INCREASING

1 Executive insight: increasing APRIL 2011 profitability | www.advanceweb.com/ExecutiveInsight
INCREASING
PROFITABILITY
STRATEGIES TO EXPAND YOUR BUSINESS SCOPE
AND STACK UP FINANCIAL REWARDS.

2 Executive insight: increasing profitability
Executive question & answer
Q:
What was an instance you turned a profit in
a formerly non-profitable area, and how?
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➤ Johnny Kuo
Chief Operating Officer,
Gracie Square Hospital, New York, NY
A:
Hospital utilization and services:
inpatient volume, health insurance
benefits, behavioral health programs, community
benefit services.
Hospital utilization is affected by demographics (number
and age of service area population), changes in health
insurance benefits such as growth of managed care,
hospital service capacity, marketing and market share
and area health status. Increasing volume generally helps
performance, since hospitals have fixed costs that are
more easily spread with higher volume. Many community
benefit services are not profitable, but address important
healthcare needs.
➤ Christine Schuster
President and CEO,
Emerson Hospital, Concord, MA
A:
Transitional care unit; keeping
tight control on labor expenses.
➤ Frank Corvino
President and CEO,
Greenwich Hospital, Greenwich, CT
A:
Occupational health; there’s a
market for increased volume
and services to companies.
➤ Amir Dan Rubin
President and CEO,
Stanford Hospital & Clinics, Palo Alto, CA
A:
Improving profit through increased
Medicaid eligibility efforts
(including on-site department of health staff), concurrent
documentation efforts and managed care contract
carve-outs for implants.
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3
Executive insight: increasing profitability
Reprocessing:
What’s to Fear?
More hospitals are adopting medical device
reprocessing programs. By Cheryl Schwanke, MBA
One of the tenets of environmental efforts is “reuse.”
And more hospitals, looking to save cash and avoid unnecessary
medical waste, are taking this tenet to heart
with medical device reprocessing programs.
The reprocessing industry has experienced steady
growth in recent years, and this trend continues as hospitals
accept reprocessing as an effective way to save cash,
as well as the environment.
More than 3,000 U.S. hospitals have adopted reprocessing
as a standard of care. Moreover, it is not just the
small or physician-employed facilities. The list of those
who use reprocessing programs comprises many of the
top 100 hospitals, as ranked by US News & World Report,
including all of the “honor roll” hospitals and the top 10
cardiovascular hospitals. In addition, leading medical
Cheryl Schwanke is senior marketing
manager for customer retention at SterilMed,
Maple Grove, MN.
Many OR de can be reprocessed as well as EP catheters/cables
and non-invasive devices, including pulse oximeter probes
and compression sleeves. Photo courtesy SterilMed

4
Executive insight: increasing profitability
Ascent, the medical device reprocessing leader
Regulatory oversight of the reprocessing industry
has further safeguarded reprocessing, especially
since the Medical Device User Fee and Modernization
Act of 2002. This act requires a reprocessor’s
manufacturing, testing and quality processes
be equal to the standards in place by the original
equipment manufacturer.
Highest overall cost savings and
environmental sustainability
Broadest and most efficient service offering
Partnerships with more than half of
U.S. News & World Report “Honor Roll” Hospitals
Advanced supply chain support
organizations support the use of reprocessed devices, including American Academy of
Orthopaedic Surgeons, American Society for Gastrointestinal Endoscopy, Association of
Perioperative Registered Nurses and American College of Surgeons.
Many hospitals only reprocess a small range of devices in the operating room. Common
reprocessed devices include pulse oximeter probes, compression sleeves and trocars.
Since reprocessing has become more widely embraced, the interest in using a wider
range of reprocessed devices has expanded to include items such as laryngeal masks and
external fixation devices.
Reprocessing saves nearly 2.5 million pounds of medical waste from being sent to landfills
each year. A typical 300-bed hospital would divert 35,000 pounds of medical waste from
landfills and reduce device purchase costs up to 50 percent with savings of $410 a bed,
according to Brian Sullivan, President and CEO of SterilMed, a third-party reprocessor.
1.888.888.3433 www.ascenths.com
➤ Why Fear?
Of course, some hospitals and doctors don’t like reprocessing for fear of infection and also
trepidation over possible equipment malfunction.
However, regulatory oversight of the reprocessing industry has further safeguarded reprocessing,
especially since the Medical Device User Fee and Modernization Act of 2002.
This act requires a reprocessor’s manufacturing, testing and quality processes be equal to
the standards in place by the original equipment manufacturer (OEM). This means each reprocessed
device must meet 510(k) standards for cleanliness, functionality and sterility.
Over the past 10 years, third-party companies have reprocessed millions of devices
with no evidence, from any source, of an increased risk to patient safety. As Makary

