In a marketplace where servings of revenue broth get thinner all the time, some hospitals are finding ways to live on what they can get while others are crying out for more.
Medicare's infamous shortfalls notwithstanding, the facilities that have performed best clinically and operationally are also achieving far higher profitability than the industry at large. And they're doing it despite a sicker patient census than the national norm, according to an annual study by HCIA, a Baltimore-based healthcare information company.
The top hospitals identified by the HCIA study operate with a slightly leaner workforce but pay employees substantially more and have lower mortality and complication rates than the industry norm. They also spend roughly $1,000 less per discharge than most other hospitals.
The high achievers are positioned better than their industry peers to stave off debt repayment troubles, showing twice the capacity to cover debt with available funds. At the same time, they're investing 7% more per discharge on capital improvements.
HCIA sifted through 1998 Medicare cost and discharge data on 2,946 acute-care hospitals to arrive at 100 Top Hospitals: Benchmarks for Success. The company grouped hospitals with similar characteristics into five categories and rated facilities according to nine measures of clinical, operational and financial performance.
Top hospitals in each category served as benchmarks. The performances of these hospitals also were incorporated into a national set of benchmarks to compare against the median performance of all U.S. hospitals.
Health Network, a Los Angeles-based cable and Internet company owned by Fox Entertainment Group and AHN Partners, co-sponsored the study.
The gap widens. After the study debuted in 1993, the benchmarks improved significantly for five straight years, raising the bar for achievable management goals. Last year, however, most benchmarks did not improve from the previous year, and the gap between the top 100 and the industry began to narrow.
Measured against the past two years' benchmarks, the top hospitals this year continue to eke out small improvements or sustain slight setbacks. But the gap is widening between the top group and other hospitals in each category.
Some of the most notable improvement comes from small community hospitals and major teaching hospitals, the facilities considered most vulnerable to the Balanced Budget Act of 1997, which cut into their expected Medicare revenues, says Jean Chenoweth, vice president of HCIA.
"The results this year are proof that given the adverse environment, good management makes a big difference," she says. "We were expecting to see numbers that weren't that positive."
In an analysis of performance indicators during the past five years, Chenoweth says, there is evidence the top hospitals anticipated the Medicare crunch and planned for it earlier than the rest of the industry. That could be why they lost ground to their peer groups last year; they were making adjustments to reduce expenses and prevent further deterioration in their operations, she says.
For example, the two hospitals in ThedaCare, an Appleton, Wis.-based healthcare network, took the hit and moved on. "We didn't get hung up on Medicare taking something away," says Mitch Hackbarth, vice president of finance. "It's what it is. Let's deal with it."
Both hospitals, 146-bed Appleton (Wis.) Medical Center and 216-bed Theda Clark Medical Center, Neenah, Wis., made the top 100 this year.
The ThedaCare hospitals increased their collective net profit for the eighth consecutive year in 1998 despite absorbing a loss of $3 million to $4 million in Medicare revenues the past two years, Hackbarth says.
While hospital interests converged on Washington to lobby for Medicare givebacks, the two Wisconsin facilities earned net income of $20 million on revenues of $180 million, and they're poised to match that performance in 1999, says Robert Malte, senior vice president in charge of both facilities.
Heartland gains. Thirty-one facilities on the list hailed from the North Central region, compared with 25 a year ago. The increase came at the expense of the Northeast, which contributed nine hospitals, compared with 14 last year.
But the South dominated the list for the fifth straight year, with 44 hospitals, one more than it logged a year earlier. The West also remained steady with 18, a drop-off of one.
The list of 100 was split into five categories, and a certain number of hospitals was allotted to each category to arrive at the final tally:
* 20 from a group of 1,266 hospitals with fewer than 100 beds.
* 20 from a group of 1,074 hospitals with 100 to 249 beds.
* 20 from a group of 219 nonteaching hospitals with 250 or more beds.
* 15 from a group of 94 teaching hospitals with 400 or more beds at major academic medical centers.
* 25 from a group of 293 less-intensive teaching hospitals with 250 or more beds.
The top hospitals in each category were not ranked in any order. Because of a statistical tie, the category of 100 to 249 beds included 21 facilities, increasing this year's list to 101.
Hospitals get sicker. This year's study finds the traditional cost-cutting measures of shortening hospital stays and moving care to outpatient settings have nearly reached their limits.
The national benchmark for average length of stay increased for the second year in a row to 4.25 days from 4.18, which barely kept ahead of the 4.52 days for all U.S. hospitals.
The average length of stay for the Southern benchmark hospitals increased to 4.45 days from 4.23, while the average for the top North Central hospitals decreased to 4.23 from 4.37. The Northeast benchmark average decreased by half a day, to 4.54, but remained the highest of all regions. Benchmark hospitals in the West averaged 3.65 days, barely shaving time from 3.73 a year ago.
