Reasons Hospitals Become Profitable...My Opinion

I recently read in Healthcare Finance News, a blog entitled "Five reasons hospitals become profitable", posted on September 16th by Mike Stephens. Mr. Stephens lists the following influences he believes contribute to profitability: Payer mix; market leverage; product differentiation; highly disciplined and rigorous control of expenditures; and true hospital/physician integration.

While I agree these are important factors for the long-term development of profitable operations, I submit that, with the exception of expenditure control,  they do not get to the root of the issue. Payer mix is important and can be influenced by service offerings and marketing, but may be limited by the demographics of the population served.

 Market leverage, through market share, is achieved through mergers, acquisitions and other collaborations (such as managed care negotiation), but may also be under limited control due to the marketplace in which a hospital or system operates.

Product differentiation and hospital/physician integration lend themselves to proactive strategic initiatives, and may therefor be more controllable. Each of the five factors are appropriate objectives to facilitate future profitability, unquestionably. I would submit, however, the first steps in building profitability are: revenue capture and collectibility; control of expenditures: customer service culture; and focus on quality.

Start with any institution you can think of, that is not sufficiently profitable (as Mr. Stephens points out, "The median operating margin for hospitals in the same category (200 beds and over) is reported to be minus 0.7 percent." The first areas of opportunity to improve operating performance are those functions that already exist. The hospital is providing services. Is it capturing all of the charges, and coding them appropriately? Are the registration, billing and collection processes optimized to collect as much cash as possible, related to those services?

Similarly, has every effort been made to identify areas of cost reduction opportunity? Have all contracts been reviewed? Are productivity standards in place? Have processes been analyzed for potential improvement? I could go on, but my point is profitability can be immediately improved by increasing revenue generation and cost reductions under the existing model.

More importantly, will physicians and patients find their experiences at the hospital to fulfill their quality and service expectations? We need to develop a customer-friendly culture and the clinical practices and protocols to ensure quality results. This is no mean feat, but if we can't deliver quality and customer satisfaction, the strategic initiatives rightfully suggested by Mr. Stephens will be doomed to failure.

To summarize, I do not disagree with strategic initiatives to improve payer mix, create market leverage, establish product differentiation or develop true hospital/physician integration. These are certainly hallmarks of the 25 most profitable hospitals in the country as listed in a recent article in Forbes titled "America's Most Profitable Hospitals", and cited by Mr. Stephens. I do believe, however, there are initial steps to take that can and should precede these strategic initiatives, so as not to put the cart before the horse.