Can Hospitals Make More With Less?

Low cost hospitals in California generate less revenue than higher-cost facilities, but they tend to be more profitable.

That's the conclusion of Cleverley & Associates, an Ohio-based hospital consulting firm that surveyed 74 non-teaching hospitals in California with annual revenue of between $100 million and $300 million per year. Cleverley's firm used 2012 Medicare cost reports from the Centers for Medicare & Medicaid Services and data from the Office of Statewide Health Planning and Development, among other sources.

Cleverley's survey was presented Tuesday at the Healthcare Financial Management Association's annual conference in Las Vegas.

The conclusion: The high-cost hospital's net patient revenue per discharge averaged $11,257 – more than $2,000 higher than the low-cost hospital's $9,753. Yet the low-cost hospital's average profit margin was 4.7%, compared to negative 1.6% for the higher-cost facilities.

Cleverley concluded that the low-cost hospital's were far more aggressive in controlling their expenses. The average salary per full-time employee was nearly $7,000 less than the high-cost counterparts, at $75,217 versus $82,210. Lower-cost facilities also spent about 25% less on employee benefits than high-cost hospitals, about 27% less on pharmacy services and nearly 10% less on supplies. Administrative costs were also significantly lower at the lower-cost hospitals.

Cleverley's chief executive officer, William O. Cleverley, noted that the cost of delivering healthcare in the United States has far outstripped regular inflation over the past 40-plus years. He noted that the price of an automobile has risen about 10-fold since 1970, but that per capital healthcare spending has gone up about 25-fold at the same time.

Moreover, the ratcheting down of reimbursements from the Medicare program and private payers means providers should consider other means of combatting negative margins than raising revenues. 

"We have reached the point where, basically, the revenue machine is tapped out," Cleverley said.