With the highest concentrations of managed care in the nation, the West Coast started trying to manage hospital stays years earlier than the rest of the country, Chenoweth says. Now those efforts may have reached their limits as hospitals are cleared of all but the sickest patients.
Aided by care advances and nudged by payers, healthcare facilities stepped up efforts to move surgical procedures and medical treatment to outpatient sites a half dozen years ago.
For example, the percentage of total revenues from outpatient operations rose to 59% at benchmark hospitals with fewer than 100 beds compared with 50% two years ago. But the rest of the class wasn't far behind. The median for all facilities in the small-hospital group reached 50% in this year's survey compared with 46% in 1997.
Meanwhile, large nonteaching hospitals with at least 250 beds caught up to the stagnating benchmark hospitals in their group, which registered the same 31% as two years ago.
Major teaching hospitals brought in nearly the same percentage of business from the outpatient side as did large nonteaching facilities. Academic medical centers increased their outpatient revenue benchmark to 30% this year, up from 25% two years ago, and the median for all major teaching facilities was close behind at 28%. Benchmark hospitals in the minor teaching hospital category did better yet, increasing their outpatient revenues to 34% compared with 29% for nonbenchmark hospitals in that category.
Managing complex cases. The next frontier of cost control is efficiently managing severe medical problems without causing undue complications, Chenoweth says. Without that attention, occupied beds are money-losing beds.
This year's benchmark hospitals are distinguished by rising occupancy rates coupled with a slightly higher complication rate that is still is much lower than the U.S. median.
During the past three years, benchmark hospitals' use of clinical protocols and other systematic clinical management have significantly reduced complications compared with industry performance, Chenoweth says. "That may account for a good chunk of the profitability," she says.
Profitability, represented by cash flow margin, was 62% higher for benchmark hospitals, the biggest gap between the best and the rest since 1995 and a much wider gap than last year's 37% increase.
Some classes of hospitals performed better than others. For benchmark facilities with 100 to 249 beds, the profitability margin of 21.5% was 90% better than for all similar hospitals, while the 17.7% margin of large nonteaching hospitals was 35% better than the margin for the peer group.
To post those gains, benchmark hospitals had to contend with a higher Medicare case mix of 1.52 compared with 1.26 for all U.S. hospitals. The measure computes the severity of patients' illnesses and the intensity of resources typically required in their treatment, with a median of 1.
The Medicare case mix at 65-bed Punxsutawney (Pa.) Area Hospital is a little more than 1.3, higher than typical for facilities of its size, says Chief Executive Officer Daniel Blough Jr. But the hospital posted 0.66 for mortality and 0.64 for complications, rates that were among the lowest, and held expenses per discharge to an average of just less than $2,600.
The clinical indexes used in the measures assign a value of 1 to the expected level of mortality or complications assigned to pre-existing patient conditions. An index of less than 1 represents the degree to which deaths or complications were below expectations-the lower the better.
Punxsutawney's mortality results beat the benchmark of 0.73 for small hospitals, and its incidence of complications trounced the benchmark of 0.89. Meanwhile its expense per discharge was $500 less than the benchmark and more than $1,500 lower than that of its peer group.
Looking long range. Blough says the statistical picture reflects a strong and expanding outpatient surgery business and a long tradition of managing inpatient stays. The facility made the list this year and last year.
The hospital used utilization reviews even before the advent of Medicare prospective payment in the mid-1980s, and it entered the skilled-nursing business about that time to help discharge patients within Medicare coverage limits, he says.
A 10-year recruitment initiative helped double the size of the physician staff to 30 from 15 and lowered the average age of physicians to 41 from the upper 50s. The younger average age means physicians are more likely to have been introduced to outpatient management issues while in training, making doctors less resistant to utilization review and cost control, Blough says.
The recruitment effort has fueled the outpatient business to represent two-thirds of total revenues. "Our major business now is outpatient surgery, and we're in the middle of a major renovation to make sure that continues to be a major business," Blough says. The renovation, when finished in 18 months, will double the number of patients the hospital can schedule daily to 20.
An incentive program rewards the workforce for reducing expenses, managing costs and quality, maintaining safety and meeting goals for net income. "It's kind of a homegrown compensation model for our employees, and that's done well for us," he says.
During the fiscal year ended June 30, 1998, goals included keeping expenses at or below $2,900 per discharge and ending the year $250,000 under budget. If all goals are met yearly, Punxsutawney employees receive a bonus distribution.
An employee gain-sharing program at ThedaCare in Wisconsin is simpler than Punxsutawney's but similarly focuses on continuous quality improvement and efficient care, says Hackbarth, the finance officer.
