Preventing -Hospital Insolvency

Posted on 02-April-2020 at 02:06 PM

“Why are hospitals more vulnerable in the current economic crisis than other organizations? 

Why are some hospitals successful in the current economy and others unable to stay open? 

What can be done about this?”


In order to measure a hospitals financial viability there are several factors to consider. 

First, it is necessary to identify how a hospital generates its revenue. 


There are several sources of revenue for hospitals which include but are not limited to revenue for providing medical services, revenue for providing nonmedical services, investments, and donations and grants from individuals, foundations, and the government.


Operating revenue, or income earned by delivering patient services, is the primary way that hospitals generate revenue. Hospitals rely directly on the patient or third party payers for reimbursement for their services.


Second, it is necessary to identify hospital expenses. 


The majority of hospital expenses result from wages and salaries paid to employees.


 Other expenses include supplies, depreciation, interest payments, and bad debt. Bad debt is the charges the hospital expects to collect for the services but for which it does not receive payment.  


Hospital revenue and expenses are used to calculate the operating margin. The operating margin measures the “hospitals profitability, before taxes, and reflects a hospitals ability to sustain and grow its business in the future.” This is measured generally by comparing the hospitals total operating revenue against its total operating expense.


The first target of any hospital today is to get operational positive in order to pay the basic wages and salaries to sustain the hospital operations. But the PAT in most of the cases goes negative as the loans and interest on the loans added with the taxes eats up most of the profit.


There are many reasons why hospitals are facing financial difficulties and considering closing down. The large organizational structure in hospitals often makes it difficult to isolate just a few factors responsible for hospitals poor financial health:


·        Reimbursement rates from third party insurer have fallen/delayed which has put a significant financial burden on hospitals.

·        High cost of hospital resources: updated equipment, training and labor.

·        Increased percentage for doctors /consultants on the treatment bill.

·        Over staffing in order to maintain the organization structure even when the need of multiple layers is not present.


Recommendations for hospitals in financial distress


While 2017 may appear to be a grim time for hospitals to keep their finances positive, there are several things hospitals can do to go beyond just maintaining solvency.


Hospitals and health systems essentially have two options: 
They can either cut costs or create new revenue streams.


Several creative cost-cutting techniques have been detailed over the years — curbing food waste by weight, properly sorting hazardous from non-hazardous waste and more. However, as hospitals continue to evolve; new opportunities to save money are poking their heads to the surface.


a)     Focus on the continuum of care.


The continuum of care hospitals need to focus on includes the initial admission, how services are provided within that admission to create the most efficient process for a quick yet appropriate discharge, a discharge to the appropriate post-acute setting and follow-ups with that discharge.


b)     Remove and reduce lighting.


Reduce the number of bulbs in multiple-light fixtures where possible, eliminated unneeded lighting in areas like chart racks that are now digitized and installed switches in rooms and areas where lights do not need to be on at all hours of the day.


c)      Install solar panels in sunny areas


Installing solar brings down on the electricity bill and also government is providing subsidy on electricity bills for the hospitals having solar panels.


d)     Manage new service lines to increase market share.


If hospitals want to become or remain profitable next year, they will have to monitor their service lines to see if any are leaking money. Increasing market share through new services is the most effective way to deal with any reduction in net payments.


e)     Control labor costs with meticulous data collecting


At most hospitals, more than 50 percent of expenses are related to labor costs or labor-related costs, so it becomes essential that the management keep a tab on the labor cost and review the cost data against the budgeted data frequently. 


f)      Reduce supply costs by working with vendors and physicians.


Hospital owners can reduce supply costs through two main ways: working with vendors to improve contracts and encouraging physicians to make fiscally responsible purchase decisions.


g)     Replace inefficient sinks, toilets and urinals.


Water wastage is a major problem which most of the hospitals ignore. As toilets are ignored by the management, they forget a major point that water saving can boost up there profitability.


h)     Better financial oversight  and management


Requiring hospitals to have better financial oversight and management can also help hospitals regulate their finances and prevent bankruptcy.


i)       Design models to reduce readmissions


Readmissions negatively impact a hospital's bottom line in several ways, such as the high costs associated with them and scrutiny from private health insurers and patients.


There are several ways hospitals and their physicians can effectively reduce their readmissions, such as ensuring patients attend post-acute OPD visits routinely after discharge and overall providing resources to people to ensure they are taking the proper post-discharge steps.


j)       Consider outsourcing some services


Laundry services, housekeeping, food services, facility maintenance and some biomedical and clinical departments are commonly outsourced services. A hospital must be prudent when it decides to outsource a service, though, and it must have a contingency plan if the proposal does not work out. "Whenever you outsource a service, you need to be prepared to bring it back in case the relationship disintegrates or if the third party is not able to provide the level of service we expected or anticipated,"


k)     Consolidations and acquisitions of services


Mergers provide a good solution for weaker hospitals who are considering closing down. Mergers can provide hospitals with cost savings, greater access to capital, improved utilization of resources, and more efficiency in the delivery of health care. By saving costs the hospital decreases its operating expenses and as a result consumers can enjoy lower health care costs


The list can be never ending as there are many small scopes which are primary ignored by hospitals. If proper planning is done and if management starts taking care of these small things then this will help hospital the state of insolvency. 

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