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Rice Hospital in Willmar, Minn., begins planning for impact of declining reimbursement

WILLMAR -- Rice Memorial Hospital leaders asked themselves last year: What will happen when health care reimbursement tightens further and commercial insurers potentially reduce their payments to a level similar to Medicare?

To begin answering the question, they developed a model that predicts the financial impact.

It will be significant -- as much as $19 million to $20 million, based on the city-owned hospital's revenue and expenses for 2011.

"That's going to require some actions," Bill Fenske, chief financial officer, told the hospital board's finance committee at a meeting Thursday.

The real impact could be less or more, and it could be stretched out over several years, Fenske said. But the lesson from going through the exercise is that the hospital needs to prepare and position itself as best it can, he said.

The resulting model, which hospital officials have titled "Surviving on Medicare," is being circulated among hospital leaders and department directors this year as they seek cost reductions.

Rice has struggled all year with a lackluster financial performance. The picture brightened in May with a positive operating margin that helped make up some of the loss. Nevertheless, department heads were directed this spring to come up with a 2 percent reduction in actual costs in each of their departments for the current budget year.

The reductions fall in a number of areas: not replacing staff who retire or resign, opting out of service contracts, skipping educational conferences and more.

Department directors are rising to the challenge, said Mike Schramm, Rice chief executive.

"It really goes to changing the mindset and changing the culture. People are looking at the nickel-and-dime things," he said. "I'm just amazed at the ingenuity."

It's a process that may become all too familiar. Based on the "Surviving on Medicare" projections, Rice will need to reduce its costs by 20 percent across the organization over the next five to seven years to absorb the impact of declining reimbursement.

"There's been significant progress made on a real dollar level but unfortunately the target continues to move," Fenske said. "If reimbursement declines, the target gets to be bigger, meaning there's more to adjust."

The scrutiny will include every department and its share of revenue and expenses. Every clinical service must be analyzed with an eye toward how well it aligns with the hospital's overall mission, Schramm said.

The "Surviving on Medicare" model also may help guide the hospital as it undertakes a master facility planning process that started this spring.

The process will include study of all the hospital's services and the space allocated to each, Schramm said. "How they're being provided and where they're being provided is certainly a part of that."

Expect the cost structure to be a major focus for the hospital's leaders over many months, he told members of the finance committee. "We just know over the next several years we're going to have to continue to bring our costs down."

Anne Polta

Anne Polta covers health care, business/economic development and general assignment. Her HealthBeat blog can be found at Follow her on Twitter at @AnnePolta.

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