Using the operating budget's bottom line as a starting point, the system distributes 30% of any savings at year-end to employees, he says.
Clinical improvement efforts during the past several years include utilization and treatment protocols, a hospitalist program at Appleton and a focus on decreasing time on ventilators in the intensive-care unit.
Protocols for the appropriate use of selected high-volume drugs decreased costs by $100,000 per year. The hospitalist program, which aimed to improve continuity of care, also decreased the charge per case for pneumonia by $630 and reduced the average stay for pneumonia patients by a half day, says Malte, the ThedaCare vice president. In the ICU, patients spent an average 40 hours on a ventilator after surgery, a decrease from 60 hours.
Such efforts helped keep complications at or below the benchmark for hospitals with 100 to 249 beds while engineering whopping profitability of 41% at Appleton and 37% at Theda Clark. Those cash flow margins eclipsed the 21.5% benchmark, which was the highest among the five groups.
Each hospital made the top 100 list once before: Theda Clark in 1993 and Appleton in 1994. But that was when the health system launched a patient-focused initiative that "turned the hospitals almost inside out in our approach to delivering care," Malte says.
The fruit of that long-term labor is appearing. From a largely department-centered culture, managers are "focused on more than their little corner of the world," viewing their jobs from a broader perspective and eliminating "handoff" problems at each point in the care process, he says.
High-end accomplishment. Cases at academic medical centers are generally more complex and expensive than cases at community hospitals. The case complexity makes it more difficult for departments to work together to reduce inefficiencies.
During the past three years, the best-performing major teaching hospitals have made incremental but steady progress in reducing mortality rates, lowering expenses per discharge, coaxing higher profitability and increasing occupancy rates.
The profitability gap between benchmark and all other major teaching hospitals widened to a chasm this year: a 14.5% cash-flow margin compared with 8.8%. That's a difference of 64% compared with last year's difference of 18%.
Of the 15 benchmark large teaching hospitals chosen, 10 have appeared more than once on the annual list of 100. The only facility to make the list all seven years is Boston's Brigham and Women's Hospital. In addition, Evanston (Ill.) Northwestern Healthcare made the list of teaching hospitals for the sixth time. Other hospitals making their sixth appearance include 502-bed Harris Methodist Fort Worth (Texas) and 271-bed St. Joseph Medical Center, Tacoma, Wash.
The performance of 529-bed Spectrum Health-Downtown Campus in Grand Rapids, Mich., typifies that of top academic medical centers by matching virtually all the benchmarks across the board. Two exceptions were a shorter length of stay at 4.35, compared with 4.65, and an expense per discharge of $4,450, which was $400 lower than the benchmark.
Four-time designee Spectrum-Downtown, formerly Butterworth Hospital, has no choice but to chip away at expenses, says CEO William Gonzalez. He is also CEO of 332-bed, Grand Rapids-based Spectrum Health-East Campus, formerly Blodgett Memorial Medical Center. Blodgett has appeared on the list four times, most recently in 1997.
The hospitals merged in September 1997 after a two-year challenge from the Federal Trade Commission ended and Spectrum officials promised the Grand Rapids community the hospitals would not increase prices for three years. They also vowed that price increases would not exceed the Consumer Price Index for another four years after that, Gonzalez says.
An initial round of nearly 100 merger-related job reductions was "99% management," from executives to clinical managers, he says. Another 200 positions were targeted for reduction by attrition because of budget law-related revenue shortfalls.
In the first 18 months, the merged organization has saved $35 million toward a pledge of $170 million in savings the first five years, Gonzalez says. The cost-control headway has been made in two areas in which many other hospital systems have encountered obstacles: consolidation of duplicate service lines and synergy with a provider-sponsored health plan.
Every department now has one director responsible for the same activities on two campuses. The movement of departments to a particular site has begun with the consolidation of pediatric inpatient services at the downtown campus-at an annual savings of $850,000.
Priority Health, an HMO that was started at Butterworth 11 years ago, invested in an aggressive care-management program at the time of the merger, which has paid off in shorter average length of stay, Gonzalez says. The HMO moved to a primary-care capitation model, also risky given widespread industry reports of failures.
That has translated into attention to costs at both campuses. In addition to paying off for the hospitals, the campaign helped Priority Health rebound to a net gain of $1.1 million for the first half of 1999 from a $5 million net loss in 1998.
Placing risk with Spectrum's physicians makes care management essential, Gonzalez says. With 85% of the plan's premiums distributed to Spectrum's physician-hospital organization, the 600 doctors in the PHO are becoming attuned to how practice patterns affect the amount of money left after expenses.
"Everybody is interested in each other's effective utilization," he says. "Everybody kind of watches each other."