Publication: Healthcare Financial Management
Author: Greeno, Ron
Date published: August 1, 2010
Language: English
PMID: 17804
ISSN: 07350732
Journal code: HFM

Renowned writer Peter Drucker once famously identified the American hospital as "the most complex human organization ever devised." Not many hospital leaders would argue this statement, as they stare down the barrel of an ever- changing regulatory environment and a broken payment system.

And neither would hospitalists, the very physicians who have to operate in the very heart of that complexity every day.

Hospitalists are physicians whose primary professional focus is the general medical care of hospitalized patients. Present in nearly 70 percent of U.S. hospitals, hospitalist programs are becoming an increasingly important model of care. Since 1996, the specialty has grown to more than 31, 000 practicing hospitalists today, according to the Society of Hospital Medicine.

Hospitalists touch virtually every component of hospital operations, including nursing, imaging, pharmacy, laboratory, referring physicians, emergency department (ED), and critical care unit. They are on the front lines for a hospital's customers- its patients- shaping patients' perception of the organization every day.

Because of this extensive impact, a highly functioning hospitalist program can help hospitals operate more efficiently. Yet despite the potential hospitalists have to positively affect hospital operations in the areas of quality, safety, and finance, hospitalist programs do not always generate expected returns.

So why are some hospitalist programs producing disappointing results? Often, the problem is a consequence of how a hospital initially decides to fund the program.

From this decision flows a cascade of events that directly affects the program's performance. The basic financing philosophy from the outset will affect how a hospital budgets resources for the program in terms of manpower and dollars, how it structures the program, what it structures the program to do, what type of incentives it offers the physicians, what tools it gives them to succeed, and what it will deem as success.

There are two ways to look at the source and use of funds related to hospitalist programs: One is traditional and prevalent across the industry. The other is nontraditional and may also seem unconventional.

Traditional Approach

Hospitals are used to thinking about physicians as customers, whether they be employed, contracted, or simply on the medical staff. The physicians bring patients to the hospital, and the more they bring, the more money the hospital makes. So it is no surprise that hospitals tend to view a hospitalist program as an expense, a line item to be funded using current operating dollars.

For this reason, many hospitals structure the program like a simple staffing model, either employing or contracting with the physicians. The approach is practice-centric; physicians are compensated and given incentives based on productivity, not on their ability to make hospital care more efficient or better in terms of quality and safety. Success is then ultimately judged by the level of hospital subsidy associated with the program.

This funding mentality also affects how the program is structured and assigned resources. Understandably, CFOs are looking to limit costs. As such, they tend not to equip the program with additional clinical staff and tools or with dedicated management.

A hospitalist program is simply a group of physicians practicing inside the hospital seeing as many patients as possible- and perhaps helping to move some important quality and safety metrics along the way.

This approach, more often than not, leads administrators and physicians down a path of frustration. Hospitals find that the physicians cannot cover their own costs, because the average hospital medical practice does not bill and collect enough to pay its physician's salaries. Although hospitalist programs seem to be a financial failure, hospitals stay committed to having hospital - ists- no matter how frustrating- because referring physicians and specialists have come to expect them. The result: perpetuation of failure.

Jumping off this merry-go-round requires a whole new way of thinking.

Nontraditional Approach: A New Way of Thinking

Many CFOs would agree that the most expensive piece of equipment in a hospital is a physician's pen. So why do they still think of their physicians as customers? Why not bring them onto the team and view them as partners?

The answer is clearly related to how the current healthcare system is structured. However, as payfor-performance and value-based purchasing initiatives continue to get traction, hospitals and physicians will be forced to work together toward common goals.

Why not start now with the physicians who are in the center of a hospital's complexity?

Forward-looking hospitals already recognize the value of a closely aligned relationship with their hospitalist group. They see the hospitalist group as an essential piece of hospital operations instead of as a physician practice. They see the physicians as partners, and as a result, share risk.

These hospitals tend to provide their programs with more than enough physicians, along with supporting clinical staff and dedicated leadership-a "care-team" approach. They may provide their hospitalists with specialized technology and training in documentation, leadership, standard - ized-care processes, and hospital citizenship. They constantly measure the program's performance using quality, efficiency, safety, and satisfaction metrics key to their business goals.

Hospitals that employ a care-team approach toward their hospitalist program often see extraordinary results and long-term value. Their hospitalists become an integral part of the patient care path and quality control, better positioning them for meeting the sweeping Medicare reform initiatives.

these results are all rooted in how CFOs look at funding the program. These visionary hospital leaders do not see the program as an expense line item, but rather as an investment to be funded through currently unrealized dollars. The funding approach requires what some may consider an uncomfortable mental leap, key to which is the belief that there truly are unrealized dollars to be had. CFOs are challenged to think creatively and have faith that this "purchase" will give them a real ROI through nontraditional value creation.

Value Realization

Three primary areas of value creation are associated with hospitalist program performance: cost reduction, revenue generation, and cost avoidance.

Not all of the metrics in each of these categories will be meaningful to every hospital. Every CFO and every hospital is unique and therefore assigns a different value to each measure. For example, busy hospitals often design their hospitalist programs to increase throughput, which increases capacity and volume, translating to the bottom line. However, for hospitals that are generally half- full, creating capacity is not going to drive the same kind of value. Those hospitals, on the other hand, may design their program as a referral magnet to increase market share, driving up volume and translating to the bottom line.

The following ROI metrics create real value for hospitals across the nation.

