Savvy management of capital assets and expenses has helped some hospitals greatly improve their efficiency while maintaining exemplary clinical outcomes and showing hefty and sustainable profitability.
Contributing to that success is a commitment to gain control of the outpatient side of business-getting a higher percentage of total revenues from outpatient services than the industry in general and moving aggressively to increase that percentage.
These efforts have helped open a striking gap between the best-managed hospitals and others similar in size, geographic location and teaching status, especially in rural areas and among larger nonteaching hospitals.
Looming as both a catalyst and a winner in this all-out drive toward efficiency: for-profit hospital companies, particularly Columbia/HCA Healthcare Corp.
Those are principal findings of an analysis of nearly 4,000 acute-care hospitals by HCIA, a Baltimore-based healthcare information company, and New York-based William M. Mercer, a human resources management consulting firm.
The analysis of 1994 Medicare cost and discharge data produced a list of "100 Top Hospitals: Benchmarks for Success." It was the third year the companies jointly conducted the analysis using eight measures of clinical, operational and financial performance to rate hospitals grouped into five categories of similar characteristics.
The study allotted a certain number of representatives from each category in the final tally:
20 from a group of 1,240 urban hospitals of fewer than 250 beds.
20 from a group of 1,295 rural hospitals of fewer than 250 beds. Rural and urban designations were based on HCFA's classification method.
20 from a list of 308 nonteaching hospitals of 250 or more beds.
15 from a group of 115 teaching hospitals of 400 or more beds at major academic medical centers.
25 from a list of 405 less-intensive teaching hospitals of 250 or more beds.
Hospitals were not ranked in any order within each category.
Performance by the top hospitals on all eight measures then was used to set "benchmarks" for all hospitals in each of the five groups.
Of this year's 100 top facilities, 27 made the list for the second straight year. Seven of those also were among the original top 100 in 1993, making them three-time winners (See listing, p. 56).
The performance indicators were revised significantly for this year's analysis to reflect industry movement away from business volume and toward more efficient use of existing assets (See related story, p. 62). That movement is a response to fixed payments negotiated with healthcare payers to cover comprehensive healthcare services for their health-plan enrollees.
Last year the HCIA/Mercer analysis showed West Coast hospitals were out in front of the industry in retooling for the new business emphasis. California and Washington each had 10 hospitals on the list a year ago, and nine Western states had 42 in all (Nov. 14, 1994, p. 74).
This year's list tells a different story. "The real action has moved to the South," said Jean Chenoweth, senior vice president of HCIA. "Managed care has really moved in. Florida has become a battleground."
That state is home to 17 hospitals on the top 100, and the South region has a total of 47. Of those, 35 are in just three states: Florida, Tennessee and Texas. More than half of them are for-profit hospitals, predominantly Columbia.
Those are the three states where Columbia is most active. Columbia sprang from Texas, while merger partner Hospital Corporation of America operated from the Nashville, Tenn., base that's now headquarters for the combined company, which has 335 hospitals in 30 states. Columbia has been establishing regional networks during the past two years in Florida, where it now has more than 50 hospitals.
"The aggressive network-building and market-based strategies of the for-profits helped vault many for-profit hospitals into the top 100 this year," said George Pillari, chairman and chief executive officer of HCIA.
"The large number of for-profit facilities in this year's study serves as direct evidence that the for-profit model of medicine is succeeding in the healthcare environment of the 1990s," he said.
In Florida, Columbia is showing the most success with its larger community hospitals.
Of the 17 hospitals from Florida in the top 100, 12 are in one category: nonteaching hospitals of more than 250 beds. All are Columbia hospitals.
One of them, JFK Medical Center in Atlantis, was not a Columbia hospital at the end of 1994, the time frame of the analysis. It was acquired earlier this year for $210 million, the largest purchase of a single hospital by the healthcare company (July 24, p. 6) and believed to be the largest ever on record.
In addition, the company is trying to acquire a four-hospital system in California (Sept. 25, p. 10) that includes another benchmark hospital in the group of larger nonteaching hospitals: Good Samaritan Hospital of Santa Clara Valley. Along with Coliseum Medical Center in Macon, Ga., which it owns, Columbia's California deal would give it 14 of the 20 hospitals named in the category.
