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HEALTHCAREMANAGEMENT CAPSTONE

Professor Wanda FletcherCTU Online February 25, 2014Nikita Brown

2Healthcare ManagementCapstone

Research and Selection

The capstone project will focus on improving profitability in a hospital health care facility. The proper relationship between delivery of health care and profitability is the most fundamental question in health care organizational ethics. Every act of an organization has a measurable cost and some effect on financial affairs. In his journal article, Benson (2012) says that in the current market-place conditions, health care organizations are facing a major challenge of ensuring profitability at all cost. However, many people fear that whenever consideration of the bottom line enters into a discussion within a health care organization, all other values are forced to give way. The question of profitability in health care organizations becomes so controversial that many health care organizations do not address it forthrightly.

Leaders at Barnes hospital must find a proper balance between making profits and other values it may hold. This is because the health care organization must always have funds to pay stakeholders or owners. Making a profit is not morally objectionable, however; profit cannot be the only criterion to be considered. The board of Barnes hospital should seek information about the impact its decision has on the institutions’ responsibility to the public and patient care and how the decision relates to the overall mission and culture of the organization.

Maintaining profitability in health care organizations is important for a number of reasons. Firstly, if operations are to provide funding for the expansion of patient service capacity, those operations must be profitable. Even at the break-even point, Barnes hospital will not be

HEALTHCARE MANAGEMENT CAPSTONE


able to maintain current capacity because inflation has resulted in higher replacement costs (Goldhill, 2013). Secondly, Barnes hospital must maintain profitability because it is the only way to build up owner’s equity. Increased owner’s equity (net assets) will lead to a better bond or mortgage rating when it is necessary to finance expansion with a long term debt. Goldhill (2013) argues that this will decrease future interest charges and hence overall debt service costs. Many health care organizations do not have maximization of profits as a goal but even those organizations must generate some level of profit to achieve their other goals. Finkler, Ward & Calabrese (2012) noted that Barnes hospital needs profits to invest in expansion of services, so there is wider access to health care. The hospital needs to earn profits on some patients in order to subsidize those patients who are unable to bear the costs of their services. Barnes hospital needs profits to acquire new technologies to improve the quality of health care. In addition, profits will ensure that the management at Barnes hospital can deal with emergencies that arise. This does not mean that profits should be the only goal for Barnes hospital. High-quality health care often comes first. However, we must always bear in mind that profits are necessary to achieve the goals related to providing high-quality care. It is likely that high profitability will attract competitors. Therefore, aggressive enhancement or product development will be required yet market development may be difficult because of the already high market share. Barnes hospital must consider vertical integration and related diversification.

Barnes hospital seeks to improve profits through a list of potential ways such as adding additional services, decreasing costs, vertical integration, and inpatient specialty services, provision of specialized


services, increasing the amount of services that are provided, or implementing a quality improvement program that qualifies for incentive monies. The hospital should introduce cash cow products and services which have low market growth but a high market share and high profitability. In this case, Barnes hospital will have a dominant position in the market and further growth is unlikely.

Literature Review

Despite the intuitive appeal of the concept of market-driven investor owned hospitals being more efficient than not for profit hospitals, research evidence for this is lacking. In, fact reviews of the literature on this issue imply that investor owned hospitals are cost-efficient despite the claims that they focus on profits. For several years, health care organizations and providers have been challenged to deliver quality patient care in an environment of shrinking profit margins. Total margins and operating margins have followed the same trend. With rising labor costs, a poorly performing economy, and an aging population, these numbers are not likely to improve soon. Therefore to succeed in enhancing hospital or health care entity streams, hospitals must venture into new revenue and profit improvement areas through the application of optimal organizational structure, technology adoption, cost reduction, good and quality customer service, diversification and integration of services. The outcome may be faster performing revenue cycle and more profitable health care organization.

Barnes hospital should focus on vertical integration to increase its profitability. Vertical integration will improve the ability of nurses and other physicians to capture patients by controlling the continuum of care that is delivered to patients. This purview will provide Barnes


hospital with market advantage over competitors and potentially higher profits. A vertical merger exists when a hospital joins with one or more health maintenance organizations, outpatient clinics, home health agencies, rehabilitation centers, long-term care facilities, surgi-centers, and technical laboratories or wellness clinics. Vertical integration can include forward vertical integration, where hospitals purchase health maintenance organization, wellness clinics, surgi-centers, or rehab centers. This form of integration will bring Barnes hospital closer to patients and hence increase its profitability. Barnes hospital can also focus on backward vertical integration, where the hospital will purchase a manufacture of health care supplies or technology, a biotech company, or a producer of biotech products used in hospitals. This form of integration will bring Barnes hospital closer to suppliers and, therefore, increase its profits margins.

