RESPONDING TO THE DEMANDS OF COST CONTAINMENT AND COMPETITIVE PRESSURES IN HEALTHCARE: A FOR-PROFIT PSYCHIATRIC HOSPITAL CASE STUDY.

The concept of cost containment in the US has been an integral part of healthcare dating back to before the early 1980s. Although many internal and external factors contributed to this development in the healthcare industry, the two most significant precipitating events were Medicare's cost control initiatives through the Prospective Payment System, and the proliferation of the managed care model. In response to the demands of cost containment and competitive pressures, healthcare entities have restructured their organizations, established regional and national systems, and entered into numerous and varied joint venture arrangements (Wolper & Pena 1987). Cost shifting to charge-based payers from Medicare and other managed care payers gave an overstated appearance of successful cost containment. This practice simply shifted the burden of paying for the cost of healthcare from the managed payment payers to those entities that continued to pay based on charges. Cost shifting provided management with a temporary false sense of security since the bottom line may have been maintained.

Cost shifting to maintain net revenue is effective only as long as the payer mix includes a significant percentage of charge based payers. As the payer mix shifts relentlessly toward managed care, benefits realized from cost shifting are significantly reduced. Other by-products of cost control initiatives are shorter lengths of inpatient hospital stays, greater scrutiny of hospital and physician services, and a major shift to ambulatory services.

Cleverly (1997) states that the responsibility for cost containment does not test only with administrative management but also requires active involvement of the medical staff, such as in length of stay and service intensity utilization decisions. Furthermore, inappropriate overutilization or underutilization of resources may result in unacceptable quality of care and increased morbidity. Cleverly cites four primary ways to contain cost:

* Reduce the length of stay

* Reduce the intensity of services provided

* Reduce the prices paid for resources

* Improve production efficiency.

This study will present the significant methods that an investor-owned freestanding psychiatric hospital has implemented to meet the challenge of cost containment in order to remain financially competitive and fiscally responsible, while maintaining a high level of clinical care. This discussion will include the tools and methods used to monitor and control the clinical staffing matrix to achieve cost containment. Also, it will summarize other significant cost containment initiatives that have decreased expenditures for supplies and purchased services for certain hospital functions.

Quality of care and appropriate resource utilization are closely related. Due to the programs offered by the psychiatric hospital we studied, changes in the length of stay or service intensity would not result in cost reductions. Opportunities for containment did exist through price reductions for purchased resources other than labor, and improvements in production efficiencies through effective labor skill mix and work scheduling management. Cost reductions in the price paid for labor was not considered to be a viable option. The market for psychiatric skilled labor in the healthcare industry is highly competitive; recruitment and retention depend greatly upon wages and benefits paid.

The most significant resource consumed by the facility is labor. Salaries, wages and benefits represent approximately 65 percent of total direct operating expenses. The variable component of labor represents about 65 percent of the total payroll expense. Appropriate control of the variable labor component within a targeted range will result in significant cost containment.

HOSPITAL DEMOGRAPHICS 

Evansville Psychiatric Hospital (EPH, name changed for confidentiality) is a 60-bed private, freestanding psychiatric facility offering a complete continuum of inpatient and outpatient services to an estimated population base of 400,000 residents in southern Indiana, western Kentucky, and southern Illinois. The facility is jointly owned by a health services company and a real estate investment company, with more than 100 facilities in the US. Primary competition is from a nearby 110-bed psychiatric facility attached to a not-for-profit general hospital. The competition is supported primarily by referrals from a major physician group practice and from the local state-operated mental health center.

EPH employs approximately 90 full-time, part-time, and temporary employees to meet the budgeted staffing level of 80 full time equivalents (FTEs). "A full-time-equivalent (1.0 FTE) is equal to 2,080 hours annually (40 hours per week for 52 weeks).... For budgetary purposes the FTE positions, not individual employees, are approved" (Kirk 1988).

The budgeted FTEs are primarily driven by the projected average daily census (ADC) range for this facility. The 80 FTEs include clinical, fiscal, and administrative personnel and, as previously mentioned, represent approximately 65 percent of the total operating expense budget.

