The number-1 reason your health system is losing money

Updated on July 14, 2023
Management Tips To Run Your Hospital Successfully

Hospitals and health systems have been decimated by staffing shortages in recent years. Against this backdrop, one might expect a nationwide hiring spree to find the best doctors, nurses, and support staff available. Instead, layoffs are ramping up as hospitals and health systems struggle to balance their books.

According to a recent report in Fierce Healthcare: “job eliminations are coming from organizations big and small, whether that be a major health system aiming to reorganize its administrative expenses, or a smaller hospital scaling down services out of financial necessity. The cuts are also primarily falling on the shoulders of administrative staff or even upper-level management rather than patient-facing employees.”

What happens when hospitals and health systems lose administrative staff? The small but essential money-saving skills they bring are lost. While the shortage of doctors, nurses, and other patient-facing staff garner the attention they deserve, the number-1 reason hospitals are losing money is an overall shortage of personnel, including behind-the-scenes staff.

Consider purchased services, the portion of a hospital’s non-labor expenses that are outsourced to a third-party vendor or consultant, rather than carried out in-house. Historically a small in-house staff would monitor these expenses ― in the millions, even billions of dollars ― for entire hospitals and health systems. Cut any amount of personnel from that already small business unit, and you can imagine the results. A critical area of oversight is weakened, costing hospitals significant money by way of wasteful spending.

Dig into the numbers, and it’s easy to understand why some of these oversight positions are among the first to be cut when a health system or hospital institutes layoffs. Take a simple example involving mobile phones: say a hospital purchases 1,000 mobile phone plans for its staff, then one year later each subscriber is eligible for loyalty discounts that total $10 per month. That’s a potential savings of $120,000. However, the corporate purchaser who signed the initial agreement ― someone who makes half that amount in annual salary ― has her position eliminated. As a result, the hospital never applies for the loyalty discount when the mobile phone plans are eligible for renewal. Administrators believe they have saved $60,000 by eliminating one job, when in reality it has lost even more.

Other hospital purchased service spend categories consist of relatively small line items in an overall budget that, when administrative oversight is lacking, tend to add up over time. Consider these categories that often fall under the designation of education and professional development:

  • Training (i.e., all online and off-line professional development tools)
  • Memberships (i.e., American Medical Association memberships for individual physicians)
  • Dues (i.e., recurring institutional expenses like membership in the American Hospital Association)
  • Professional associations (i.e., SHRM memberships for HR professionals, and other non-medical staff associations)
  • Subscriptions (i.e., academic periodicals)
  • Conferences (i.e., the cost of attending annual presentations, including travel and lodging for all attendees, that are essential for professional development)

Wasteful spending in common categories like these are playing out in real time at hospitals around the country. Administrative functions are being decentralized, leading to a lack of oversight. Other positions are being outsourced to third parties that actually cost health systems more money than they would if they had remained in-house. While patient services might not be compromised in the short term, the long-term effects can cut across multiple departments over time. Wasteful spending in an area that indirectly affects patients today (mobile phone plans, for example) might reduce a hospital’s budget for things that directly affect patients (say, a new MRI machine) tomorrow.

Every hospital’s imperative is to deliver care with the utmost quality, and to deliver it better. However, with a weakening of the support staff that allow hospitals to function, the quality of its care declines ― along with its profit margins.

Hilton Hudson
Dr. Hilton Hudson

Dr. Hilton Hudson is a board-certified cardiothoracic surgeon and the Chief of Cardiothoracic Surgery at Franciscan’s Michigan City and Olympia Fields health systems. He is also the CEO of HPC International (HPC), the leading educational purchased services supplier for healthcare, corporations and academic institutions.