Monday, July 12, 2010

Ten Practices for Increasing Hospital Profitability: Tip #5

We continue this week with the discussion on practices that can make your hospital more profitable. Key areas like data based staffing decisions, managing vendors, OR utilization and physician involvement were discussed last week. Today I want to focus on the appropriate use of outsourcing or partnering for certain hospital activities.

Generally there is a reluctance to go outside for management of any area. These companies will come in and take a fee off the top to manage your area so that must be made up first before the hospital will see any financial benefit on the bottom line. Yet some of these companies can still produce a significant net increase in profitability because of the economies of scale they have particularly when dealing with smaller hospitals. I have used services like these in the past for areas such as dietary and pharmacy and have seen their benefit.

One additional motivation that drives hospitals to consider outside management is the ability to delay capital expenditures by using the management company's capital. A laundry facing the replacement of major equipment may be outsourced thus eliminating the need for new equipment. Dietary management companies have access to capital at attractive financing rates to assist with the purchase of new kitchen equipment.

With today's sluggish economy many hospitals, particularly in smaller communities, want to keep as many jobs as they can inside the hospital. Outsourcing is a last resort. Yet in some situations it may still be the best option. When considering this option it is important to make sure that each party knows why it is entering into the agreement and there is a mutual benefit. The benefit to the hospital may be directly financial through reduced cost of supplies and equipment, or it may be indirect by providing hard to recruit positions like ED physicians or anesthesiologists.

One final thought before you enter into any management agreement, make sure that you would not significantly improve the department's profitability through internal streamlining. Organizations such as Compirion have helped hospitals attain significant and sustained savings while working with existing hospital management and staff.

Outsourcing can make sense if done for the right reasons.

More on profitability practices tomorrow.

Mark Brodeur

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