The traditional payer mix in the local psychiatric market has been dominated by indemnity plans. However, steady growth in the governmental and managed cam markets has been experienced over the past rive years. The current payer mix is approximately 40 percent government subsidized, i.e. Medicare, Medicaid and Champus, 25 percent indemnity, 25 percent HMO and PPO, 5 percent Blue Cross Blue Shield indemnity and managed plans, and the remaining 5 percent self-pay and charity care / uncompensated days.

According to a recent study by the Indiana Hospital & Healthcare Association (IHHA 1996), managed care penetration is approximately 30 percent in the Evansville market. This 1996 study analyzed all of the major metropolitan areas in Indiana using criteria for assessing managed care penetration and evaluating the speed with which market transformation should occur. The final report rank-ordered each metropolitan area, and Evansville was round to have the highest aggregate score for managed care penetration in the state. As managed care continues to spread in the market, it will replace indemnity plans and limit the fee-for-service business, placing pressure on the facility to expand its market share and streamline its cost structure to sustain clinical and financial viability.

COST CONTAINMENT GOALS

The first step in cost containment was to identify the goals of the process. The corporate parent system's leadership team established the cost containment goals for the healthcare system. Corporate financial leadership established the cost benchmarks for each local hospital with input from the local leadership. Local and national factors were considered when establishing local cost benchmarks, including cost of living indices, labor cost indices, program mix, supply contracts, outsourcing opportunities, physician staffing arrangements, etc. The local hospital, such as EPH, had the opportunity to challenge the benchmark if it considered the benchmark to be too aggressive.

If the established cost thresholds create a life safety threat, the local hospital is ethically and legally responsible to make the necessary resources available and be prepared to justify its actions to corporate headquarters. This is a delicate balancing act, and in some cases corporate leadership does not fully agree with an assessment of imminent risk. When consensus cannot be reached, final disposition requires intervention by corporate and local medical control, risk management, and financial management. Justified overages usually result in an adjustment to the benchmark. Repeated unjustifiable overages result in disciplinary actions against the local leadership. The following four goals were established:

1. Meet cost benchmarks

2. Improve clinical and fiscal effectiveness and efficiency

3. Improve customer satisfaction

4. Improve employee satisfaction

The objective was to meet unit cost targets, expressed on a per-patient-day basis. The unit cost targets were benchmarks established in mutual cooperation with corporate management. To facilitate this process, a clinical/fiscal interdisciplinary team was established to identify focus areas and develop goals and action plans within the framework provided by corporate upper management. The following departments/positions were represented on the Interdisciplinary Team (I/T):

1. Chief Financial Officer--I/T Chair, responsible for budget development and balancing clinical expectations with fiscal limitations, reported denial trends, accounts receivable days, payer mix, census, and payer coverage limitations.

2. Director of Clinical Services--Responsible for the development and implementation of the clinical programming. Determines caseloads for the therapy staff (social workers/therapists). Responsible for managing the patients' length of stay, balancing programming needs with approved/certified days or the patients' financial responsibility.

3. Director of Nursing--Responsible for maintaining nursing and mental health technician staff schedules in accordance with a census-based staffing matrix.

4. Director of Utilization Management--Responsible for reporting the days/services per those certified or denied by the insurance carriers. Responsible for requesting additional days/services when clinically indicated, but clinical certification of days does hot guarantee insurance coverage.

5. Director of Intake/Needs Assessment--Responsible for assessing potential patients seeking services and, in cooperation with the on-call psychiatrist, determining the level of service/intensity required for the patients' needs.

6. Business Office Manager--Responsible for admitting patients, including verifying insurance benefits. Responsible for reporting insurance benefits of inpatients, which serves as a potential qualifier for the number of days pre-certified internally by the Utilization Management Director. It was a fairly common situation where the days certified by the Utilization Management Director were not equal to the insurance benefits verified by the Business Office Manager.

7. Chief Medical Officer/Medical Director--Psychiatrist representation, responsible for the overall medical and clinical direction of the hospital.

8. Director of Human Resources--Responsible for filling open positions and for reporting employee satisfaction survey results.

9. Director of Health Information Management--Responsible for coding, transcription and abstracting medical records. Reports documentation issues and, in cooperation with the Business Office Manager, performs chart-to-bill audits.