Nationally, Columbia owned 26 of the 33 hospitals in the top 100 that were designated as for-profit as of the end of 1994, HCIA said.
With the addition of JFK Medical Center and the completion of deals for Good Samaritan and MetroWest Medical Center in Framingham, Mass., the healthcare company would have 29 of the top 100 hospitals.
Columbia has an agreement to acquire an 80% interest in MetroWest, which finished among the 25 minor teaching hospitals of 250 or more beds that were selected this year.
Outdistancing the pack.
No analysis was available on the performance of Columbia benchmark hospitals as a group, but the company dominated the benchmark group of larger nonteaching hospitals, which registered significant improvement compared with the median for that group.
Larger nonteaching hospitals as a group had some difficulty keeping expenses and clinical problems from rising, and return on assets hovered around 13%.
But the benchmark group within larger nonteaching hospitals reduced mortality significantly while achieving a 23% return on assets. Cash flow margin improved nearly 5 percentage points to 23%, the highest of any group, and the hospitals also had the highest annualized equity growth rate-35%-of any of the benchmark groups.
For all larger nonteaching hospitals, the growth rate was less than 10%.
For hospitals in the Columbia chain, "it's fair to say that Columbia has provided significant benefit to its institutions through their tough dealing with vendors and their ability to go out to the capital markets," HCIA's Chenoweth said.
Those advantages translate to reduced costs at each hospital through lower group-purchasing prices and lower costs of adding or replacing assets that produce a good return, she said.
The biggest difference between best performers and the rest of the pack, however, was in rural America. The group of 20 benchmark hospitals recorded a stunning reduction in mortality while still being able to post the lowest average length of stay and expense per discharge among the five benchmark groups.
Through it all, they maintained a 26% return on assets, also the highest as a group, and achieved an equity growth rate of 32%.
Nationally, rural hospitals weren't nearly as successful. Length of stay stood at more than a day longer than the best performers, and cash flow margin and return on assets were half those of the benchmark group.
Meanwhile, mortality rates were night and day.
The clinical index used in the measure assigns a value of 1 to the level of mortality expected given pre-existing patient conditions. An index of less than 1 represents the degree to which a hospital had fewer deaths than expected, so the lower the better.
The index for all benchmark hospitals was 0.8, an improvement from 0.86 a year ago. But the rural benchmark group had an index of just 0.58, a free fall from the index of 0.88 posted by last year's benchmark group.
By contrast, the mortality rate for all rural hospitals was 1.004, meaning they had more deaths than expected. Complications during hospital stays also turned for the worse, at the same time that the best performers improved slightly on an already better track record.
Data on outpatient business, a factor considered for the first time this year, showed that rural hospitals are fast approaching an even split between inpatient and outpatient revenues in their operations.
The best performers have a higher proportion than the group's already impressive 40%, and they're increasing that proportion at a faster pace than rural hospitals overall.
Copper Basin Medical Center, a 44-bed not-for-profit hospital in Copperhill, Tenn., took in a third of its total revenues from the outpatient side as far back as 1992, according to HCIA data. By 1994, the percentage had grown to 42%.
The hospital's current proportion is 46% and growing, Administrator Grady Scott said. "We're trying to educate our physicians and our employees that this is the way we have to do it," he said.
"You change people, or you change people."
Copper Basin conducts two retreats a year with department managers, physicians and hospital trustees to get across the importance of using the facility efficiently, Scott said.
According to the 1994 Medicare data, the hospital had an expense per admission of $2,400, several hundred dollars less than the industry-leading rural benchmark level of $2,688, while posting a mortality index of 0.37, low even for the best rural hospitals. Length of stay was 3.7 days, the rural benchmark standard.
At the same time, Copper Basin posted a return on assets of 44% and a cash flow margin of 21%. For fiscal 1995 ended Sept. 30, the hospital earned $900,000 on total revenues of $6.5 million, more than double the net margin of 1994. The hospital had $1.1 million cash on hand at the end of fiscal 1995, compared with $300,000 a year earlier, Scott said.
Outpatient activity is calculated daily at Pompano Beach (Fla.) Medical Center, one of the dozen larger community hospitals on the top 100 list that are owned by Columbia.
