Major Business Challenges of Hospitals

The Major Business Challenges of Hospitals

Hospitals across the country seem to be constantly battling conflicting priorities. On the medical side, this includes the need to focus on delivering high quality patient care, preventing infections, and ensuring patient safety, for example – all with extremely stretched resources. But there are as many challenges on the business side of things and here are eight that seem to be highly
pressing today.

1) Financial challenges: Hospitals are extremely expensive places to run, being a giant “ department store” for healthcare. This includes not only capital costs like buildings and equipment (which are often large and run into many millions to buy) but involve very large scale expense items like staff, consumables and energy costs, just to name a few. These financial challengesare putting huge pressure on healthcare provider organizations to do more with less without compromising quality of care and this means that the hospital business model and hospital business plan needs to be updated on an annual basis to make sure that the whole entity can remain solvent. These days this is an amazing “juggling act” and one that needs a lot of help.

2) Reduced Reimbursement rates
As a matter of public record, Medicare, on average pays hospitals more for treatment and procedures than any other type of healthcare provider organization. For example, last year Medicare paid US hospital outpatient departments over 65% more than ambulatory surgery centers for the same procedure, according to the Medicare Payment Advisory Commission. But this gap is fast closing and hospitals will face enormous pressures to respond. This is particularly the case because a hospitals’ whole business model is based on covering their fixed costs as well as ensuring high occupation and utilization of the operating and patient rooms that have already been built. Hospitals and health systems have several ways of addressing the issue, including building their own surgery centers, for example, with lower overheads or entering into joint ventures and partnerships with physician groups to do so. In addition, hospitals can address their overhead costs more strategically (such as looking closely at complex processes and waste at all levels) in order to become more able to survive in his lower reimbursement level climate.

3) Shifting from volume to value-based reimbursement
The move from volume to value-based reimbursement has been a much-discussed topic across healthcare and is no more so than in the hospital system. But this is no easy transition. If hospitals move too fast in the making the change they risk losing revenue or adopting a strategy their market does not support. Conversely, if they move too slowly, they may lose potential partnership or collaboration opportunities. This may be critical experience and time that could have been spent changing internal staff behavior (albeit slowly).In the final analysis hospitals know that value based reimbursement will quickly replace traditional fee-for-service. The quicker hospitals therefore face up to how to make the transition, and have a clear strategy to do so, the better.

4) Regulatory standards. Compliance with regulatory laws and standards can lead to significant disruption in cost, operational and human terms, not to mention adversely affect the patient/consumer confidence in the hospital. Healthcare providers must therefore carefully adhere to numerous complex regulations that set guidelines and expectations for quality, coding, reimbursement, data security and overall care delivery etc., and keep this compliance up-to date while doing so. Although many of these regulations were designed to improve care and efficiency, many hospitals see them as burdensome and impractical.Regulations like the transition to ICD-10 coding and the two-midnight rule (which ensure that any patient who stays in the hospital longer than two midnights legitimately needs to be there), for example, each require providers to allocate extensive time, money and staff for effective implementation. Once again, hospital business intelligence must include good planning about compliance needs and then a well-crafted system to ensure that it is not exposed to inappropriate risk.

5) Patient satisfaction:Not only do patients need to be happy about their treatment to use a hospital’s services again (which can have a significant affect on future revenue) but the well-being of patients is a key to reducing length of stay and preventing readmissions, which now have even greater cost implications than ever. Hospitals therefore need to make patient satisfaction a core part of their business strategy and make sure that it helps to build rather than harm their reputation.

6) Dealing with Population health
Although healthcare leaders at all levels need to think creatively about how to improve the health of a population in a given geography, hospitals are often expected to take a lead in appreciating what their local population needs are and how they should be accommodated, in the short, medium and long term. As a start this often means that a hospital must have the capacity to pull together a lot of what might be quite disparate data on the population, some health and some other, and then use it to determine how services should be then best designed or provided. Some of these will be defensive and preventive-based interventions (such as better healthcare education) and some will be more reactive (but with the added intelligence of knowing statistically what to expect).

7) Dealing with Big (and Small) Data
IBM’s supercomputer Watson is already producing healthcare treatment plans for individuals based on their genetics and large companies such as Google, Apple, Microsoft and Samsung (just to name a few) now have full platforms for health and wellness tracking accompanied by sensors and wearable consumer technology. These initiatives will produce health-related data about people on an unprecedented level and, as unfair as it sounds, hospitals will be expected to be able to both receive and interpret it to help render the best possible treatment interventions when necessary. But this creates a huge business challenge for hospitals that have their own large pools of patient data to manage and now need to have the systems and processes to accommodate these many eternal sources. Its not that hospitals don’t want the data, they just need to be able to cope with the volume (and associated cost of doing so) and then use it gainfully to the patient’s benefit.

8) Integrating systems
Many senior physicians and hospital administrators are beginning to realize their health systems are an often large and unconnected series of “islands” which may or may not be properly connected. And this has to change. The clear challenge then is to develop a well-thought through integration strategy that can be implemented in a way that is both cost effective and can be accommodated without disrupting normal day-to-day operations. This needs very careful planning and often benefits from external consulting perspective.

There are clearly many other business challenges that hospitals face but by focusing on these eight and by having a clear strategy to deal with each of them this focus can make very dramatic differences very quickly. RX4 has experienced all of these challenges in many different hospital environments and can provide considerable insight and options where the knowledge is limited or does not exist internally.

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Dr Jon Warner

Dr. Jon Warner
CEO-RX4 Group-Taking Care of the Business of Healthcare

Jon is the CEO of RX4 Group based in Los Angeles, California. He can be reached at

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