10. Director of Business Development--Responsible for maintaining and developing patient referral sources. Exercises significant influence over the payer mix.

An underlying principle of the process was to analyze patient care for clinical effectiveness and efficiency in conjunction with cost containment, and not to paralyze patient care through blind cost containment. The areas most receptive to cost containment were identified and prioritized as follows:

1. The variable labor component of clinical staffing

2. The clinical skill mix and overtime control

3. Purchased services involving hotel services, i.e. including plant maintenance such as:

* Housekeeping and dietary services

* Purchased services for the pharmacy

* Purchased services for the clinical labs

* Supply procurement and distribution

* Purchased services for medical procedures not available at the facility.

The variable labor component was targeted for starting this process, since it represented the most significant opportunity for the facility to contain costs.

VARIABLE STAFFING & CLINICAL SKILL MIX

Healthcare is an extremely labor intensive industry, requiring a diverse range of technical training and professional experience. Salaries, wages, and benefits paid by the organization commonly represent 50-65 percent of the total direct operating expenses. Variable salary costs may account for as much as 70 percent of total salaries, wages, and benefits. As Cleverly (1989) notes, because wages and benefits typically represent the largest percentage of total hospital cost, management of employee productivity can have the greatest impact on cost containment.

In most psychiatric hospitals, there are two primary skill levels involved with direct patient care: Registered Nurses (RNs) and Mental Health Technicians (MHTs). The average cost per hour plus an estimated 17 percent for benefits is approximately twice as much for RNs as it is for MHTs, at $20.40 and $10.20, respectively. Benefits include, but are not limited to, paid days off, employer portion of payroll-related taxes, employer-funded pension contributions, tuition reimbursement, and shift differentials. Therefore, the incremental cost of staffing with an RN versus staffing with an MHT is $10.20 per hour for regular pay, and an additional $5.10 per hour for any overtime premium.

The primary cost drivers for determining staffing levels and mix are census and acuity levels. The census is usually expressed over time as the average daily census and represents the number of inpatients admitted as of midnight. The acuity level is determined by the admitting diagnosis made by the admitting/attending psychiatrist following criteria established by the medical staff. It is an estimation of the seriousness of the patient's condition, and usually is an indication of the resources required to manage the patient's care.

A common monitor used in hospitals is the Employees Per Occupied Bed (EPOB) ratio, which is calculated by dividing the number of paid hours per time period by the Average Daily Census (ADC) for the same time period. The optimal clinical staffing levels for this hospital are determined by an EPOB of 1.20, which means the hospital will staff 1.2 employees per inpatient. The EPOB targets are based on clinical and fiscal parameters using patient and staff safety as the primary criteria. These targets vary between facilities due to differences in programming and patient acuity.

The determination of the optimal staffing mix between RNs and MHTs requires consideration of State licensing regulations, Joint Commission on Accreditation of Hospital Organizations (JCAHO) standards, and other governmental program standards. Planners must also take into consideration the staffing plan that would be in the best interests of the patient and the staff in terms of safety and clinical appropriateness. This delicate balance between operational efficiency versus operational effectiveness must continually be monitored. An uncontrolled shift to one end of the spectrum could be disastrous for the patient, staff and hospital.

As previously mentioned, the cost behavior of RNs would be classified as a step-function cost. The MHT staffing cost is all variable, and is based on the inpatient census in order to maintain the target EPOB. The next step in the staffing process is to make adjustments for the patients' acuity levels, the scheduled discharges and admissions for the day, and scheduled assessments for the day including probabilities of outpatient conversion to inpatient status. Adjusting staff levels to changes in the daily census is crucial to meeting the needs of the patient and clinical staff, as well as containing costs within acceptable boundaries.

