Can hospitals maintain high quality care while cutting costs?

Myron Machula, the CFO of Enloe Medical Center in Chico, Calif., knows that his hospital’s costs are rising while revenue and patient volume are falling. He also knows that rural not-for-profit hospitals, such as Enloe, face a challenging financial future, one in which some facilities might close or at least “go hungry.”
That sobering vision explains why Machula is cutting $15 million from Enloe’s annual operating budget of $410 million and why he may need to cut $10 million more when fiscal 2015 begins on July 1, he says.

A major revenue concern harbored by Machula, and hospital CFOs nationally, relates to the anticipated influx of newly insured patients resulting from the Affordable Care Act.  Many of these patients may be unable to pay for care because their health insurance requires high out of pocket spending before an insurer pays a dime.

“For many of the newly insured, their ability to take care of their copayments may be beyond their means,” Machula says. In Enloe’s case, revenue from self-pay patients (currently at 3 percent) may rise to 5 percent or 7 percent, and its level of bad debt may climb as well.

It’s time to operate below budget, he says. “We are having conversations to make sure managers and directors understand that if they are operating to budget, that won’t do it,” Machula explains.

[See also: Managing the shift from volume to value.]

But cost cutting must be done judiciously because the 298-bed hospital needs to deliver high quality care to attract and retain patients in a competitive market. In June of last year, the medical center earned the Community Value Five-Star award from the consulting firm Cleverley + Associates. The firm ranked Enloe in the top 20 percent of hospitals for maintaining low costs and low charges, for reinvesting in care delivery, and for offering high quality care.

Despite this recognition, the two primary insurers serving the region, Blue Shield of California and Anthem Blue Cross of California, are uninterested in developing strategic partnerships, Machula says. The medical center lacks the patient volume they seek.

A level-two trauma center, Enloe is the largest hospital between Sacramento and the Oregon border. Its nearest competitors are the 133-bed Oroville Hospital (which also received the Cleverley award) and the 86-bed Feather River Hospital in Paradise, Calif., part of Adventist Health. Several urgent-care clinics and critical access hospitals compete for patients as well.

While capitated contracts have a long history in the state, they are virtually nonexistent outside of Southern California, meaning rural hospitals such as Enloe lack a steady stream of managed care payments that would be useful for developing a strategy for population health.

[See also: Reforecast: The end of the budget.]

“The question being asked is how many of these facilities will survive over the next five years,” Machula says. “The market value of the Enloe Medical Center is indisputable. That doesn’t make it any easier, but it means that if we take the correct course of action, we will be here. Maybe one or more of the other facilities will not.”

To ensure its survival, Enloe is considering forming alliances with federally qualified health centers, one or both of the two nearby hospitals, or a large urban hospital system. It also seeks to partner with as many physicians as possible but is limited in its ability to contract with them directly because the corporate practice of medicine is prohibited under state law.

Another constraining factor is a California law that mandates minimum nurse-to-patient ratios. “The law limits our flexibility,” he says. “Maybe there needs to be more support staff or perhaps the model of care here at Enloe needs to be revised.

“We are only just beginning to dip our finger into this transformation but we need to move quickly because if we don’t, rising costs and falling revenue will eat our lunch,” he says.

And if a Five-Star facility like Enloe goes hungry, that’s an ominous sign for rural hospitals everywhere.