Barnes hospital should develop unique services to attract patients with specific diagnoses who require specialized care by highly trained specialists. In their research about hospital profitability, Yesalis, Politzer & Holt (2012) noted that services such as eye surgery or ophthalmology, brain surgery, pain management, hernia repair, gamma-knife brain surgery, and prostate treatment are specialized services that the hospital can use to acquire unique patient groups. The research also articulates that Barnes hospital can declare that they offer centre of excellence care in areas such as cardiology, transplantation, surgery, cancer treatment, patient safety, minimally invasive surgery, surgical weight loss, and robotic surgery. Through these types of specialization, the hospital can increase its market share hence improve its profitability through operating center of excellence.

Barnes hospital can focus on various diversification strategies to


improve profitability. Hospital diversification strategies include freestanding outpatient diagnostic services, inpatient rehabilitation, freestanding outpatient surgery services, industrial medicine, and women’s medicine (Yesalis, Politzer & Holt, 2012). In their research, other diversification strategies for hospitals include developing emergency departments, outpatient alcohol or chemical treatment centers, hospices, outpatient departments, outpatient rehabilitation, home health care and occupational therapy. It is important to note that competition between hospitals has led to an increase in the diversity of services that are offered. Services that are more complex enhances the prestige of Barnes hospital hence improve its profitability. The management must realize that hospitals are offering more technological services because health care is increasing in complexity and hospitals must maintain their market share of patients.

Hospitals have increased their focus on delivering ambulatory services due to their lower cost. The reimbursement method for inpatient care is a prospective payment system (PPS) where the provider is reimbursed a specific amount for the primary diagnosis. This method of payment has forced the hospital to cut costs, and consequently, the profits for some diagnoses have been lowered. Thus by shifting the patient away from inpatient care to less stringently controlled outpatient care there is the potential to increase profits.

Barnes can increase profits through waste reduction. This clearly is important for the management of Barnes hospital to avoid wasting the assets placed under their care because the difficulty is in finding expenses that are wasteful (Helvin, 2013). The above descriptive evidence is consistent with Helvin (2013) analysis. He conducted two tests of the hypothesis that non-profit hospitals behave differently from


improve profitability. Hospital diversification strategies include freestanding outpatient diagnostic services, inpatient rehabilitation, freestanding outpatient surgery services, industrial medicine, and women’s medicine (Yesalis, Politzer & Holt, 2012). In their research, other diversification strategies for hospitals include developing emergency departments, outpatient alcohol or chemical treatment centers, hospices, outpatient departments, outpatient rehabilitation, home health care and occupational therapy. It is important to note that competition between hospitals has led to an increase in the diversity of services that are offered. Services that are more complex enhances the prestige of Barnes hospital hence improve its profitability. The management must realize that hospitals are offering more technological services because health care is increasing in complexity and hospitals must maintain their market share of patients.

Hospitals have increased their focus on delivering ambulatory services due to their lower cost. The reimbursement method for inpatient care is a prospective payment system (PPS) where the provider is reimbursed a specific amount for the primary diagnosis. This method of payment has forced the hospital to cut costs, and consequently, the profits for some diagnoses have been lowered. Thus by shifting the patient away from inpatient care to less stringently controlled outpatient care there is the potential to increase profits.

Barnes can increase profits through waste reduction. This clearly is important for the management of Barnes hospital to avoid wasting the assets placed under their care because the difficulty is in finding expenses that are wasteful (Helvin, 2013). The above descriptive evidence is consistent with Helvin (2013) analysis. He conducted two tests of the hypothesis that non-profit hospitals behave differently from

for profit hospitals. First, a profit variability test determined whether profits of nonprofits exhibited less inter-temporal variation than did for profit hospitals as he expected. This according to Helvin (2013) would occur if Barnes hospital maximizes utility subject to a profit constraint or maximize income per physician on the medical staff, subject to a zero profit constraint for the hospital.

For this evidence from literature, it appears that, for those hospitals that survive, nonprofit hospitals will on average do what it takes to earn a nonnegative total margin, although for profit hospitals do not like negative margins either. In the process of maximizing profits, health care organizations may undertake riskier activities such investing in diversity areas such as ophthalmology, brain surgery, pain management, hernia repair, gamma-knife brain surgery, and prostate treatment. Benson (2012) in his research noted that one logical way to maintain profitability is to shift service mix away from unprofitable and toward profitable services. His review of literature suggests that direct national empirical evidence on changes in service mix by ownership form is not available.