A benchmark commonly used is a skill mix ratio of RNs to MHTs. Normal values range from 35:65 percent to 40:60 percent, based on average acuity. An analysis of the clinical staffing patterns found that the RN to MHT mix ratio was consistently running at an 80:20 level. The primary factor that contributed to this high rate of RN staffing was the lack of a coordinated staffing plan. No formal monitoring system was in place evaluating the skill mix on a routine basis. As long as the total FTEs remained within the budgeted limits, Human Resources would fill personnel requisitions submitted by Nursing Services, and open MHT positions were filled by RNs whenever possible. Total salaries, wages and benefits did not initially appear to be excessive due to numerous open middle and upper management positions. As these management positions were filled, the real impact of being RN staff-heavy became sharply evident. Another factor further escalating cost was the number of vacant nursing and technician positions. Open staffing positions were filled with full time personnel who then worked in extensive overtime hours. RNs frequently were staffed in open MHT positions and received overtime premium pay for what should have been charged at the regular MHT rate. The combined effects of the skill mix weighted toward RNs, excessive overtime paid due to ineffective scheduling practices and unfilled positions resulted in a monthly expense of approximately $60,000, or 30 percent over budget.

Once the problem was identified, the next step was to develop an action plan that would drive the development of a staffing matrix to meet the clinical needs of the patients and the fiscal needs of the facility. The matrix would determine the number and skill mix of clinical staff at a given daily census level. The plan would also have to address how a shift in the skill mix back to the desired target levels would be accomplished while minimizing the negative impact on the current clinical staff. Finally, a systematic recruitment and retention program to fill the remaining open skilled positions would be necessary.

The staffing matrix was developed to meet the clinical EPOB targets established by the corporate office. The FTE staffing matrix was based on the ADC. Other terms used included:

UR--Utilization Review
NA--Needs Assessment / Intake
SW--Social Workers
AT--Activity Therapy
QI--Quality Improvement
Allocated--FTEs allocated from corporate headquarters
CEPOB--Clinical Employees Per Occupied Bed

The CEPOB and EPOB are staffing efficiency indicators. Staffing by this plan would provide the minimum coverage required. On a daily basis, the patient acuity levels require evaluation to determine if additional adjustments to the staffing plan are needed. Unlike general acute care hospitals, acuity level adjustments are not driven by the medical health condition of the patient. Freestanding psychiatric hospitals adroit "medically cleared" patients, i.e. no patho-physiological conditions exist that, if left untreated, would be life threatening to the patient. An exception to this general principle is geropsych (geriatric psychiatric) units. In most cases, Geropsych units are attached to a general medical facility.

Acuity level adjustments in a psychiatric facility are usually driven by one-to-one (staff-to-patient) observation orders by the admitting psychiatrist. Common diagnoses warranting this order include suicidal ideation, aberrant sexual behavior, or aggressive physical behavior on the part of the patient which pose a potential risk to themselves, other patients or the staff. If the patient lacks self-harm tendencies, then locked seclusion may be considered as a possible short-term alternative to one-to-one staffing. Long-term cases of aberrant behavior that is non-responsive to traditional therapies would be considered candidates for institutionalization in a long-term psychiatric state facility.

The Daily Staffing Plan is reflected in the Clinical FTE Planning Worksheet. This worksheet is used to plan FTE staffing requirements using the actual census and the planned census. Planned census is determined by actual census plus anticipated admissions less scheduled discharges, and is to be completed at the beginning of the day shift (0700 hours) by the house supervisor. Using the staffing matrix as a guide, the goal is to match the staffing plan for that day and evening to the beginning census, as of midnight, adjusting for planned admissions and discharges for the day.

This information is brought together in a planning and information-exchange meeting called a "Flash." This meeting usually lasts 15 to 30 minutes and is staffed by representatives from Nursing Services, Utilization Review, Intake, Admissions/Business Office and the Medical Staff. Topics include the prior day's admissions and discharges, problems encountered, disposition of existing one-to-one staffing orders, and the planned activity for the day. Planned activity includes scheduled assessments for admissions (a probability of admission potential is assessed), scheduled direct admissions from other facilities, and scheduled discharges. Beginning census is adjusted using the planned activity to determine staffing requirements for the next three shifts (day, evening and night).

After staffing adjustments are made for the current day's census, a summary of the prior day's actual staffing is compared with the acuity adjusted matrix staffing plan for the actual census level. Explanations are provided for variances from planned staffing. A report of the current day's staffing plan and prior day's actual level is prepared and forwarded to administrative management for review and discussion.