Cost reduction. Decreasing direct variable cost (DVC) per case is true cost elimination. To measure value created by a hospitalist program in this area, a baseline must first be determined. The baseline is generally the average DVC before a hospitalist program is implemented or the DVC of multiple groups of physicians treating patients with a like diagnosis -related group severity weight.

Consider, for example, the experience of a 442-bed metropolitan hospital in the southeast. From April 2009 to September 2009, the average DVC per case on 3, 000 patients treated by a hospitalist group with a care-team approach was compared with the average DVC per case on a comparable volume of patients treated by a hospitalist group with a traditional approach, as shown in the top exhibit on page 78 . Both hospitalist groups treated a patient population with the same or similar severity. The average DVC savings of more than $1,000 per case with the care-team approach added up to approximately $3 million in total savings to the hospital in this timeframe.

Other possible cost- reduction strategies include efficiencies brought about through staffing modifications, resource utilization improvements, and IT investments- all enabled by an effective and productive hospitalist care -team working at its highest and best use.

Revenue generation. Hospitals can also increase their capacity by decreasing length of stay (LOS) . Decreasing LOS, especially for those at capacity, gives hospitals an opportunity to see more patients who would otherwise be sent away. Those numbers add up fast. For example, if a hospital reduces its average LOS of five days to four days, the hospital is essentially 25 percent larger.

Add to that the fact that elective surgical cases, which are profitable for hospitals, are the first to be deferred when a hospital is at capacity. The cases taking precedence are ED cases, which are generally acknowledged as the least advantageous payer demographic. By increasing capacity, hospitals can see more patients, improve their payer mix, and improve patient safety by getting patients out of the hospital faster.

At the same 442-bed metropolitan hospital in the southeast, the hospitalist care-team program is credited with reducing LOS from April 2009 to September 2009 to 1.1 days lower than the LOS under a traditional hospitalist model, as shown in the bottom exhibit on page 78. Multiply 1.1 days by 3,ooo hospitalist cases, and the hospital realized an increased capacity of 3,3oo patient beddays, or 890 incremental patients during that period.

CFOs may also look to generate revenue through other means, such as increasing inpatient flow and limiting ED diversion, increasing market share from new admissions, or focusing on value-based purchasing initiatives and advanced documentation methods to improve case mix index measures.

Cost avoidance. Avoiding one readmission of an uninsured patient saves hospitals thousands of dollars. Having better control over unnecessary readmissions will take on a new level of implication as Medicare moves toward implementing a penalty for Medicare readmissions beyond a designated threshold.

In fact, a recent academic study presented at the Society for Hospital Medicine's 2009 annual meeting found that a care -team approach to hos - pital medicine had exceedingly low readmissions rates, particularly for Medicare patients. The study reviewed patients discharged from 25 hospitals in 11 states during a one-year period. Medicare patients who had been treated and discharged from hospitalist programs that utilized a standardized discharge process that included outreach to patients following discharge were readmitted to these hospitals at a rate of only 6.4 percent within 3o days of discharge.

This study followed a popular April 2, 2009, New England Journal of Medicine (NEJM) research article, "Rehospitalizations Among Patients in the Medicare Fee-for-Service Program," which analyzed national Medicare readmission data. Researchers found that approximately 20 percent of Medicare beneficiaries are rehospitalized within 3o days of discharge- costing Medicare $15 billion annually.

Other cost-avoidance measures CFOs should consider include standardized practices and policies to decrease medical-legal liability cases. Hospitals are seeing large numbers of sick medical patients who are uninsured or underinsured- the highest risk profile for medical-legal action. Avoiding just one case could be worth millions of dollars to a hospital.

Which Approach Will You Take?

Although the value metrics discussed above may not apply to every CFO or every hospital, the undeniable common ground for hospitals is that the cost of care is high and hospitalist programs generally see a large number of the sickest patients. As a result, moving any of these metrics even a small amount creates tremendous value.

The number of hospitalists in U.S. hospitals likely will continue to increase. Hospitalists are seeing about 3o percent of all adult admissions, a number that is increasing every year. Hospital medicine is the fastest growing medical specialty in modern medicine, surpassing 3i ,000 hospitalists in only 14 years. The Society of Hospital Medicine predicts that 33, 000 hospitalists will be practicing nationwide by the end of 2010, compared with 3i.8oo emergency physicians and 32,751 cardiologists today.

Healthcare reform, including alternative payment methodologies, will create the need for tighter physician-hospital integration across the country. The trend is clear: Hospitals are moving toward a scenario where they will be paid based on their ability to perform. And to perform, hospitals will need physicians at their side aiming to accomplish the same goals.

With this perfect storm, how well its hospitalist program functions is going to become a greater determinant of a hospital's success.

Hospitals that believe their hospitalist program is underperforming should evaluate how and why the program was funded and built. Before building a new program or reorganizing the current one, hospital leaders should considerthe program in terms of the organization's goals: whyyou have a program, what you want it to accomplish, how your goals for the program fit into the overall hospital strategy, and whether or not your physicians are incented appropriately.

Remember that a hospital's performance related to its hospitalist program starts with a philosophy around the source and use of funds in building- or rebuilding- the program. To get it right, CFOs are challenged to think outside the box. After all, once the cascade of events is set into motion, there is no turning back.

Author affiliation:

About the author

Ron Greeno, MD,

is cofounder and chief medical officer, Cogent Healthcare, Los Angeles (

The use of this website is subject to the following Terms of Use