The hospital industry is currently facing a confluence of trends that require a complete reexamination of the cost and value of new hospital construction. Despite a slight increase in Medicare payments for 2012, Medicare, Medicaid, and private insurance reimbursements remain under significant, long-term downward pressure, which have the potential to be further reduced in the wake of Congress’ super committee failure.
Also, the persistently soft economy has many states looking for relief from their Medicaid budgets, and although Medicaid only represents an average of 10-11 percent of most hospitals’ revenue, the potential for reductions will further constrain hospital revenues.
With these concurrent trends, hospitals considering the development of more capacity must carefully weigh the approximately $1 million cost for each bed created in a new facility versus pursuing operational improvements which will lead to the creation of virtual beds that offer real revenue enhancements.
For providers who have achieved total hospital efficiency by transforming their operations from a collection of silos to a well-tuned operating system, the creation of virtual bed capacity has been a very consistent outcome. Virtual bed capacity is calculated by multiplying the improvement in LOS, for example 0.4 day, times the annual admissions (example 21,141), then dividing by 365 (days per year). The resulting 23 virtual beds represents the amount of 'new' capacity the hospital has created, enabling them take on additional patients without the expenses associated with a capital building project.
Besides the avoidance of capital costs, there are two distinct cost savings that hospitals can also realize. First, as the LOS drops the cost per case is reduced resulting in direct improvement in financial performance. Secondly, as the LOS improves the ability to maximize case rate revenue and the revenue position of the hospital is enhanced.
In one recent example, a 534-bed teaching hospital, over a two-year time period was able to reduce its ALOS from 5.1 to 3.8 days on a case mix index of 1.8. As a result of its operational transformation effort 110 virtual beds were created. This remarkable achievement represents the equivalent of creating a new hospital within a hospital, while avoiding all of the associated capital outlays.
While many hospitals have undertaken process improvement efforts to increase operational performance, they have been unsuccessful in creating sustained virtual bed capacity. This is because these process improvement efforts are constrained by persistent silo behavior and the dependence on human performance to maintain improvements. Only the transformation of operations from a collection of silos to a well-tuned human and technology operating system resulting in total hospital efficiency will drive the sustainable reduction of ALOS and the creation of virtual beds.
In an era of tighter reimbursements, the ability to create virtual bed capacity, and improve financial performance through the achievement of total hospital efficiency will help hospitals improve their financial position during these uncertain times.
Ben Sawyer is executive vice president of Care Logistics.