Taming Corporate Overhead: A Key to Restoring Hospital Operating Profits

By Milind Pawar, Lisa Jansen-King, and Jeff Goldsmith

In the past two years, U.S. hospitals have experienced significant reductions in operating profits as growth in revenue has subsided into the mid-single digits. In Guidehouse’s financial performance database, two-thirds of 104 leading health systems in the U.S. saw operating earnings fall in three fiscal years ending in 2017 — almost a fifth of whom experienced declines of over $100 million.

Cost growth for corporate services and nonclinical functions serving both internal and external customers has been one of the key drivers of the slump — these include functions like human resources, finance, supply chain, marketing, and IT. Few high-performing health systems have been successful in managing the costs of corporate services. Fact-based understanding of where the problem lies is often a good beginning. However real change can come from achieving consolidation of duplicate efforts, standardization of processes, labor efficiency, and process automation.

We examined in detail the financial disclosures of 21 leading U.S. health systems from July 2015 to June 2017 and found corporate expenses increased at more than twice the rate of net patient revenue. Corporate services spending varied by more than three-fold- from a low of 7% of operating expense to a high of 25% of total operating expenses (Figure 1).

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