Hospitals Look to Reduce Corporate Services Spending

Three-quarters of provider executives believe their corporate services spending could decrease without impacting quality of care or efficiency, according to a recent survey of over 100 hospital and health system executives.

About 36 percent of the respondents also suggested reductions of 10 percent or more, found the survey conducted by the Healthcare Financial Management Association (HFMA) for Navigant, a Guidehouse company.

“Revenue growth remains a constant challenge for hospitals and health systems due to such aspects as stagnant reimbursement and meager inpatient growth, prompting many providers to grow inorganically via M&A while targeting corporate services for meaningful cost reductions,” stated Robert Green, partner at Guidehouse.

“This economic reality requires providers explore creative opportunities to simplify and streamline a complex organizational structure while consolidating, automating, and outsourcing functions to drive more efficient and effective corporate and shared services delivery.”

Most hospitals and health systems (48 percent) spend at least 10 percent of total operating revenue on corporate services, such as communications, finance, supply chain, human resources, and IT. The spend allows the organizations to manage hundreds to thousands of employees across the enterprise while advancing the organization’s business goals.

Hospital corporate services spend has increased dramatically, rising more than twice the rate of net patient revenue from 2015 to 2017, according to a previous report from Navigant. Spending drivers during this time included an uptick in merger and acquisitions, repurposing of staff following technology implementation, focus on lowering costs, and inability to take advantage of newfound scale.

But corporate services spending may be too much, the new survey found.

Just 11 percent of health systems spending 12 percent or more of total operating revenue on corporate services were efficient versus 32 percent of all hospitals, Navigent reported.

Additionally, only one-quarter of executives surveyed agreed that their organization’s corporate services spending is appropriate or needs to increase.

Specifically, 44 percent of executives from smaller hospitals felt their organization overspends by 10 percent or more versus 24 percent of those from medium-sized hospitals and 28 percent from large hospitals.

Healthcare organizations across the care continuum are feeling the pressure to reduce expenses, especially as reimbursement rates continue to fall and operating margins take a hit.

Despite most respondents seeking to reduce corporate services spend, 45 percent said their organization plans to increase corporate services budget. Most anticipate a modest increase between 0 and 10 percent.

About 26 percent of executives do not anticipate changing the corporate services budget, while 29 percent expect a decrease.

But more than half of executives said they will be held accountable for reducing corporate services budgets (29 percent) or holding spending flat (26 percent) over the next year.

Most executives plan to do that by targeting revenue cycle management (23 percent), supply chain (20 percent), and IT (19 percent).

Automation will also be a major focus for hospital executives in the next year, the survey indicated.

Only 15 percent of executives described their corporate services functions as automated.

Additionally, just 12 percent of respondents said they have optimized their enterprise resource planning (ERP) system. Instead, most executives (45 percent) said their organizational corporate services are consolidated or centralized, while 27 percent said they were standardized, simplified, or streamlined. Just 13 percent reported that the services were selectively outsourced.

The survey also found that about half (51 percent) of executives plan to optimize their ERP solution within the next two years.

“New technologies leveraging RPA, ERP, and machine learning have unlocked significant opportunities to drive back office efficiencies,” said Jeff Palmieri, associate director of robotics automation at Guidehouse. “As many providers have learned the hard way, overlaying technology as the 'solution' without first reengineering the processes and concurrently embedding a change management program has proven to be frustrating at best, and value-degrading at worst.”