5
Executive insight: increasing profitability
SterilMed uses microscopic analysis to ensure effective reprocessing.
Photo courtesy SterilMed
et al stated in “A Call to Go Green in Health Care by Reprocessing
Medical Equipment,” which appeared in the
March 2010 issue of Academic Medicine, “the practice
has a reliable safety record of excellence identical to that
of new equipment.”
In addition, a 2008 report by the Government Accountability
Office (GAO) found no evidence to indicate that
reprocessed devices present an elevated health risk to
patients and no evidence linking usage of reprocessed
devices and hospital acquired infections.
In some respects, reprocessors must meet ever stricter
requirements than the OEMs. Since reprocessors will
reprocess some devices several times, the companies
must demonstrate that the device does not degrade during
repeat reprocessing. Thus, each manufacturer needs
to dissemble the device and put it back together, testing
functionality, cleanliness and sterility.
➤ Checking Functionality
Different from OEMs that typically lot test, reprocessing
standards requires that 100 percent of devices be inspected
and tested using customized and FDA-validated
procedures.
Functionality testing processes confirm durability and
functionality after usage and reprocessing. Tests are devicespecific
and include mechanical and electrical tests such as
sharpness, sealing pressure, spring actuation, component
alignment, energy delivery, diagnostic and imaging functionality.
In addition, companies also need to identify and
refurbish device-specific physical degradation and potential
failure modes through reverse engineering. For example,
SterilMed uses computer-controlled equipment to resharpen
orthopedic shavers. It also microscopically hones bladed
trocars and replaces pads for ultrasonic scalpels.
➤ Choosing a Partner
Not all reprocessing partners are the same, so we suggest
using the following criteria when choosing your reprocessing
company.
Device collection. Treating single-use devices like reusables
enhances clinical acceptance while increasing the
percentage of devices yielded from the reprocessing operation.
Higher collections and yield equal fewer devices
sent to the landfills.
Breadth of devices. Ensure your reprocessor has FDA
clearance to reprocess devices for all OR departments, including
cardiology, general surgery, orthopedics, urology
as well as for GI and EP/cath labs. Reprocessed devices
include compression sleeves, pulse oximeter probes, EP
catheters, lap instruments, ultrasonic scalpels, shavers
and blades.
Material flow. Managing inventory is easier if your reprocessed
devices are returned on a regular schedule.
Make sure devices are returned automatically on a prescheduled
basis, typically weekly or bi-weekly, depending
on your facility’s needs.
On-site support. Ensure that your reprocessing partner
offers the necessary field support team, including regularly
scheduled pick-up service, device care and handling
support, as well as clinical in-services. Select a partner
that will help maximize savings by optimizing implementation
and driving continuous improvement.
To analyze the effectiveness of a reprocessing program,
you need to follow the money. Cost savings of programs
are typically measured in dollars per staffed bed and medical
waste diverted from landfills. The more rigorous the
process, the better the cost savings.
SterilMed has increased the savings of current customers
by 15 percent annually over the past five years. For
customers who fully embrace reprocessing, SterilMed
increased savings by an average of 71 percent.
If physicians at your facilities are hesitant to consider
using reprocessed devices, they should meet with reprocessing
company representatives. Also, have them visit
a reprocessor for a tour and demonstration. These experiences
will help alleviate concerns about the safety of
using reprocessed devices and the decision to “reuse”
could save your organization cash in the process.
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6
Executive insight: increasing profitability
[Part I]
Profitable vs.
Non-Profitable
Some hospital departments are profitable, others less
so. How can you keep the former strong and help the
latter? By Michael Gibbons
In a tumultuous field like healthcare, there are no
givens, especially when it comes to profits and losses.
Can any one department of a hospital qualify as a financial
thoroughbred, a surefire profit-maker? Conversely,
does any one department consistently under-perform
year after year, decade after decade, in all hospitals, in all
demographic areas? Executive Insight wanted to know.
First, we asked our board members to name three reliable
winners and three perennial loss-leaders. Then we
asked two financial consultants the same question. The
results should not only satisfy your curiosity but give you
insights on how you, as a hospital executive, can keep
your gleaming yachts — your winners — sailing in the
right direction and your tugboats, well, help them to reverse
course.
Michael Gibbons is an editor at ADVANCE.

