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What's on hospital executives' 'do-not-forget' list

January 2nd, 2013

by Kevin L. Shrake

There are 100 top initiatives that any healthcare executive can focus on today and 99 of them don't count. The one top priority is securing the financial viability of our organizations.

Two-thirds of hospitals do not make money on operations. They depend on investment income, spending reserves or corporate subsidy to survive.

So how can we focus solely on financial issues when other areas such as safety, quality and patient satisfaction are so important?

The answer is actually simple. Organizations that have set high safety and quality standards and have developed a culture that enhances physician, staff and patient satisfaction have lower costs.


You can take this concept further in regards to healthcare organizations that are proactive in meeting community need and involving key stakeholders in strategic planning, as well as the development of new strategies such as accountable care organizations (ACOs).

This also leads to margin improvement that creates financial stability. The old adage of "all roads lead to Rome" applies to the importance of how all of our key initiatives affect finances.

Executive Amnesia
One of the biggest obstacles to improving the financial stability of healthcare organizations is a phenomenon that could be termed "executive amnesia." We simply forget basic principles that should guide us in this unpredictable era of healthcare reform.

Here are some of the common areas that should be on every executive's "do-not-forget" list.

Quality: Study after study has demonstrated that high-quality lowers cost. If there is a commitment to drive your patient and employee incident rates toward zero, costs will decrease. How would finances be affected if surgical complication rates, lost employee days due to workers compensation and readmission rates did not exist?

Willingness to Look: Today's society offers the greatest level of "sensory overload" in history and it is escalating daily. Executives must cut through the white noise and have a commitment to looking at new ideas that can improve operations.

Clearly, not all best practice resides in healthcare. Look how long ATM cards have existed for banking as opposed to the progress of electronic medical records. There are lessons to be learned from other industries such as the use of e-payable programs to create cash rebates for paying bills, 100-percent-use of an electronic data interchange (EDI) process to eliminate paper transactions and self-distribution models for supply chain logistics, to name a few.

Prioritization: Executives should continue to challenge their priority list. Too often, we concentrate on something that does not have the impact of other initiatives with a much greater return. For example, what if there was an initiative that could lower annual utility costs by $500,000 without the need for capital purchases.

Here is the potential domino effect of such a project. The lower utility costs equate to securing the positions of 10 full-time equivalents (FTEs), which allows for better staffing ratios and leads to higher quality and satisfaction levels. Less energy use supports community "green initiatives" and lowers the stress on existing equipment, thus extending useful life.

People: Employees are the backbone of any successful organization. Optimal staffing ratios, low turnover and high levels of satisfaction all lead to high-quality and low-cost care. Executives should adhere to the simple rule of "be hard on things and good to people." That means having a benchmarking, process improvement and ongoing monitoring program for labor management that optimizes staffing and mitigates the need for employee layoffs when used appropriately.

In addition, if there is an emphasis to go after every single available non-labor cost saving or revenue enhancement opportunity, it is easier to support better staffing. Some organizations have lowered their beverage costs by going to a "sole source" arrangement. Even though this may limit the beverage choices for patients, visitors and employees, it is a much more prudent method of lowering costs than balancing the budget by eliminating FTEs.

Revisiting Options: There are too many times that executives get mired in the daily grind and don't go back to explore all options that have been presented to them. A prime example is to be sure to go to the files and include all pertinent companies in requests for proposals (RFPs).

Defaulting to only the most recent company discussions may overlook the best option for things, such as equipment maintenance and print management. Don't be afraid to look at innovative options that might include strategic outsourcing for service departments or aggregated, high-leverage programs to lower employee benefit costs.

Some organizations are thinking outside the box by adding a "virtual chief financial officer" to either fill a current vacancy or add resources to an existing CFO.

High Cost of Inaction: There are easily measured "opportunity costs" of not taking action on key margin improvement initiatives. Calculate the lost cost savings or revenue enhancements on a weekly or monthly basis and then use that data to prioritize projects.

If a project offers annual costs savings of $520,000 the weekly opportunity cost of not taking action is $10,000 per week. When put in these terms, it often adds clarity to the priority list and minimizes the "ready-aim-aim-aim-aim" syndrome.

Take-home Thought: You cannot downsize your organization to prosperity.

Understanding the high cost of executive amnesia will keep us focused on the "do not forget" list. Be open to new ideas, look for ways to add strategic assistance, go hard after non-labor savings and optimize staffing levels. Don't forget to listen to what you are telling others. Warning statements of ineffectiveness include:

  • I'm too busy to meet on that concept
  • We already have that covered
  • That is not enough money to go after
  • I have more important priorities right now
  • I will look at this at the start of the fiscal year

The upcoming years will provide change and uncertainty for healthcare. If we default to emphasizing quality, safety and satisfaction, which lead to financial stability, we will be better prepared to handle the changes before us.

Kevin L. Shrake ( is a 35-year veteran of healthcare, a Fellow in the American College of Healthcare Executives and a former hospital CEO. He currently serves as the Executive Vice President/Chief Operating Officer of MDR™, based in Fresno, Calif.


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