Hospital industry divided into the haves, have-nots
Financial analysis takes business school approach
If hospitals want to stay in business in the long term, they have to start looking at themselves the same way other businesses do: Maximize return on equity and stop looking at the relationship of income to revenue as the primary financial focus. That’s the message from William Cleverley, PhD, president and CEO of the Columbus, OH-based health care information consulting firm Cleverley Associates.
In a study of data from more than 4,000 hospitals over three years, Cleverley says he found that hospitals are in a great deal of financial trouble and that there are some that are very unlikely to survive. Those that will survive will be looking at issues and information that aren’t usually considered important by the health care industry. "This is different than what is out there because we try to interpret the data that are out there, not just report a bunch of numbers," he says. There are compilations of data put out by Solucient and by United Healthcare, the Source Book and the CHIPS Almanac, respectively, but Cleverley says they are only financial and operating statistics. "We provide an extra step," he says.
In addition, he uses some data sets that aren’t usually included in financial analyses of hospitals. For instance, looking at surgery percentages is rare, although surgery is more profitable. Average margin on Medicare discharges and revenue growth percentage year to year aren’t shown. "In the retail sector, same store sales growth, revenue growth percentage, is a key driver," says Cleverley. "But no one looks at that for health care. And they’ll look at average charge per discharge, but not per Medicare discharge. They’d have to integrate databases to do that," he adds.
Cleverley also looked at different coding factors, such as the mix of chest pain, DRG 079, and angina, DRG 089. "If you have a lot of chest pain but not a lot of angina, you may have an issue with bad documentation," he says. Similarly, long experience in health care has taught Cleverley to look at the highest of the supply costs, such as joints for replacement surgery and pacemakers. "If they are high there, likely, the facility is paying too much across the board."
There are key drivers that will show whether a facility is going to do well or not. Among them are market share, product mix, and market size. Not among them is cost. "High market share in high-performance hospitals does not produce lower unit costs for these hospitals," Cleverley writes in the report. "Many people have an intuitive belief that hospitals that perform better financially have lower costs. Our data suggest that this is not true. Better-performing hospitals do not have lower costs when compared to other hospitals."
For example, high performance hospitals’ median cost per adjusted patient day wage is about the same as low performance hospitals for administration, higher for nursing, capital, and ancillary services. (See chart, below, for the comparison.)
|
Median Cost per Adjusted Patient Day Wage Index Adjusted 1999 |
||
| High Performance | Low Performance | |
| Administration | $158.68 | $158.87 |
| Nursing | $137.03 | $123.11 |
| Ancillary | $369.60 | $315.45 |
| Capital | $94.55 | $90.74 |
| Emergency Room and Outpatient | $44.71 | $51.87 |
| All Other | $350.66 | $368.40 |
|
Source: Cleverley Associates, Columbus, OH. |
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What really drives performance, he says, is price. "And if price is the difference, why don’t hospitals that aren’t doing well raise their prices?" Cleverley asks. "We aren’t able to answer that question. But even if you only have 10% of your products where you can raise prices, it can still make a difference. There are smaller indemnity players or expensive elective surgeries that are candidates for that. It can make a difference. And we can see in this report that the most successful hospitals are the ones that charge more."
Not that pricing is the only issue, Cleverley says in the report. "Successful hospital executives must understand all of the critical relationships that affect the financial performance of their hospitals, and they must be able to aggressively manage those relationships wherever and whenever possible."
The successes are the facilities whose management emphasizes the most profitable product lines and negotiates the smallest discounts on managed care contracts. "We can see from this that the better performers concentrate on higher margin product lines and code more aggressively," Cleverley says. "It makes good business sense."
[For more information, contact: William Cleverley, PhD, President and CEO, Cleverley Associates, 1550 Old Henderson Road, Suite S-176, Columbus, OH 43220. Telephone: (888) 779-5663.]
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