About a third of the hospital's $128 million in 1994 patient revenues came from outpatient services, and it's more than 35% now, said Allen Kern, the facility's chief financial officer.
Outpatient activity is converted to a measure of how the activity would equate to extra inpatient days. That's done by calculating a factor of intensity and multiplying it by each day's inpatient census.
At an inpatient census of 90 on a given day, for example, a 70% outpatient factor adds the equivalent of 63 extra patients that day, Administrator Heather Rohan said.
That's a high factor compared with the industry average of 30%, but Pompano Beach recently recorded outpatient factors as high as 70%, Rohan said.
During the past few years, Pompano Beach retooled for outpatient capacity without a large investment by renovating one of its two patient towers to serve outpatient operations, Kern said. The $75 million renovation made better use of existing space "instead of pouring a lot of capital into a freestanding building," he said.
Return on assets.
Hospitals converting capacity to outpatient uses can doubly benefit under the HCIA/Mercer definition of success, which credits high return on capital assets, said Peter Heisen, M.D., a principal with William M. Mercer.
Outpatient operations require lower levels of asset investment, and although physicians make the decisions about where to provide care, hospitals can help them along and improve the return, he said.
"That's a management, medical-staff measurement," Heisen said. "That's (a measurement of) how the doctors are deciding to treat the patients and how the hospitals are accommodating them by providing the means."
In an atmosphere of consolidation, return on assets "is related to doing good things with the assets you have, and making money on them," he said.
At 131-bed Tri-City Hospital in Dallas, the diagnostic imaging department was one of the first in the market to stay open until 10 p.m. weekdays and keep a schedule all weekend, said Linda Murdoch, vice president of outpatient diagnostic facilities and business development for the not-for-profit hospital.
The returns weren't measured only in extra appointments but in the increasing roster of physicians who were attracted to the hospital by the extra flexibility, said Patti Griffith, Tri-City's chief operating officer.
In the past half-dozen years, the hospital's medical staff increased more than tenfold, to 250 from just 20 in 1988, when it averaged six patients a day and nearly closed, Griffith said.
The hospital, which opened in 1957, invested $30 million in state-of-the-art equipment and facilities since 1988 and lured physicians and patients with an emphasis on service, she said.
But it doesn't compete with comprehensive hospitals such as Columbia's Medical City Dallas Hospital, another of HCIA/Mercer's top 100. Instead, Tri-City is concentrating its assets on specialties, such as its detoxification program, that larger hospitals don't emphasize or offer, Murdoch said.
Cut costs, deliver quality.
Asset management aside, many top performers have gotten there by taking costs out of their operations and getting good clinical results.
For example, not-for-profit Hermann Hospital in Houston has taken millions of dollars out of its cost structure to compete in a market that includes a dozen Columbia competitors and other strong tax-exempt institutions. "There's no formula we can see other than we have to be effective in controlling our costs," said David Page, Hermann's president and CEO. "We have to manage our economic life so we're a good value."
Hermann's management already has taken $40 million in costs out of operations, about 10% of its overall budget, "and that's just the start," Page said. Another 10% in reductions is targeted for next year and an additional 5% in 1997 for an eventual savings of $90 million to $100 million, he said. Meanwhile, revenues, about $400 million in fiscal 1995 ended Sept. 30, are projected to remain flat.
The bulk of current and anticipated savings is coming from improvements in the way physicians move patients from site to site and work with colleagues, Page said.
Some initiatives are specialized, such as the sophisticated clinical cooperation being fostered between physicians and nurses in its Level I trauma center, he said. But many of the improvements are basic-less order volume in medicine and supplies, shorter patient stays, and tighter turnaround in the operating room.
Resource utilization also gets systematic scrutiny at Hollywood (Fla.) Medical Center, which shares severity-adjusted medical outcomes data every month with all its physicians, COO Leonard Freehof said.
The teaching hospital, owned by Tenet Healthcare Corp., posted figures near the industry norm for length of stay, expenses per admission and cash flow margin, but its 30% return on assets was well above the norm. And its clinical performance on mortality and complications also distinguished it from others in its category.
The hospital also has implemented "critical paths"-clinical management aids that standardize treatment of specific conditions-and expanded the role of case managers. Those actions help provide more resources to patients but in a well-coordinated way that produces savings and better care, Freehof said.