Hospital executives frequently talk about slashing costs, but how much is just verbiage and how much is action?
A new survey by KPMG Peat Marwick reveals that a group of hospitals not only talks the talk but walks the walk of cost-effectiveness. Leading the ranks of effective hospital cost managers is Walter O. Boswell Memorial Hospital in Sun City, Ariz., a Phoenix-area destination for retirees and snowbirds.
When compared with a group of the nation's hospitals, Boswell kept its costs 82% below the average. That made it tops in the ranking by KPMG (See chart, p. 25). The study shows how much each hospital's manageable costs-when cost of living and patient severity were factored in-varied from the national norm.
At Boswell, keeping costs in line is essential to survival. "Between 80% and 90% of our patients are Medicare," said Leland Peterson, president and chief executive officer of Sun Health, the hospital's parent corporation. "One learns to manage your costs when you're as heavily Medicare as we are."
Sun Health also operates another hospital ranked high in the KPMG survey: Del E. Webb Memorial Hospital in Sun City West, Ariz. That hospital's manageable costs were 61% below the national norm.
In general, the study shows that hospitals in heavy managed-care areas are more cost-effective. Hospitals in California, for example, proved to have lower costs than hospitals in Texas, where managed-care penetration is lower.
The KPMG study also shows that patient stays are lower and mortality rates decrease as managed-care competition increases.
Cost management is crucial because hospitals that keep expenses low are bound to win more managed-care business.
The proclivity of managed-care buyers to look for low-cost providers was verified earlier this month when Blue Cross of California said it would give lower-cost hospitals preferred contracting status (July 10, p. 3).
Clearly, payers aren't going to cover rising expenses at hospitals. In 1994, average medical plan costs for active employees increased 2% for non-HMO enrollees and decreased 2% for HMO enrollees, according to Towers Perrin, a national benefits consulting firm.
To keep costs low, "hospitals want to know what `best practices' are," said Michael Hamilton, national director of healthcare practice in KPMG's Los Angeles office. That interest was the reason for collecting the data. "They may know where they are now, but they don't know where the market is," Hamilton said.
Also, many hospitals want to know how much overhead they need to shave from their budgets to be competitive, he said.
The hospitals. Exclusive financial and operational information on how more than 3,600 individual hospitals manage their costs recently was published in the Guide to Hospital Performance by KPMG Peat Marwick. The sample represents about two-thirds of the nation's community acute-care hospitals.
To be included, a hospital needed a minimum of 150 discharges from commercial DRGs. Those are DRGs in which Medicare makes up less than half the admissions. The intention was to get a demographically balanced patient group that wasn't limited to the elderly. Excluded from the study were hospitals with fewer than 25 beds, as well as psychiatric, children's, and rehabilitation hospitals.
KPMG contracted with HCIA, a Baltimore-based healthcare information company, to construct the unique database. KPMG adjusted the data for differences in patient severity and cost of living, both of which are factors hospitals can't control. The severity portion was adjusted for differences in hospital characteristics, patient severity and diagnoses. The cost of living was determined by the wage index, which Medicare uses in its reimbursement formulas.
The information in the newly released guide is published in a state-by-state format. However, MODERN HEALTHCARE asked KPMG to rank individual hospitals to see which were the top performers in cost management. To ensure that hospitals weren't lowering costs at the expense of quality, KPMG dropped hospitals with a higher-than-expected mortality rate. (Hospitals with that distinction are listed with a dagger beside their names in the KPMG guide.)
The data are drawn from 1993, a year when many hospitals were just beginning to adjust to the slowing of healthcare inflation. For example, between April 1993 and April 1994, per-capita hospital costs rose just 1.7%, according to the Prospective Payment Assessment Commission. That rate, which was adjusted for inflation, was less than half the rate of growth from 1985 to 1992.
MODERN HEALTHCARE also asked KPMG to rank hospitals by two product lines: cardiac and general surgery (See charts, this page).
In terms of both charges and costs, Boswell ranked well below the national averages. The hospital's average charge per discharge was $5,223, which was 51% below the national average. Its costs per discharge were $1,767, 70% below the national average. The difference between costs and charges isn't pure profit because very few payers reimburse at the "charge" rate.
The hospital reported net income of $6.6 million on revenues of $77.4 million in 1993, the most recent year for which figures were available, according to HCIA.
Being in a retirement community, Boswell is aided by hundreds of healthy elderly residents willing to lend a hand, which helps reduce costs. The 325-bed hospital boasts an auxiliary of 2,200, which CEO Peterson said is probably the largest such group in the nation. The hospital also has been successful in keeping costs low on the clinical side, where volunteers wouldn't have an impact, said KPMG's Hamilton.
For example, the firm's analysis shows a lot of surgery, especially cardiac surgery, is performed at the hospital. That would tend to drive costs up, he noted. Even so, "here's a hospital that is doing two of the most expensive things and they're still low cost," he said.
All shapes, sizes.Boswell is a not-for-profit hospital, but the list of hospitals proficient in cost management includes facilities of all stripes.
Two high-ranking hospitals, San Leandro (Calif.) Hospital and Palm Drive Hospital, Sebastopol, Calif., are owned by for-profit giant Columbia/HCA Healthcare Corp. San Leandro formerly was owned by Galen Health Care, which merged with Columbia in 1993, and Palm Drive was owned by Healthtrust, which merged with Columbia this year.
Of hospitals in the KPMG study with fewer than 99 beds, 38-bed Palm Drive and 49-bed Healdsburg (Calif.) General Hospital, also formerly owned by Healthtrust, ranked first and second in containing costs. The hospitals' costs were 63% and 53% under the national average, respectively.
