Short of turning over seat cushions for loose change, the nation's healthcare chief financial officers are having to get fairly creative as they search for savings to offset revenue reductions stemming from last year's Balanced Budget Act.
After years of paring back to adapt to managed-care pressures, CFOs are under the gun to wring out even more expenses from their institutions (See Outliers, p. 88).
Through 2002, the federal budget law will shrink projected Medicare spending growth by more than $115 billion, with $39 billion of that coming from hospitals. In this fiscal year, which ends Sept. 30, Medicare payments to acute-care hospitals will drop just $100 million to $85.7 billion.
"People are just tightening up even further," says Pamela Federbusch, a senior vice president at Moody's Investors Service.
Moody's doesn't believe the balanced-budget law will hurt healthcare providers in the near term. It's the hit that providers take in the next three to five years-as Medicare costs at hospitals begin to outpace Medicare revenues-that worries analysts at the New York-based bond-rating agency. More than 75% of the reductions are set to take place between 2000 and 2002.
While some CFOs believe they have time to prepare for the payment squeeze, Bob Greene isn't one of them.
"I'm still amazed at the number of my colleagues who haven't tabulated the impact of the Balanced Budget Act," says Greene, senior vice president of finance at Baptist Health System in Birmingham, Ala.
Greene's organization began assessing the damage just weeks after the budget act was signed into law. Baptist's share of the $115 billion reduction, at least through 2000, is about $42 million, he says.
It's difficult to know the exact impact since the government has yet to write regulations implementing many of the law's provisions. "That is really frustrating for us, especially since we're in the throes of budgeting for fiscal 1999," Greene says.
Lacking a "silver bullet" to make up lost revenues, Baptist will implement a variety of cost-saving initiatives. System executives are thinking of moving to a single meal preparation and distribution system, for instance. Staff at each of the systems' 11 hospitals prepare and deliver patient meals. At one facility alone, streamlining meal preparation would save $500,000 a year, Greene says.
At St. John Health System in Detroit, Paul Van Tiem, senior vice president of administration and CFO, is turning to his vendors, including drug and medical suppliers, to make up some of the $8 million a year he expects the eight-hospital system to lose on Medicare. "If our ability to pay is going down, we expect them to share in that," he says.
St. John also is budgeting for a lower margin on operations. Van Tiem expects the total operating margin, which usually runs between 2.5% and 3%, to slip as much as 1 percentage point.
Darby, Pa.-based Mercy Health System plans to maintain its 2% operating margin on net patient revenues of $1.3 billion. But it will need to come up with total savings of $48 million to offset the cumulative impact of Medicare payment reductions through 2002, says Joseph Bradley, Mercy's senior vice president of finance.
Even before the Balanced Budget Act became a concern, Bradley began battling another budget-buster: Medicare managed care. For each 1% of seniors who move into managed care from traditional fee-for-service plans, Mercy loses $450,000, he says. That's because its negotiated per-diem rates with managed-care plans are less lucrative than Medicare's DRG payments.
Since 1995 the system has experienced a 25% swing of seniors into managed care, costing Mercy some $10 million in revenues, Bradley says. He expects the percentage of seniors enrolling in managed-care plans to rise to a high of 60%, leaving Mercy with a larger gap to fill.
It's the managed-care movement that prompted Mercy to begin implementing a performance improvement program, developing clinical pathways and consolidating services and departments, including the finance department.
With additional Medicare reductions on the horizon, Bradley is counting on joint programs with other healthcare providers in the market to help spread its costs. For example, Mercy officials are contemplating an affiliation with Philadelphia's Jefferson Health System, he says.
"There's only so much you can trim in costs. You just can't continue to ratchet down your (full-time-equivalents)," Bradley says.
At Texas Health Resources in Irving, Medicare reductions are seen as "part of the cost of doing business," says Ronald Bourland, the system's executive vice president and CFO. He says the 13-hospital system will need to absorb a $12 million reduction this year. By 2000, the tab rises to between $15 million and $18 million.
THR's biggest hit-$6 million to $7 million in the first year of implementation-will come from Medicare's movement to a prospective payment system for skilled-nursing facilities. The system operates nine such facilities.
Bourland is keeping a cool head about the challenge he faces. The merger of Presbyterian Healthcare Resources and Harris Methodist Health System, which led to TRH's birth last August, generated some net savings. He's keeping that figure under wraps until he presents it to the board. Now Bourland's goal is to improve efficiencies every year.
There's no magic to it, "just hard work every day to improve our processes," he says. "I think you have to simply build this into the cost-saving program."