHCPR. Of those hospitals that are managed by outside firms, 65% are located in rural areas.
Although the base year of 1987 used by AHCPR is dated, contract management experts said the results are valid. In addition, "it's important for hospitals to be efficient from a financial standpoint for access to managed-care contracts," said Robert Huseby, president of Quorum Health Resources, which manages 265 hospitals.
Initially, contract-managed hospitals are in poor financial shape, the study concluded. "It might be fair to speculate that boards of trustees surrender control of the day-to-day operation of their hospitals to contract managers as a means of last resort," said Avi Dor, the study's author.
However, once hired, contract managers appear to make a big impact. For example, contract-managed hospitals reported expenses of $4,759 per admission during the first year of contract management (See chart). That was 4% higher than hospitals that weren't managed by outside firms.
However, after at least two years of contract management, expenses per admission dropped 18% to $3,909.
"It takes a while," said Edward Schott, chief operating officer at Brim, a Portland, Ore.-based company that manages 62 hospitals. "You come into a situation where there are some real things that need to be done." For example, Brim often brings in a new chief executive officer and chief financial officer to manage the hospital, he said.
Management firms typically sign three- to five-year contracts, which gives them time to turn around a hospital's financial status.
One of the cost centers that contract management companies trim significantly is total compensation, according to the AHCPR report. Hospitals that were managed for only one year reported spending 57% of their costs on salaries and benefits. That was nearly 7% above hospitals that were not managed by outside firms. However, after two years of contract management, the percentage spent on total compensation dropped to 53.6%, or just under the 54% spent by non-contract-managed hospitals.
Mr. Huseby noted that while savings in purchasing and business operations can be made quickly, personnel changes usually take longer. For example, if a hospital is overstaffed, Quorum typically reduces staff through attrition "unless the hospital is in dire straits," he said.
One item that affects contract-managed hospitals is the lack of high-cost specialty units. For example, only one-third as many contract-managed hospitals have cardiac and neonatal intensive-care units as other hospitals, the report said. The study concluded that those units aren't available because contract-managed hospitals are more likely to be rural and small-with fewer than 100 beds.
Messrs. Schott and Huseby both noted that hospital boards now are more likely to seek out contract-management firms for help with managed care and networking rather than because the hospital is in poor financial shape. "They don't have the revenues to bring on all these experts," Mr. Schott said, adding that they can draw on that talent from a hospital management company.