"A lot of small, little things."
Justin Rushin Jr.'s simple cost-reduction recipe could very well rival "It's managed care, stupid" as the mantra of chief financial officers for 1997.
As an example, Rushin, the vice president and chief financial officer of Jeannette (Pa.) District Memorial Hospital, has spent nearly three years chipping away at inflated staffing ratios, scrapping costly outsourcing contracts and paring unnecessary services. These things, and more, earned the Pittsburgh-area hospital a debt-rating upgrade to BBB+ and reduced long-term debt costs by $150,000 annually.
One casualty of the cost cutting was daily massages for patients. The archaic practice was dropped from Jeannette nurses' repertoire. "I had never even heard of it before I came here," Rushin says.
Running a hospital or health system in 1997 is no job for those squeamish about managed care. Like Rushin, CFOs trying to meet managed care's demands must keep up the vigil of cost eradication. And they will.
But cost-accounting systems for measuring and monitoring results have tended to lag behind integrated delivery systems' needs. The perfect information system is the Holy Grail for some corporate vice presidents of finance. The move to capitation from discounted fee for service, case rates and per diems makes good computer systems a necessity for CFOs.
But while the small stuff really adds up, finance officers have fallen short on the economies of scale they've been promising. Last year's flurry of mergers, acquisitions and odd-ball combinations yielded little in terms of big-ticket savings, according to consulting firm Deloitte & Touche's biennial hospital survey (June 24, p. 3). Among hospitals that joined larger organizations in the past two years, merely 7% said patient services were reduced or eliminated, and 61% of hospital executives acknowledged they have not combined services.
Increasing managed-care penetration will feed industrywide consolidation and starve the overbedded and heavily indebted. CFOs of bloated hospitals and financial weaklings had better pull a few tools from their re-engineering kits.
If the interest-rate gods are willing, tax-exempt debt deals will be plentiful. Analysts expect merged institutions to refund old bonds and seek new money for service realignments, adding satellite facilities to round out delivery networks, for example. Hospitals will also finance long-term-care and subacute needs and information systems.
This also will be the year that many CFOs will rediscover "nonoperating" income. As inpatient profits get squeezed, executives will look to balance-sheet assets such as real estate or cash and investments to boost return. A recent national teleconference by the asset management group of investment banker Morgan Stanley drew an impressive 90 hospital and health system CFOs and treasurers, a powerful sign of where the industry is focusing its attention.
Pressure on not-for-profit hospitals to sell to a for-profit chain will be tempered by increased scrutiny from state attorneys general and skittish board members. One palatable alternative rips a page from the "Friendly Skies" of United Airlines and the "We Care" Avis rent-a-car people, whose employees are investors in the company. Word is that several bigger not-for-profit healthcare systems are exploring employee stock ownership plans to raise capital from within. Smart attorneys and investment bankers are figuring out how to offset the resulting loss of their tax exemption with other tax advantages. And getting employees literally to buy into the corporate mentality presumably will make hospitals friendlier, more caring places.