7
Executive insight: increasing profitability
Profit-making
departments
can be doubleedged.
If not
run correctly,
they can all
lose money.
First, let’s look at those departments of a typical metropolitan hospital, if there is such
a thing, that reliably bring in the bucks. These areas make it possible to keep the doors
open, the lights on, the broken arms re-set, the knees replaced and the heart valves unclogged.
Christine Schuster, president and CEO of Emerson Hospital, Concord, MA, told us: orthopedics,
bariatrics and pain management. Nancy Templin, CFO, All Children’s Hospital,
St. Petersburg, FL, offered instead ICUs, cardiac services and neurosciences.
Which three did our consultants choose and why?

8
Executive insight: increasing profitability
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➤ Double-Edged Departments
Adam Higman, MS, BS had no trouble naming three profit-makers. He tossed in a caveat,
though: if not run correctly, all three can lose money.
“Number one, the OR,” said Higman, a consultant at Soyring Consulting, St. Petersburg,
FL. “Number two, the cath lab. And three, I would say, the ED — less because it brings
in money and more because it brings in lots of patients. Today, EDs can bring in up to 70
percent of total admissions. Many are not just admitted to med/surg units. They are also
getting diagnostics and more profitable services while at your hospital. They may need
surgery.”
Of course, EDs in poor demographic areas, taking in lots of uninsured patients, are not
profitable, Higman acknowledged. “You can’t control that,” he said. “If you’re a hospital in
inner-city Detroit, you are struggling to make a profit even if you run a perfect hospital. If
you’re in metropolitan D.C., it’s much easier.”
On the other hand, EDs with lots of self-paying or well-insured patients might find it easier
to make a profit but must work harder to satisfy those patients. “Well-heeled patients
are usually more demanding,” Higman pointed out.
Cath labs have gained prominence, unfortunately, due to Americans’ fatty diets. “We
are an obese country and more people have heart issues,” Higman noted. “Reimbursement
runs pretty high, historically. But cath labs are also very expensive to run because of
the high-priced products they use and the well-trained people on staff. If they are not run
efficiently, it’s easy to lose money on them.”
➤ Procedure-Oriented
The same question brought some new candidates from Jim Hook, MPH, director of Consulting
Services for The Fox Group, Upland, CA.
“Three traditional areas for profitability are orthopedic, cardiology (especially invasive cardiology)
and neurosurgery,” Hook said. “In the last five to ten years, cancer services have
maybe overtaken neurosurgery as profitable in the eyes of administrators.”
DRG reimbursement and the aging population explain his choices. “They are profitable,
in part, because they are procedure-oriented, especially orthopedics and invasive cardiology,”
he said. “Traditionally, they have relatively high rates of DRG reimbursement.”
The expanding senior population will keep orthopedics profitable in the near term, Hook
predicted. “More people will need knees, hips and various joints replaced and
BESmith_Q211_CEO.indd 1
3/23/11 11:30 AM