The FTE staffing matrix and the Daily Staffing Plan address the first component of the action plan, i.e. to gain control of FTE staffing and the skill mix. Next, the action plan must address how the facility will match the work force to the staffing matrix. The goal is to minimize the negative effects of re-engineering the skill mix. The hospital was able to accomplish this transition through a process of promotions, transfers, and normal attrition.

The remaining component of the action plan involves the recruitment and retention of skilled staff. Basic components of recruitment and retention include competitive pay and benefits, flexible scheduling, a work environment that encourages professional and personal growth, and a basic hospital philosophy that promotes the fair and equitable treatment of all employees. As previously mentioned, the compensation component is competitive with the market for RNs. However, the hospital is competing with a wider market for the MHT staff. A major competitor for entry-level staff is the hotel/restaurant industry. The proliferation of hotels and restaurants in the region that also provide attractive health and retirement benefits for their employees have lured traditional entry-level personnel away from the healthcare industry. The lack of entry-level staff has been reported as a common problem among healthcare facilities in the Evansville area market in particular. At the time of writing, EPH is considering other recruitment and retention alternatives.

OUTSOURCING HOSPITAL SERVICES

The decision to outsource certain hospital services to control and contain costs has been driven by corporate office initiatives. The three key areas that have been outsourced on a national level are pharmacy, clinical lab, and hotel services. The pharmacy and lab services have been outsourced since the facility opened in 1991. These services were continued with the original vendor when the hospital was acquired by the current parent company as of July 1994, and have been continued through the date of writing. Hotel services were outsourced effective September 1995.

Although the funding mechanism differs between services, contracts are all negotiated on a national level. The savings realized due to reduced costs is a direct function of the volume potential of the parent company. An outside firm provides the pharmacy function. The original contract, as negotiated by the parent company, was based on a management fee driven by the monthly average daily census. This contract provided coverage with a 0.5 FTE pharmacist position. The hospital was responsible for all pharmaceutical supply costs. The monthly management fee averaged $3,500 for the 0.5 FTE plus $6,000.00 for the monthly average pharmaceutical supplies expense. The contract was renegotiated in 1996 with an agreed capitation rate of $8.07 per patient day. Based on the average cost per patient day of $14.28 before the contract change, the facility recognized a cost reduction benefit of approximately $6.21 per patient day. The only disadvantage noted was that on occasion, a medication ordered by a psychiatrist was not in the hospital formulary (i.e. the drug manifest). This required the hospital to purchase the prescribed drug from a local pharmacy causing a delay in drug administration and treatment, and higher cost. The hospital could request that the drug be added to the formulary, and based on cost and utilization the vendor could approve or deny the request.

The next hospital function that has been outsourced since the inception of the facility is the clinical lab function. Like the pharmacy, its presence is crucial to the clinical operations of the facility, but the volume of activity and reimbursement potential cannot justify establishing a full-time lab operation within the hospital. The service is outsourced to a commercial laboratory. The financial terms of the contract incorporate a discounted-fee-for-service arrangement. The main advantage to the hospital is the discount, which ranges from 10 to 25 percent off the published rates per test.

The disadvantage of this contract was that coverage could not be guaranteed and the phlebotomists came to the facility to draw specimens only at scheduled times. They were often late or failed to arrive. The problems caused by the commercial laboratory's performance forced the hospital to contract with a different local laboratory for lab services. However, the hospital was not in a position to cancel the original agreement due to poor performance, since all of the parent company's hospitals were required to participate in the national contracts. In cases of documented substandard service, ancillary contracts were reluctantly permitted to handle stat testing. Since the company could not guarantee volume to the local laboratory, the company was unable to receive comparable rates to that of commercial laboratories. This situation was more than a cost containment issue, it was a service quality issue that impacted the facility's ability to provide appropriate patient care. This is an example of how cost containment initiatives, if blindly driven, will increase the business and liability risk of a hospital.

The third area outsourced was hotel services, which included plant maintenance, dietary/cafeteria, and housekeeping. A national contract was signed with ServiceMaster to provide these functions. In this arrangement, the hospital employees occupying these positions were transferred to the ServiceMaster payroll without layoffs, reductions, or pay changes, unless the hospital's staffing plan or compensation was unreasonable prior to the changeover. No changes were required at the Evansville facility.

