The cuts come as healthcare executives have seen revenue growth slow and states that help to finance safety net insurance struggle with budget stress. That has prompted some to plan for significant cuts to operating expenses, even as executives acknowledge they are not fully sure how to achieve projected reductions.
Executives at health systems in Florida, Illinois, Ohio and Texas say they already have planned hundreds of millions of dollars in expense reductions over the next three to five years. To get there will require savings beyond straightforward reductions to supply and labor costs, they say. Hospitals will need to find ways to treat patients more efficiently, a more difficult and less certain prospect for cutting costs.
William Santulli, executive vice president and chief operating officer at Advocate Health Care, says the nine-hospital system based in Oak Brook, Ill., will cut $350 million from its operations through 2015. Advocate ended its fiscal year in December 2011 with operating income of $300.8 million on revenue of $4.4 billion. That's compared with operating income of $335 million in 2010 on revenue of $4.3 billion. Expenses totaled $4.1 billion in 2011 and $4 billion the prior year.
Projected Medicare reductions will trim $50 million in revenue during the period, Santulli says.
Advocate officials say they already are seeing falling demand for inpatient services, and also expect cuts in Medicaid payments from the state of Illinois. The system has seen Medicare patients who previously were hospitalized are now treated under observation, a category of outpatient care, he says.
In Illinois, where unemployment remains above the national average, more patients are also without insurance and struggle to pay medical bills, he says.
“We do not yet have this … bogie figured out,” Santulli says. “It will take us the better part of this year to have a plan that will add up” to cover proposed expense cuts.
That plan has executives combing for cuts in costs for supplies and operations such as laundry, food and environmental services.
Also under consideration: labor. “We're taking a hard look at productivity and labor expenses,” he says.
He stresses that the system will seek to reduce expenses through attrition.
Officials are also looking to better management of clinical resources—use of imaging and medication management—to reduce costs.
At Catholic Health Partners, a Cincinnati-based system with 29 hospitals, the 2% reduction to Medicare will amount to a revenue hit of $23 million to
$25 million a year, says James Gravell, senior vice president and CFO.
The system, which closed its books last December with operating income of $120 million on revenue of $3.6 billion, has targeted expense cuts of $250 million over five years to offset an expected drop in revenue and additional capital expenses, Gravell says. It reported operating income of $100 million on revenue of $3.4 billion in 2010.
Similar to other health system executives, Gravell says it's not yet clear how the system, which reported $3.5 billion in expenses for fiscal 2011 compared with
$3.3 billion the prior year, will meet that target.
“There's nothing that's a sacred cow,” he says, though officials have ruled out across-the-board cuts to healthcare professionals.
Investments in information technology, including computers stationed inside patients' rooms, have improved efficiency, he says, as have other investments that have reduced the length of a patient visit by 11% in the past five years. That leaves the system with fewer obvious options to reduce costs.
The system has launched an effort with its employees to promote wellness and better manage chronic disease, with the aim of lowering the system's health benefit expense.
“We're not totally discouraged,” Gravell says. “We're challenged and concerned.”
At Baylor Health Care System, where executives are in the middle of budget plans, officials have set a target to cut $680 million over five years.
That includes $150 million for the current fiscal year, of which executives hope to squeeze $90 million from hospital operations and $60 million from administration, says Gary Brock, COO for the 11-hospital Dallas-based system.