They're hitting the wall.
Hospital management teams with a knack for outperforming the competition are running out of ways to improve profitability, shorten inpatient stays and wring more productivity out of their assets.
But the nation's best-performing hospitals, as determined by two healthcare management and consulting firms, still register management results that separate them from the pack. The hospitals' successes are chronicled in 100 Top Hospitals: Benchmarks for Success, an annual analysis that uses nine measures of clinical, operational and financial performance to rate hospitals grouped into categories of similar characteristics.
Performances of the top hospitals on all nine measures were used to establish "benchmarks" in each of five categories of hospitals. The performances also were combined into a national set of benchmarks to compare against the median performance of all U.S. hospitals.
Since the study's debut in 1993, the benchmarks have improved each year, setting ever-higher standards of achievable management goals. In the latest study, however, most performances measured among the top hospitals did not show improvement (See explanation of measures, this page). And the gap narrowed between the performances of the best and the rest.
The list is based on 1997 Medicare cost and discharge data from 3,258 acute-care hospitals. The analysis is conducted by HCIA, a Baltimore-based healthcare information company, and William M. Mercer, a New York-based human resources management consulting firm.
The going gets tougher. The slowdown at the leading edge is evidence that managed care's cost-cutting ability, as currently practiced, is nearing the end of the line, says John Kralovec, senior principal with Mercer's healthcare provider consulting group.
"The easy kinds of things have been done," says Kralovec, resulting in "a lessening in the incremental annual improvement" in the aggregate performance of the top hospitals.
Mature managed-care markets in the West are showing the most dramatic signs of leveling off, says Jean Chenoweth, vice president of HCIA. According to this year's analysis, the length of inpatient stays increased the most in areas of high managed-care penetration, while expenses per discharge rose and profitability fell.
Overall, the top-performing hospitals were able to do more with less. Compared with all U.S. hospitals, they employed 18% fewer staff members per 100 adjusted patient admissions, their occupancy rates were 22% higher, and they were 38% more profitable.
To reach the next level, however, hospitals will have to change the way medicine is practiced, not just trim around the operational margins, Kralovec says.
"We're beginning to see the point at which these hospitals can't do more cuts, at least in the way they have been doing them," Chenoweth says. "However greater efficiencies are achieved, they will be achieved in a different way than in the past."
And some institutions are leading the way, wading into the clinical process up to their chins, according to the study's research.
Who's on the list. For the fourth straight year, the South dominated the list, with 43 hospitals, but that was a drop-off from 50 in 1997. Paralleling the decline in the South was a decrease in for-profit representation, to 25 hospitals, compared with 40 a year ago.
For-profits continued to produce benchmark hospitals in the South but rarely in any other region. Only three of the 25 on this year's list were outside the South; last year nine of 40 were in the other three regions charted in the study.
And paralleling the for-profit drop-off was a steep decline in the number of hospitals on the list operated by Columbia/HCA Healthcare Corp., to 17 this year from 28 in 1997.
The list of 100 was split into five categories, and a certain number of hospitals were allotted to each category to arrive at the final tally:
* 20 from a group of 1,353 hospitals of fewer than 100 beds.
* 20 from a group of 1,230 hospitals of 100 to 249 beds.
* 20 from a list of 245 nonteaching hospitals of 250 or more beds.
* 15 from a group of 99 teaching hospitals of 400 or more beds at major academic medical centers.
* 25 from a group of 331 less-intensive teaching hospitals of 250 or more beds.
Hospitals were not ranked in any order within each category.
Occupancy not a cure. In all four regions of the country, the benchmarks improved for hospital occupancy, contributing to a 60% occupancy rate among the top 100 hospitals. That mark comfortably exceeded the 50% rate for all U.S. hospitals and beat last year's benchmark by 2 percentage points.
Therein lies part of the problem for cost control. The analysis showed that less-complex cases are leaving the hospital for outpatient or ambulatory sites, and the remaining patients have more complex, resource-intensive conditions, Kralovec says.
