Rice Memorial Hospital develops plan to curb its operating costs

WILLMAR -- As Rice Memorial Hospital's financial situation sinks farther into the red -- the operating deficit is now about $1 million -- officials are putting together a strategy to curb the hospital's operating expenses. The city-owned hospital can't count on a massive turnaround in patient volume any time soon, said Lorry Massa, CEO of Rice Hospital.

"We're convinced we need to reduce expenses," he said.

Spending reduction measures were outlined Thursday at a meeting of the hospital board's finance committee.

The plan will be introduced next week to the hospital management team. Officials said they want to avoid a slash-and-burn approach. Instead, what they've proposed is to ratchet down the hospital's operating expenses by 1 percent each year.

"It's a goal that we all believe is realistic and achievable," said Bill Fenske, chief financial officer.

The proposal will focus on the hospital's controllable expenses, which include salaries and overhead but don't include interest, depreciation, bad debt or utility costs.

For 2007, this will amount to cutting $650,000 from an overall budget of $83.2 million.

"It's going to be a matter of having the departments figure out a different way of doing things," Massa said. "We're just trying to elevate the way we manage our finances to the same level of importance as our clinical activities."

How hospital officials hope to restore Rice's fiscal health:

n Establish a committee, made up of administrators and directors, to review all staffing changes.

This means that before a vacant position can be filled or a staff position added, it must be reviewed, along with the department's productivity and financial performance and the need for the position, Fenske said.

"It doesn't mean that if somebody asks for more staff, the answer is going to be no. It means we're going to be taking a closer look at it," he said. "We need to be seeing improvements in productivity."

He told the finance committee Thursday that with a review process in place, the number of requests to fill positions "will significantly decrease."

n Establish operating reports for each hospital department, from surgery to housekeeping.

The idea is to track the productivity and financial performance of each department more closely, so that action plans can be developed if the indicators start going in the wrong direction, Fenske said.

"We're hoping to correct them sooner so they don't continue to compound on each other through the year," he said. "It enhances the accountability we have to each other."

n Develop a financial performance improvement plan that calls for saving 1 percent in controllable operating costs each year, starting in 2007.

All departments are being targeted.

Massa said administrators have already been keeping a close watch on expenses, "but we need to crank it down a little bit more in light of what's been going on."

Improvement will likely be slow, but it's more sustainable than making dramatic cutbacks in staff or services, Fenske said.

"This is a better strategy in the long term," he said.

Key financial indicators will be closely tracked to monitor whether the budget cutbacks are improving the hospital's financial health, he said. "We may not meet all the goals but we have to keep pushing. ... Any improvement is a good improvement. That's what we have to focus on."

The hospital's latest financial report, for the month of October, underscores the need to take action.

There were two bright notes. Rice Care Center, the hospital-owned long-term care facility, and Rice Home Medical, a durable medical equipment company, both are doing well financially.

But the hospital itself sustained a $660,000 operating loss during October. Although patient volume and revenue were down significantly from budget, operating expenses fell only slightly.

The result: The hospital's operating deficit ballooned by more than double, to around $1 million. The loss comes on top of a $540,000 operating loss in 2005.

Although expenses were less than what was budgeted, they fell only slightly as patient volume dropped off during the month, Fenske said.

He said it points to the need to get tighter control of costs and staffing levels. "You can really see that as the volume was not there, we did not make the adjustments in our staffing," he said.

Hospital officials don't have any clear answers to why volume has been so flat this year. Other hospitals around Minnesota have been experiencing the same thing.

Dr. George Gordon, chief medical officer for Rice Hospital, suggested one possible cause: No new physicians have joined the hospital staff in the past year."

"I don't think that's a coincidence. We have not grown in medical staff," he said.

Recruitment is becoming increasingly difficult for a city the size of Willmar, particularly for specialties in short supply such as orthopedic surgery and psychiatry, Gordon said.

"Everything is getting harder, and we're looking for the toughest ones to fill," he said.