Rounding out the top five in that category were 80-bed Cartersville (Ga.) Medical Center; 64-bed Sonoma Valley Hospital, Sonoma, Calif.; and 86-bed Springhill (La.) Medical Center. Springhill also is a Columbia hospital.
San Leandro ranked first among hospitals with 100 to 249 beds. It was followed by Del E. Webb; FHP Hospital-Fountain Valley (Calif.); Landmark Medical Center, Woonsocket, R.I.; and St. Rose Hospital, Hayward, Calif.
Among hospitals with 250 beds or more, Boswell ranked first, followed by Westchester County Medical Center, Valhalla, N.Y.; Elliot Hospital, Manchester, N.H.; Glendale (Calif.) Adventist Medical Center; and Bronx (N.Y.) Municipal Hospital Center.
Westchester's low costs are particularly interesting because it's a public hospital that provides a lot of trauma, cardiac and surgery care, which would tend to elevate its cost structure.
For example, 1,300 open-heart surgeries are performed annually at Westchester, which has the highest case-mix index of the state's tertiary-care hospitals, said Edward Stolzenberg, Westchester County's commissioner of hospitals.
Taking it to heart. Cardiac care was one of two product lines MODERN HEALTHCARE asked KPMG to evaluate. Although cardiac charges have been falling nationally, it's an area that costs the nation billions. For example, the U.S. hospital bill for cardiac bypasses totaled $13.5 billion in 1993, according to HCIA, and the average charge was $40,800, down 2% from the previous year.
In cardiac care, Westchester ranked at the top among hospitals of 250 beds or more, with manageable costs 116% below the national norm.
Behind Westchester in the cardiac-care category were Boswell (105% below); Washington Adventist Hospital, Takoma Park, Md. (80% below); Good Samaritan Hospital and Medical Center, Portland, Ore. (78% below); and Bayfront Medical Center, St. Petersburg, Fla. (70% below).
Westchester has what may seem to be several cost strikes against it. It's a teaching hospital and as a public hospital has charity care and bad debt that total about $10 million annually.
To keep costs down, Westchester scrutinized costs and quality in six product lines in the early 1990s: cardiac, neurosciences, oncology, pediatrics, transplantation and trauma.
To lower costs in oncology and organ transplants, for example, the hospital negotiated an exclusive deal with the Greater New York Blood Program. Rather than buying blood products from several blood banks as many hospitals do, Westchester contracted in volume with the Greater New York program. The move saves the hospital about $2 million on blood costs of $11 million annually, Stolzenberg said.
In addition to specific services, Westchester has tried to keep a lid on capital spending. "Most of our development has been without doing new buildings, even though it's glitzy to do new buildings," Stolzenberg said.
The hospital is looking at contracting out its housekeeping and laundry departments, for an annual savings of $3 million.
Keeping costs low is critical because Westchester has no flexibility to raise charges, he added. Currently, 12% of the hospital's revenues come from managed-care companies. Most pay a discounted DRG rate, but some companies are considering a per-diem rate.
"How do you create a razor-thin margin to survive and at the same time do volume-based contracting?" Stolzenberg asked regarding keeping future costs in line.
In some cases, hospitals that ranked high had completed mergers, which helped them lower costs. That was the case with 295-bed Landmark Medical Center.
The hospital's manageable costs were 57% below the national average, according to KPMG.
Merger pays off. Landmark officials trace much of their efficiency to a 1988 deal in which the hospital merged with a nearby facility in North Smithfield, R.I.
"This was a very successful consolidation because it was bottom-line oriented," said Bob Walker, Landmark's president and chairman.
The two hospitals formed Landmark Medical Center, cutting the number of employees to 750 from 1,200. The North Smithfield facility was turned into a for-profit specialty facility, Rehabilitation Hospital of Rhode Island, which is 50% owned by Horizon/CMS Healthcare Corp.
This month Landmark agreed to be acquired by Columbia (July 24, p. 6).
To keep a handle on labor costs, Landmark managers scrutinize staffing on a shift-by-shift basis. They start with a minimal core nursing staff that is augmented by an in-house pool.
Such staffing flexibility saves the hospital $500,000 to $750,000 annually, said Gary Gaube, executive vice president and chief financial officer.
For example, staffing hours per adjusted patient day have dropped from five when the merger was completed to 31/2 now, he said. National figures weren't available.
About four years ago, the hospital also started documenting the steps a patient goes through during a particular procedure or treatment. Care mapping gives patients, physicians, nurses and other healthcare workers a sense of how a patient proceeds through the hospital and back home.
Some of Landmark's care maps start before the patient even gets to the hospital. In the case of a hip replacement, the care map begins with an in-home assessment by a physical therapist.
Another merged system that ranked high was Elliot Hospital, which last year merged with its only competitor in Manchester, N.H., into a new system called Optima Health. Federal and state officials cleared the merger of 286-bed Elliot and 284-bed Catholic Medical Center after hospital officials said the deal would save as much as $200 million over the next 10 years. The savings estimate is based on what they would have spent as separate facilities.
Yet, Elliot apparently was managing its costs well even before the merger. According to KPMG's analysis, the hospital's manageable costs were 63% below the national norm.
Elliot uses several productivity-based costing and staffing tools to ensure that expenses mirror increases and decreases in patient volume, said Philip Ryan, Optima's president. Ryan was president of Elliot before the merger.
"We're the steward of community resources," Ryan said, noting that hospital staff members have evaluated their costs by DRG. By using external benchmarking, critical pathways and continuous-quality-improvement teams, the hospital learns which areas to highlight.
Cutting costs is a total effort, Ryan said, noting that the hospital's process hasn't hit any "home runs" in cost reduction. "Collectively, they add up to something significant," he said.