While admitting more patients beats the alternative, it's becoming more difficult to improve the care of typically sicker patients without a partnership with physicians to tackle clinical processes and their outcomes, he says.
The contingent of 100 hospitals gave ground on inpatient length of stay, which increased to 4.18 days from 4.14 a year ago-ending a streak of year-to-year decreases registered since the study's inception. Rates of death and complications also increased slightly.
Benchmark hospitals scored gains in outpatient revenues, which grew to 36% of total hospital revenues vs. 34% last year. But the benchmark group continued to trail the outpatient percentage for all hospitals, which rose to 40% in 1998 from 39% a year ago.
The cost pressures contributed to a mixed result for expenses per discharge and to slippage in measures of profitability and productivity.
Overall, the benchmark for expenses improved a bit, to $3,508 per discharge, compared with $3,528 in 1997. But the improvement came courtesy of hospitals in the north central region, which improved dramatically to $3,400 per discharge from $3,750 a year ago.
Those results, however, were overdue: They brought the nation's heartland in line with the lower expense levels recorded previously by benchmark hospitals in the South and West.
The top hospitals in those two regions still set the pace nationally on expense control, but their benchmarks failed to improve on last year's regional results. The benchmark for the West region, in fact, rose $350 per discharge, to $3,200, from about $2,850 in 1997. Despite the slide, the region remained lowest in expenses.
On the high end, the Northeast's benchmark increased $200 per discharge, to $3,980. That wasn't much better than all Northeast hospitals, which had expenses of $4,100 per discharge in 1998.
Profitability, as measured by cash-flow margin, dipped to 16% for this year's 100 top hospitals from 19% last year. And productivity, as measured by total asset-turnover ratio, declined to 1.04 from 1.14 in 1997.
Consistent, persistent. Look for the most consistently effective hospital management teams to chart the next course, Kralovec says. And when you look, you'll see them launching and nurturing clinical improvement initiatives as well as pulling the usual operational levers.
Kralovec cites clinical programs at Brigham and Women's Hospital in Boston and Cleveland Clinic as leading examples. Both have a track record of management success-Brigham is the only hospital to make the HCIA/Mercer list all six years, and Cleveland Clinic made it for the fifth consecutive year.
Also appearing for the fifth straight year are Evanston (Ill.) Hospital, Harris Methodist Fort Worth (Texas), and St. Joseph Medical Center, Tacoma, Wash.
Overall, 40 of the hospitals in this year's list repeated from last year's. What's more significant, Chenoweth says, is that a subset of hospitals keeps returning to the list, some battling back after absences of more than a year. Of this year's group, 63 have made the list before.
Common threads among the repeaters are physician participation, consistently clear communication across the institution and an approach to systemwide integration of operations that exceeds lip service, Chenoweth says.
"In the year they won, these hospitals were operating on all cylinders," she says. Initiatives to improve an aspect of performance may have cost a hospital a year or two off the benchmark list, but they rebounded on the strength of their success with new approaches and programs, she says.
Medically focused. In the heart of the capitation-crazed Los Angeles market, Pomona (Calif.) Valley Hospital Medical Center has taken a decidedly clinical approach to trimming expenses while posting a mortality record far better than expected, given the condition of patients at admission.
Initiatives launched several years ago put the 381-bed facility among the top 100 hospitals in 1996, one of 20 nonteaching hospitals with more than 250 beds. But a move to become a teaching facility for UCLA's medical school required upfront capital and operational investments that affected short-term results and knocked it out of contention last year, says its president, Richard Yochum.
A year into its management of 18 family practice residencies, Pomona's expenses are back in line, and the hospital is among this year's 25 minor teaching hospitals on the HCIA/Mercer list. Its average expense per discharge of $3,621 was higher than the overall West region benchmark but $100 lower than the standard for facilities in its teaching class.