Some empirical studies have investigated diffusion of technology in hospitals. Goldhill (2013) in his article asserts that new technologies will play a critical role towards improving the profitability of health care organizations. A large variety of innovations have been examined including process and product innovations. With rare exceptions, there are no statistically significant differences in adoption rates between improving profitability in privately owned hospitals and non-profit hospitals. Walker (2013) in his article articulates that ownership structure of a health care organization influences the mix of services offered by a hospital and hence the profitability of the healthcare


organization. His findings suggest that cases with high potential profitability are more likely to be treated in a for-profit facility. It is, however, unclear from Helvin (2013) research whether these cases would represent higher or lower risks.

According to Helvin (2013), complex cases might represent higher costs of care, but this might be offset by higher marginal revenues; therefore, more profitable cases might be more complex. The reverse could also be true. Either could skew comparisons between for profit and other hospital ownership types. Helvin (2013) noted that a healthcare outcome can be defined as a technical result of a diagnostic procedure or specific treatment episode. According to the high complexity of health care services and the fact that financial results are not key factors of an effective health care, multiple indicators have to be defined in order to measure the profitability of a healthcare organization.

Profitability of a health care organization can be improved through focus customers. The customer perspective in healthcare organizations could be seen as more important than the financial perspective. Yesalis, Politzer & Holt (2012) in their research noted that while in the case of a profit organization, the financial perspective stays on the top of the priorities, the most important perspective in a nonprofit health care organization is the mission. The most common customer perspective indicator is customer satisfaction.

In 2003, Yesalis, Politzer & Holt (2012) in their research used a simulation model to estimate the costs and benefits of forward vertical integration adoption in a generic primary care setting. The model relied on data from the author’s institution and literature reviews, although


data were somewhat limited in 2003. They estimated a net benefit over 5 years of $86,400 per provider, driven by reductions in the paper chart pulls and transcription, reduced drug events, more economically efficient prescribing, reduced laboratory and radiology ordering, and increased revenue or reduced losses brought about by improved billing accuracy.

In 2004, Yesalis, Politzer & Holt (2012) used a pre-post study design to examine the economic effect of implementing diversification strategies in a health care organization. His study included the savings achieved by more efficient customer service and billing. However, it is clear what, if any costs, were factored into the analysis. The estimated profitability of $8.2 million over 5 years for a 59 bed hospital facility was realized.

Arezes et al. (2014) noted that cost reduction was an important aspect towards improving profitability of health care organizations. Arezes and his colleagues noted that hospitals are under constant pressure to control health costs in order to improve profitability. In order to cut costs, the optimization of asset management within health care appears to be an important issue. In their research, Arezes et al. (2014) noted that in hospitals, the high value mobile assets such as blood, bed instruments, and surgical devices are often misplaced, lost or stolen. It is common for a hospital to lose 10% of its inventory annually. This is because of the fact that no one in a hospital has real time information about where movable assets are because these resources are frequently moved due to emergency necessity responses in different locations.

Research shows that hospitals have difficulty to locate 15-20% of their asset due to inappropriate and ineffective monitoring procedures. In


this context, healthcare organizations are searching for answers to reduce operational costs to improve profitability while at the same time facilitate healthcare delivery in order to offer patients with highly reliable care service. Arezes et al. (2014) conclude that appropriate use of technology in healthcare could result in process simplification and substantial improvement in patient safety. Establishing a traceability system is a key enabler to enhancing patient safety, improve the quality of care and at the same time reduce operational costs.

In healthcare sector, one of the environments that are being especially targeted for improvement is the operating room. Arezes et al. (2014) argues that this is because the operating room is the highest revenue generator within a typical hospital, but at the same time, it is also the one that has the largest costs. Focusing on cutting costs incurred in the operating room will greatly improve the profitability of Barnes hospital. Another important fact is that the quantity and complexity of SI, the high cost of equipment and staff time, and the inherent risk involved in many surgeries makes operating room and all processes that are involved directly or in directly with surgeries the main setting for improvements in patient safety and efficient management operations through technology.

From an economics point of view, if a hospital prices so as to maximize its profits, then the hospital will set a profit maximizing price to each payer class. Assuming that there are two types of patients, privately insured and Medicare patients, the hospital will have two sets of prices, the fixed DRG price per admission for Medicare patients and a price for the privately insured. The hospital is a price taker in the Medicare market and a price setter in the privately insured market. In this


context, Barnes hospital will seek to maximize its profits through the privately insured patient’s by setting the price at that point on its demand curve where marginal revenue (MR) equals marginal cost (MC) (Feldstein, 2013). If Medicare reduced its price and the hospital attempted to recoup that money by charging private patients more, increasing the price to private patients, the hospital would be worse off; they would be forgoing profit they could have earned. As a result, it is unlikely that Barnes hospital will increase the price if they are already at the profit maximizing price (Feldstein, 2013).

