Brooklyn hospital goes from bankruptcy to profit
Decision-support system rescues hospital
Anyone who doubts the importance of a viable information system should heed the story of Long Island College Hospital (LICH) in Brooklyn, NY.
Just three months from bankruptcy, the institution was able to return to profitability with the help of a decision-support information system.
LICH is a State University of New York-affiliated teaching hospital with 516 beds, 2,700 employees, and 200 residents and medical students.
When Don Snell began as president and chief executive office in November 1996, he found LICH on track to lose about $24 million to $25 million for the year. "It was spending $1.5 million a month more than it was taking in. LICH was meeting cash flow obligations by liquidating board funds," says Snell.
"When I arrived, the hospital had about $4.5 million to $5 million left." The hospital had done little to bridge the widening gap between revenue and expenses, he explains. "While the revenue was dropping probably 5% or so a year, [LICH] had not [reduced] its expenses at all."
One problem the institution had was a minimal information program. It had an automated general ledger system, but almost everything else was done manually.
Compounding the problem was the deregulation of the industry in New York state. "On Jan. 1, 1997, the state went from a total rate-setting methodology to a free market overnight. The institution was poorly positioned to compete in an open market. It had been existing in a rate-setting state and even under that mechanism, had been losing money ever since 1993."
Since all of the hospitals in the state were going from a state rate-setting mechanism to having to negotiate individual contracts with third-party payers, Snell began looking for a system that would give him basic cost information, as well as some medical staff profiling capabilities.
"I was looking for some information that would allow me to know my costs, the components of the costs, and the utilization so we could have intelligent negotiations with the third-party payers," explains Snell. "Without this type of system, any kind of analysis in terms of negotiating per diem contracts or full-risk capitation would have to be done manually."
Snell's search for an information system was stymied by a lack of funds, however. Consequently, he notes, with a history of no profitability, the institution had no money for capital, facilities improvements, or information systems.
"Within the first three months, I had to take out $25 million in expenses, and we laid off 565 people, which was about 18% of the work force." Snell found several systems that seemed to fit his needs, but most were out of his price range. One cost accounting system cost in excess of $2 million. Medical staff profiling systems cost $500,000 to $1 million.
In December 1997, Snell's staff assistant saw a demonstration of HealthShare One, from Health Share Technology in Acton, MA. The system offered cost capabilities, market intelligence, and physician profiling, at a price of about $30,000.
Included in this system was discharge data by patient from New York State and Medicare Cost Report information filed by hospitals with the Health Care Financing Administration in Baltimore. "Because New York is such a data-rich state, this system, at the time we were looking at it, had all of 1996 data for every discharge in the state and half the year of 1997," notes Snell.
Turning finances around
Snell purchased the system and began using its information to stop the hospital's financial bleeding. The first thing he and five other key executives at LICH with access to the system did was analyze the facility's costs.
"We have been able to use the system to compare our costs institutionwide and by product line to our competitors. Using the database, particularly because it's fairly current, we can get cost per day, and cost per case information and compare it to institutions, compare it with services within institutions and even to physicians within institutions. That's been helpful to us."
The system uses a standardized ratio of cost to charges to determine the institutions' cost. "You can do cost profiling by DRG, by service, or by physician. The information helps you understand your costs and utilization, your history as well as your current status," he continues. It allows you to make operational decisions and negotiating decisions."
The information has proved invaluable in negotiating with third-party contractors.
"In running the reports in the system, we knew that our cost per day for our Medicare population was in the $850 to $900 per day range," Snell says.
"One of the major third-party payers that was doing a Medicare-managed care product had initially offered $700 per day. The information was helpful in letting us know how much flexibility we had and when we had to walk away from the table," he adds.
From the first couple of rounds, LICH walked away from the table because it knew that its direct costs were not going to be covered by the rates that they offered, recalls Snell.
"We now know what our cost per diem in terms of Medicare is. We know how we are going to shape up against any competitors in this market. We also know what the floor can be then in terms of negotiations with third-party payers. [The information] has changed the nature of our relationship with third-party payers," he says.
He also uses the system to evaluate staff loyalty. He can determine which physicians are admitting 100% of their patients at LICH. If they are not admitting 100%, the information shows where their other patients are going.
Snell can examine physicians by specialty, too. "If I want to do a consultant report of cardiology, I can load in all of our cardiologists. I will get information on market share and payer mix. I will get the profile of the entire group against the best practice and get recommendations about potential savings."
Snell can use the staff profiling information in negotiations with LICH's department chairmen. For example, the information lets them see how their faculty ranks against others.
"We've been putting a lot of pressure on the chairmen here to reduce length of stay and utilization, and to keep unit costs down. In some of the negotiations, we have more information than they remember us having - and more than they think we probably should have," he explains.
The turnaround has been dramatic. Once the high-cost leader in the market, now LICH is the second-lowest. (To see how LICH has performed, see chart, p. 141.)
"[The information] has helped us identify our former position and has allowed us to monitor it. LICH is now profitable. Our bottom line is now close to $1 million in the black. That is a turn-around from a $31 million operating loss in 1997," adds Snell.
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