A facilitywide push reduced the length of inpatient stays 30% in one year, matching the benchmark of 3.75 days for hospitals in the West and bettering the benchmark of 4.5 days for the teaching-hospital category.
Yochum says management focuses on cost rather than price in a strategy of innovation rather than cutbacks-"not doing the same thing for less, but doing something different."
Several years of re-engineering the care of patients with respiratory ailments-asthma, congestive heart failure, chronic obstructive pulmonary disease-are improving results against established industry benchmarks, says Linda Johnson, vice president of patient-care services.
Similar efforts in cardiology management underscore Pomona's commitment to managing high-risk conditions when they reach the critical-care or intensive-care units.
A maternal child health program, started in 1992, cut the rate of admissions to the neonatal intensive-care unit in half. Obstetricians refer Medicaid-eligible expectant mothers to case managers, who provide nutrition information, psycho-social intervention and education on the physiology of pregnancy, Yochum says.
Every high-risk birth avoided saves nearly $50,000 in neonatal ICU costs, he says.
The clinical approach paid off with a mortality rate of 0.65, well below the benchmark of 0.91 for the best minor teaching hospitals.
The clinical indexes used in the measures assign a value of 1 to the expected level of mortality or complications, given pre-existing patient conditions. An index of less than 1 represents the degree to which the deaths at a hospital were below expectations. So, the lower the better.
Joint projects with physicians have yielded other successes, such as supply savings of $550,000 in cardiac catheterization on volume of $4.2 million, Yochum says.
Docs around the clock. Close cooperation with a large physician practice in the St. Louis area has contributed to significant decreases in expenses at a major medical center and its community hospital affiliate 45 miles away.
The appearance on the list of both 584-bed St. John's Mercy Medical Center in St. Louis and 98-bed St. John's Mercy Hospital in Washington, Mo., is a story of a hospital pair responding in a coordinated way to the same managed-care dynamics gripping the market, says Mark Weber, president of both facilities.
The Washington facility made the top 100 list in 1995. The medical center qualified for the first time this year.
Aggressive managed-care inroads have made cost control the focus for the two hospitals. "Payments have declined precipitously during the past three years," Weber says.
As part of Unity Health, a regional Catholic system, the two St. John's hospitals and four other area hospitals developed a 200-physician primary-care medical group and used a disease-management approach with such conditions as asthma and congestive heart failure, he says.
In July 1997 the medical center started a "hospitalist" program, staffed by physicians in the critical-care department. The hospitalists work with the Unity medical group to keep nearly a 24-hour watch on patients, write orders more promptly and "keep things moving ahead," Weber says.
The result has been a decrease of 30%, or 1.35 days, in the lengths of stay for patients under the care of the medical group and hospitalists.
Besides boosting efficiency, the medical group has helped increase the hospitals' volume to record levels in surgeries and births. Obstetricians last year delivered 6,500 babies at the medical center.
The effect on operations has been dramatic. Expenses per discharge handily beat even the benchmark targets in this year's study: $3,035 for the medical center vs. $3,720 for the group of minor teaching hospitals, and $2,850 for the Washington facility vs. $3,250 for benchmark hospitals of fewer than 100 beds.
Profitability also outpaced the benchmarks: a cash-flow margin of 21.6% for the medical center vs. the 15.6% benchmark, and 29% for the community hospital vs. 16.5% for the best small hospitals as a group.
Weber emphasizes that medical innovation made the difference. With managed care continuing to exert pressure on profitability, "if we had stood still, those margins would be gone."
The appearance of both hospitals on the top 100 list is evidence that healthcare system integration is starting to work, Chenoweth says-and it's not the only example. Other hospital pairs from the same healthcare system include:
* Alta View Hospital, Sandy, Utah, and American Fork (Utah) Hospital, both operated by Intermountain Health Care.
* Centura St. Anthony Hospital North in Westminster, Colo., and Centura Health-St. Anthony Central Hospital in Denver, operated by Catholic Health Initiatives.