9
Executive insight: increasing profitability
Match utilization with staffing in areas such as the OR. ‘You need to
make sure you schedule surgeries wisely so you don’t have these
expensive staff members sitting around. You need to have some
hard conversations with physicians so you have appropriate ratios of
staff members to patients.’ — Adam Higman
will be healthy enough to benefit for a long time from
those interventions,” he said. “Cancer services are coming
on because of a need by aging baby boomers for expanded
services in cancer diagnosis and treatment. Another growth
factor is the availability of better cancer treatments.”
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➤ Personnel, Equipment Key to Profits
How can hospitals keep these areas profitable? Focus on
two key priorities, Hook advised: the right personnel, and
the right equipment.
“If you’ve got a superstar orthopedist, he or she may
not be enthused about you recruiting another orthopedist,
but that might be in the best financial
interests of the hospital,” he said. “You need the
right mix of specialties to support these programs.
You can’t have a top-notch cancer program without
a surgical oncologist, a radiation therapist and
a medical oncologist.”
Having the right equipment is critical, too. “You
want to have the best cardiac catheterization and
angiography equipment you can find — with the
qualifier that you want to do an ROI before purchasing,”
Hook said. “You also want to look at supply
costs if you are moving into or expanding into an
area like that. Some hospitals took a real hit when
Medicare reduced its reimbursement for pre-medicated
stents.”
Match utilization with staffing in areas such as the
OR, Higman advised. “Those are highly-paid individuals
in the OR,” he said. “You need to make sure
you schedule surgeries wisely so you don’t have
these expensive staff members sitting around. You need
to have some hard conversations with physicians who
refer and physicians who practice at your facility so you
have appropriate ratios of staff members to patients.”
Also, review your product utilization, Higman continued.
“If you look at specific types of procedures, you might
be losing $40,000 from the types of products you are using,”
he said. “Some procedures may never make you
money because of the nature of reimbursement but, depending
on what your product usage is, focus on how
much capital you expend on products.”
Maintain control over your vendors, particularly providers
of high-priced products, Higman stressed. “Make
sure vendors for expensive items like implants are not
just walking things in the door,” he said. “You need an
approval process, a value-analysis committee in place to
review all products coming in. Does this product make
good clinical sense? Does it make sense in terms of cost
to the facility?”
Dealing with vendors will become even more complex
as hospitals convert to electronic medical records, Hook
added. “A hospital may have many different IT systems
for all its departments,” he said. “One hospital I knew
had 100 different software systems running, all from different
vendors. Finding something to replace all of those
is nearly impossible. Vendors haven’t expanded their offerings
that broadly. It’s a huge challenge.”
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10 Executive insight: increasing profitability
[Part II]
Profitable vs.
Non-Profi table
Some service lines are chronic loss leaders. Why?
And how can they do better? By Michael Gibbons
In the second part of our examination of hospital
profitability, Executive Insight considers the most fiscally
challenged service lines. Economists use the term “loss
leaders” to denote areas of a company that typically lose
money but are retained for the sake of the reputation and
prestige of that company.
Our editorial board members had several ready examples.
Home care and pediatrics, said Christine Schuster,
president and CEO of Emerson Hospital, of Concord, MA.
Home care, agreed Nancy Templin, CFO of All Children’s
Hospital, St. Petersburg, FL, but also primary care in the
ED, and non-specific med/surg units.
Hospital profitability changed forever in the 1980s,
when DRGs (diagnosis-related groups) were introduced.
Before DRGs, the longer the patient stay, the more money
a hospital made. “DRGs capped reimbursement,
Michael Gibbons is an editor at ADVANCE.

