Healthcare organizations that have maximized the value of revenue cycle management can find additional ways to reduce costs and enhance efficiencies by looking at one of the biggest items on the balance sheet: real estate. Efficiencies in facility operations can improve profitability and enhance patient care, the core mission of the provider.
Real estate and facilities offer tremendous opportunity for untapped cost savings that drive bottom-line profitability. In many cases, the cost savings are recurring, compared to one-time reductions to the annual run rate.
Because hospitals operate with an average three percent bottom-line profit margin, real estate strategies that reduce costs by $10 million annually provide the equivalent of $330 million in additional revenue. Moreover, these financial gains can accrue without being detrimental to patient service or employee morale, which are frequent side effects of staff reductions.
Cost savings can result from a range of facility strategies, from energy management to optimization of space utilization to technology-enabled solutions that improve efficiency. A sophisticated, integrated approach that includes project management, capital solutions and tracking and documenting operational costs is the best tack to take.
Think beyond the hospital "box"
Healthcare executives who focus cost reduction strategies on flagship hospital facilities should expand that scope to include their entire portfolio. The best prospects for savings might exist outside of the main hospital facility.
Hospital executives can look for savings opportunities at all owned and leased property: ambulatory care units, physician and medical clinics and administrative offices. Every square foot of owned or leased space contributes to occupancy costs, and every site holds potential opportunities to save money.
Match the space cost to the value it provides
Aligning the function performed in a given space with its return on investment is prudent for healthcare organizations. As healthcare systems merge, expand or otherwise reconfigure, high-priced space is too often filled with low-return functions. For example, administrative departments may be housed in expensive quarters in the core hospital. Such office space can usually be secured outside of the main facility at a lower cost per square foot, freeing higher value hospital space for better mission-related purposes.
With the potential for increased demand for inpatient space from healthcare reform and the aging population, hospital facilities will be required for revenue-generating services, not cost centers like back-office services, IT, administration and others.
Another area of evaluation is the use of medical office buildings. The right mix of physicians in the right locations can drive revenues through referrals to the hospital. Further, if the building is owned by the hospital and occupied by independent physicians, there's an opportunity to monetize it, adding to cash reserves.
Track and document all operational costs
In many hospital operations, capital expenditures often are evaluated in program terms, such as a new facility or major addition, and individually instead of collectively. Also critical, especially when evaluated over time, are expenses generated by a new facility's day-to-day operations.
Senior decision makers often forego capital expenditures that would pay for themselves within a few years by lowering current operational expenses - particularly when facility managers can't provide accurate data on current costs and payback periods. Operational costs may not stand out individually as line items, but they can add up to millions of dollars annually.
It likely would prove beneficial for hospitals to establish reliable metrics and reporting systems in areas such as energy and water, maintenance labor, and equipment repair and replacement. Facility related expenses such as cleaning, food preparation and waste disposal can also present opportunities for cost reduction whether performed by internal staff or vendors.
Consider leasing when possible
Hospital executives may find it financially beneficial to take a hard look at their owned portfolio for opportunities to monetize properties that could be leased without impacting quality of care and improving regulatory compliance matters. In properties they own - like multi-tenant office buildings - healthcare systems can avoid excess operating expenses and capital costs.
Hospitals that have adopted an effective lease-oriented space strategy have reduced their overall occupancy costs by eliminating the initial investment cost and future capital costs that are the responsibility of the landlord. Ultimately, this creates more flexibility in future occupancy. Comparisons can be made between the cost of capital - including the total cost of capital (debt + equity) - and the effective rental rate.
For new space initiatives, executives should consider leasing a build-to-suit facility from a third-party developer. An organization can acquire needed space with minimum capital outlay and also mitigate the financial risk of design underestimates and construction overruns. The recent sluggish economy has increased availability and competition among qualified developers willing to build to suit and retain ownership responsibility, freeing the healthcare provider of the responsibility.
Sydney Scarborough is a managing director at financial and professional services firm Jones Lang LaSalle.