* Lutheran General Hospital, Park Ridge, Ill., and Christ Hospital and Medical Center, Oak Lawn, Ill., both operated by Advocate Health Care.
* William Beaumont Hospital, Royal Oak, Mich., and William Beaumont Hospital-Troy (Mich.).
Management continuity. At the Beaumont hospitals in suburban Detroit, the partnership dates to the late 1960s and has benefited from managers who know each other so well that cooperation comes naturally.
The director and senior vice president of the Royal Oak facility, John Labriola, has been with the organization 29 years, and he's far from being the most tenured. The president of the parent company, Ted Wasson, has 38 years with Beaumont, and its chief medical officer, Robert Reid, M.D., has 40 years. Kenneth Matzick, the chief operating officer, has 30, and Dennis Herrick, the chief financial officer, has 27.
The senior vice president and director of the Troy facility, Eugene Michalski, is the "newcomer," at 22 years with the organization, broken up by five years in the 1990s at Evanston Hospital. He returned to Beaumont two years ago.
Each executive has a work history that includes moving among the two hospitals and the parent company through the years. As a result, "there's a fair amount of common bodies of knowledge among the leadership team," Michalski says.
Executives in the system meet every two weeks, but integrated decisionmaking is more instinctive than formal. "It comes quite naturally . . . that the key players in the organization participate," Labriola says. "Integration isn't something we strive for; it's something that automatically happens."
However, the administrative structure includes plenty of room for physicians, a "dual participation throughout the organization" that begins at the top, Michalski says.
The system COO and CMO are executive vice presidents of equal standing, and key facility committees are co-chaired by administrators and medical officers. "I can't overemphasize the partnership we have with our doctors," Michalski says.
That includes active physician participation in development of a systemwide information system that computerizes "the essence of the patient chart," Labriola says.
About 700 physicians on staff have computers in their private offices, where they can view such information as operative reports, orders and tests involving hospitalized patients.
The computer system has been expanded to five nursing homes, and home healthcare nurses use laptop computers on their rounds. The access to information fosters communication in a system that on a given day averages 1,000 inpatients, 1,000 nursing home residents and 1,500 on the home-care roster, Michalski says.
The coordination is important because both hospitals are bulging at the seams. The Royal Oak facility's occupancy stood at 81% in 1997, according to the HCIA/Mercer study, surpassing the 74% benchmark for major teaching hospitals. The Troy facility went one better, registering 84% occupancy and eclipsing the 57% of the benchmark group of hospitals with 100 to 249 beds.
"Most days we literally have no beds," Labriola says.
Rural contrast. That's only a pipe dream for small hospitals, which have under 50% occupancy and where outpatient revenues account for more than half of total revenues.
But in the sparsely populated region around Mount Vernon, Ill., 37-bed Crossroads Community Hospital has made the top 100 list three consecutive years by bolstering its physician staff with specialists and upgrading its operating room.
With 60 physicians on staff, 27 of them active in admitting patients, Crossroads has built surgery into a strength and reduced "outmigration" of patients to big cities such as St. Louis, says CEO Donnie Frederic.
The hospital recruited an ear, nose and throat physician, an internist, an orthopedic surgeon and a pediatrician who also is a pediatric neurologist-the only one in the region. Crossroads also affiliated with the cardiology department at Barnes-Jewish Hospital in St. Louis, which sends three cardiologists to the hospital every week, Frederic says.
Two hospital-based anesthesiologists also were recruited to the staff, an upgrade from the certified registered nurse anesthetists typically found in hospitals of its size.
In addition, nearly all surgical nurses are certified, which involves a two-year residency-like stint followed by an exam. Nurses also are trained in advanced cardiac life support.
Frederic says the measures explain the hospital's complication rate of 0.52, way below the 0.77 benchmark for hospitals of fewer than 100 beds.
Occupancy reached only 37%, but it has increased nearly 10% a year for the past three years. Meanwhile, the hospital's cash-flow margin is 25%, nearly 10 percentage points better than the small-hospital benchmark.