11 Executive insight: increasing profitability
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forcing hospitals to keep a closer eye on LOS (length of service), especially for psych and
long-term care, where patients tend to stay a long time,” noted Adam Higman, MS, BS, a
consultant at Soyring Consulting, St. Petersburg, FL.
That remark revealed two of Higman’s three choices for least profitable areas of a hospital.
“My top three are psychiatric services, where you are definitely losing money, longterm
care, and a newer one: employed physicians, that is, hospitalists, generalists or
specialists employed directly by a facility,” he said.
➤ Poor Reimbursement
Reimbursement for psych services has only gotten worse over the years, according to
Higman.
Psychiatrists have changed their treatment approaches and the government has changed
its reimbursement accordingly. “You really don’t want [psych services] but, in reality, you
can’t get rid of it if you have it,” he said. “It could hurt the image of a community hospital
if it eliminated the only psych services in the community.”
Long-term care, he said, “doesn’t pay as of now, but with the right mix of patients it can
break even.”
And many facilities now employ physicians. The reason is competition: if physicians
work for you, they will use more of your services. But there’s a downside. “A directly employed
physician has no incentive to increase a facility’s patient volume if the facility pays
that physician a fixed salary,” Higman explained. “By contrast, private practice physicians
will see as many patients as they can to maximize their own profits.”
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➤ Pediatrics, Pregnancy Care
Pediatrics tops the list of financially sluggish service lines for Jim Hook, MPH, director of
Consulting Services for The Fox Group, Upland, CA.
“A great many pediatric departments struggle financially,” he said. “Most pediatric inpatient
care is consolidated into larger hospitals or children’s specialty hospitals. Trying to
operate a pediatric unit in a suburban community hospital is a tough challenge. You may
not get many patients needing inpatient care. Plus, your payer mix is unfavorable, as many
patients are covered by Medicaid.”
Number two is obstetrics. “Payment rates are depressed given the cost of the service,”
he said. “It’s like having surgery, but you are out in one day, so it’s a per-diem payment arrangement.
It’s hard to get the rates for those one- or two-day stays up where they need

12
Executive insight: increasing profitability
to be to break even. Yet it’s hard to raise
your rates adequately to cover your costs
because there is a lot of competition.”
Next comes psych services and EDs,
which Hook called “a mixed bag. EDs are
the single largest source of admissions
but also bring in a lot of people with limited
or no insurance coverage. Standing
alone they can be a problem area finan-
not just getting the worst of the worst.”
For directly employed physicians: Build
appropriate performance incentives into
their contracts. “If you hire hospitalists,
base their incentives on core performance
measures like LOS,” he said. “It’s
better to prolong the contract negotiation
process than, six months down the road,
finding out you’re making a lot less on
“The idea of paying for quality versus
volume will take hold in the next few
years, through ACOs, other partnerships,
and with insurers involved,” he predicted.
“If enough payers offer incentives and increased
reimbursement to organizations
that can demonstrate the quality of care
they are providing, rather than their volume,
that can have a positive impact on
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➤ Community Support
Higman had several suggestions for improving
the fiscal health of his problem
areas.
For psych services: Find out what safety
nets your community has in place.
“You don’t want to be a non-profit hospital
with no community support, taking
all the losses on that,” he said. “Generally,
there are only one or two psychiatric
facilities serving a large area, so you are
these physicians than you thought you
would. It’s human nature. They need incentives.
So if you are exploring hiring
physicians, you need an idea of what it
takes to at least break even and build
those things into the contract.”
➤ Closing Service Lines
Asked how to fix his problem service
lines, Hook dared to suggest the most
draconian option of all: close them.
“It was a trend in the late 1970s to close
OB services. It’s going on now, too,” he
said. “It’s hard to think how to save mon-
profitability.”
In the meantime, Higman offered a
final bit of advice: focus more on strategic
marketing. “Do your homework,”
he said. “Look at your numbers, your demographics,
your competitors. Figure out
what programs you should be promoting.
Maybe promote yourself as a heart hospital
because there are none nearby and
you have a good heart program that fits
your overall image. Pitch that message to
the community.”
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getting referrals for patients near and far.
The key is making sure you work in partnership
with the community so you are
not a second home for homeless people
or those with psychological problems.”
For long-term care: The more private
pay and well-insured patients you have,
the better, Higman advised, “so make
sure primary care physicians and gerontologists
in your area refer correctly so
you have the right mix of patients and are
ey in the delivery area. People have such
high expectations. OB may remain a loss
leader for the foreseeable future. And administrators
of a community hospital with
a good children’s hospital nearby might
ask themselves why they keep their pediatrics
department open.”
Hook sees a glimmer of hope, though,
in accountable care organizations (ACOs),
a key aspect of last year’s healthcare reform
legislation.
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