When dealing with the financial complexities of the new healthcare economy (i.e. doing less with more) we often overlook a simple lesson that other industries have learned in this recession: To be successful in this new economy we need to forcefully match our revenues to our expenses. There can be no exceptions to this business rule!
Based on a study of hospital operating margins circa 2006-2009 by Thomson Reuters, most hospitals have responded to this lesson and have posted operating margins in the range of 2.9 and 4.5 percent. However, my frequent discussions with healthcare leaders, along with performing in depth analysis of their operating expenses, leads me to believe that all healthcare organizations haven’t gotten this message.
We are still seeing major teaching, and large, medium and small community hospitals exhibiting meager or non-existent operating margins while their expenses are still ballooning. In one major teaching hospital that we recently studied, we identified 8.5 percent in wasteful and inefficient non-labor practices in the range of $13 million that this hospital is either ignoring or is in denial about. Yet, this same hospital’s bottom line is seriously bleeding red ink.
This business rule reminds me of when I was a consultant for a large hospital turnaround company. In our first month on any turnaround assignment we would determine, as a team, how much money was needed to be saved to give this client a respectable bottom line, and then we would set out to find the corresponding labor and non-labor savings to make this a reality. No elaborate analytics! No lengthy meetings! No philosophizing! No procrastinating! We just rolled up our sleeves and made savings happen!
This is exactly what AmerisourceBergen, Cosco, Wal-Mart, McKesson, Procter & Gamble, Kroger, etc., did to maintain their status as the most profitable companies in America even when the great recession trimmed their sales. We all can take a lesson from these hard-nosed business leaders: Cost is always our enemy; we must always be on the attack!
Robert T. Yokl
Chief Value Strategist
Strategic Value Analysis® in Healthcare