Faced with financial pressure from public and private payers, hospitals have attempted to increase revenues, decrease costs, and strengthen their negotiating positions with other providers and purchases of care. Many hospitals have diversified, offering new products to boost revenue and become less dependent on the demand for a particular service. Barnes hospital should focus on integrating with other providers, either by contractual arrangements or acquisition or have combined forces, forming alliances or actually merging with another institution (Helvin, 2013). Assisted by changes in the organization and ownership, hospitals have dramatically slowed their cost growth. Changes in the number and mix of admissions, outpatient visits, and other services may affect hospital cost growth and improve profitability. While hospitals seem to have made substantial gains in labor productivity, some of the improvement may be due to changes in the services being provided rather than greater efficiency.

Summary of Literature Review

The literature review highlights that changes in financing of care and medical practice patterns are profoundly affecting the profitability of


health care organizations. Both the shift in demand from inpatient care to ambulatory and post-acute settings and increasing payment restraint by private and public payers have eroded hospitals traditional revenue base. As more services have shifted from the inpatient setting to other sites, and as private payers have demanded ever larger payment discounts, most hospitals have seen a falloff in profit growth.

Hospitals have responded to the above unprecedented pressures by cutting their costs and attempting to improve their market positions. Lower cost growth reflects hospitals success in downsizing and improving productivity while restraining annual increases in wages. Hospitals should focus on expanding into related lines of business such as being specialists in cardiology, transplantation, surgery, cancer treatment, patient safety, minimally invasive surgery, surgical weight loss, and robotic surgery. This will enable hospitals to target specific market share and reduce competition. With this type of specialization hospitals are able to improve their profitability.

In conclusion, the review of literature articulates that hospitals should expand into related lines of business offering a wider range of ambulatory services as well as a post-acute care like skilled nursing services and home health care. In addition, hospitals can improve their profitability through entering into new relationships with physicians and other providers to ensure the continued flow of patients and enhance their negotiating leverage with payers. Finally, the literature review asserts that some hospitals can choose to consolidate operations with other hospitals through acquisitions and host of other arrangements with the view of growing revenue and improving profitability. The ability to change over from one patient to the next, from one test to the next, and from one operating room to next is critical to improving profitability


of health care facility. Barnes hospital should realize that setup reduction and maintaining flow of patients has the potential to increase revenue, reduce costs, enhance customer satisfaction and ensure the unobstructed low of processes in the hospital.


Arezes, P., João. J. S., Barroso, M. P., Carneiro, P., Cordeiro, P., Costa, N., Melo, R. B., Miguel, S. A., & Perestrelo, G. (2014). Occupational Safety and Hygiene II. Boca Raton, FL: CRC Press.

Benson, A. (2012). Amalgamated Leadership Model in For-Profit Organizations. The Journal of Global Health Care Systems, 2 (1). Retrieved from http://jghcs.info/index.php/j/article/view/91

Feldstein, P. (2013). Health Care Economics 2nd. ed. Styamford, CT: Cengage Learning.

Finkler, S. A., Ward, D. M., & Calabrese, T. (2012). Accounting Fundamentals for Health Care Management. Boston, MA: Jones & Bartlett Publishers.

Goldhill, D. (2013). Use Profit Motive to Improve Health Care. Retrieved from http://www.bloomberg.com/news/2013-01-21/profit-driven-medicine-offers-better-safer-care.html

Helvin, L.K. (2013). Caring for the Uninsured: Are Not-for-Profit Hospitals Doing Their

Share? Yale Journal of Health Policy, Law, and Ethics: 8 (2) Article 4. Retrieved on February 24th 2014 from http://digitalcommons.law.yale.edu/yjhple/vol8/iss2/4

References


References

Walker, J. (2013). Amid Health Law Rollout, Stryker Boss Braces for Profits and Pain Medical-Device Tax Seen as 'Very Significant Burden'. Retrieved on February 24th 2014 from

http://online.wsj.com/news/articles/SB10001424052702303643304579109234260309204

Yesalis, C., Politzer, R., & Holt, H. (2012). Fundamentals of US Health Care: Principles and Perspectives. Stamford, CT: Cengage Learning.

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