The financial terms of the contract are based on cost-plus a markup, and include a discounted group purchasing arrangement. The hospital would pay ServiceMaster's cost for the labor wages and benefits, subject to annual cost of living increases, and would purchase dietary, maintenance, and housekeeping equipment and supplies from ServiceMaster at a group discounted rate. The main benefit to ServiceMaster is that they share in the efficiencies realized through controlling operating costs of these functions, as compared to a base year. The key indicators for this contract include cost per meal and supplies for cleaning, food, and maintenance. The corporate return on this contract has been reported as significant, but the results realized locally have been cost neutral.

MONITORING TOOLS

As we mentioned, this study discusses monitoring tools used to plan, schedule and track FTEs and the skill mix staffing. Budget tools are used to compare projected budget FTEs and dollars with the actual current period amounts. Other tools are used to compare actual Direct Operating Expenses (DOEs) with the Target DOEs, using patient days as the primary cost driver. We will also briefly discuss each tool by use, construction, and special considerations.

The Staffing Matrix is used as the primary guide to determine the staffing and skill mix levels, driven by the average daily census. This matrix includes both variable and fixed staff including clinical and non-clinical FTEs.

The Clinical FTE Planning Worksheet is the tool used to plan the daily staffing requirements compared to actual staffing levels. Variances are to be explained by the Unit Manager. A special aspect of this report is the FTE Equivalent Factor, which adjusts a 40-hour, 5-day week to a 7-days per week basis. Normally, FTEs are based on standard 40 hour 5 day per week positions, not on the number of people. If a position is staffed 8 hours per day for 7 days per week (56 total hours), it would take 1.4 FTEs (i.e. 56 hrs./40 hrs.) to staff the entire week. A 12-hour shift staffed 7 days per week would require 2.10 FTEs (i.e. 84 hrs./40 hrs.).

Another tool is the Weekly FTE and Census Summary. A weekly summation report of hours allocated hours, ADC, and the CEPOB calculation is prepared from the Kronos Time & Attendance System every Monday for the prior week ending on Saturday night. This report is compared with the daily report to test the accuracy and reliability of the system. Differences are reconciled by the Payroll department, with assistance from Operations. General staffing guidelines are provided by corporate headquarters to assist in the development of the FTE staffing matrix.

An additional planning tool is the Comparative summation of payroll FTEs, Annual Salary per FTE, and Total Salaries by Department/Profit/Cost Center. This Comparative summation is a component of the Budget Business Plans it compares current year to date actual (annualized) with the projected budget. The report is delineated by program and ancillary department. One weakness of this report is that it does not show clinical skill mix. The annual salaries and wages are based on a weighted average.

Another component of the Budget Business Plan discusses Financial Budget Indicators depicting, revenue and cost per patient day. Employees Per Equivalent Occupied Bed (EPEOB, an EPOB measure adjusted for outpatient service) provides statistics on Paid EPOB, Direct Expenses per Patient Day and Direct Expenses as a percentage of Net Revenue, i.e. Gross Revenue less Contractual Adjustments, Bad Debts, and Administrative Adjustments.

Another tool is used to project the Direct Operating Expense (DOE) Targets driven by the patient days. The target numbers are derived from historical data adjusted for unusual and infrequent expenses. It is recommended that the worksheet be set up in a spreadsheet file that will allow the user to determine the DOE Targets based on any ADC and patient day levels.

The Worksheet that reports actual Direct Operating Expenses (DOEs) compared to Estimated DOEs (Benchmarks) includes patient days. ADC is used to monitor compliance with DOE targets on a weekly basis. Since many businesses close their books on a monthly basis, the weekly presentation requires the user to estimate some expenses that would hot normally be determined except during a monthly closing. This requires the user to have a clear understanding of the cost per patient day or cost per FTE in order to calculate the DOE target variances month-to-date. Consideration should also be given to unusual circumstances occurring during the month that will impact the DOE. If accurate DOE estimates are calculated and compared to the targets, they will alert the user to a variance before the month-end closing. This lead-time may provide the opportunity to take corrective action before month-end, or at least it may serve as a signal to management before the preliminary financial statements are issued. Variances are explained along with corrective action plans, when material. The Three-Month DOE Monitoring Worksheet is categorized by expense, and provides a rime series trend analysis for management. The report compares the actual DOEs to the targets.

SUMMARY

Cost containment will continue to remain a major focus in the design, management, and delivery of healthcare. Continued proliferation of the managed care model and the reduction in charge-based reimbursement will require the healthcare industry to provide increasingly cost-effective programs in order to survive. Providers must plan now by analyzing their cost structure, eliminating non-essential discretionary costs, establishing reasonable cost targets, and developing systems to monitor actual results compared to targets. Cost containment for ongoing operations must be a continuous activity. Productivity and quality control reporting systems provide regular feedback that must be monitored on an exception basis; that is to detect when productivity and quality deviate from an expected range, including both high and low deviations (Wolper & Pena 1987).

Due to the high labor intensity involved with the freestanding psychiatric hospital we studied, the greatest potential for cost control is through FTE planning and management. Failure to effectively control and monitor the labor component of hospital costs can be devastating. Developing cost-containment programs for long-run survival will reduce the negative impact of stringent revenue reductions that usually result in large FTE reductions. Proactive cost containment will allow the hospital to incrementally reduce FTEs through early retirement, resignations, and transfers versus wrenching layoffs. Outsourcing selected hospital services is another key opportunity for effective cost containment.

As a result of these processes, costs were contained for EPH and improvements were noted in clinical efficiency, effectiveness, and both customer and employee satisfaction levels. The outcomes for other hospitals in the same system, however, were not as positive. In some cases, a few local hospitals were able to achieve the corporate objectives, but these hospitals were already profitable and operating within, or close to, corporate expectations. More commonly, the local hospitals failed to meet all four objectives of, (1) meet cost benchmarks, (2) improve clinical and fiscal effectiveness and efficiency, (3) improve customer satisfaction, and (4) improve employee satisfaction.

When cost containment initiates failed to meet their targets for direct operating expenses, corporate leadership focused it's attention almost entirely on cost controls at the "expense" of clinical operations and customer and employee satisfaction. Once this decision was made, the project's fate was sealed and doomed to failure. The usual outcome resulting from blind cost controls was usually manifested in clinical failures and a marked reduction in customer and employee satisfaction. Like dominos, the effects of failure resulted in a reduction in admissions and an increase in employee turnover. A reduction in viable job candidates further exacerbated the staffing challenges.

Some of the lessons Learned from this study include:

1. Follow Basic Management 101. Performance standards (cost benchmarks) must be jointly developed

2. Be flexible with benchmarks, make adjustments as needed 

3. Striving to achieve a benchmark at any cost is doomed to failure. Don't sacrifice the overriding goals of customer satisfaction and employee morale just to blindly meet the mark. You will risk losing customer loyalty and subsequent patient admissions, and face a decline in employee morale, as well as increasing recruiting challenges, and ultimately, precipitate the failure of the organization.

REFERENCES

Cleverly, W.O. (1989) Handbook of Healthcare Accounting and Finance, 2nd ed., Aspen Publications, Inc., 652.

Cleverly, W.O. (1997) Essentials of Healthcare Finance, 4th ed., Aspen Publications, Inc., 15.

Indiana Hospital & Healthcare Association (1996) Managed Care Study, Indiana Hospital & Healthcare Association, 20.

Kirk, R. (1988) Healthcare Staffing & Budgeting: Practical Management Tools, Aspen Publications, Inc., 26.

Wolper, L.F. & J. Pena (1987) Healthcare Administration, Principles and Practices, Aspen Publications, Inc., 45.

Address for correspondence: Mehmet C. Kocakulah, Department of Accounting and Business Law, University of Southern Indiana, 8600 University Boulevard, Evansville, IN 47712 USA, [e-mail].

Mehmet C. Kocakulah
University of Southern Indiana (USA)

Brian L. McGuire
University of Southern Indiana (USA)

Michael J. Klueh
St. Mary's Medical Center (USA)