Wednesday, June 25, 2014

Focus and Leverage Part 356

In my last posting I talked about 91 hospitals who have gone through lay-offs as a way to improve their margins.  In this posting I am presenting a link to an article entitled Fewer hospitals have positive margins as they face financial squeeze written by  Beth Kutscher reporting in Modern Healthcare.  As you read this article, I want you to notice how many times the author talks about cost cutting as a way to become more profitable.

As I have written about many times in my postings, the key to profitability is not achieved by cutting costs and attempting to save money.  The true pathway to profitability is through making money.  And how do we do that?  We do that by focusing on increasing the throughput of your revenue generating processes such as surgical units, out-patient clinics, the Emergency Departments, etc,

The real problem here is that healthcare, like so many other industries, is firmly in the grasp of cost accounting with all of its performance metrics and the belief that profitability is best accomplished through saving money.  Throughput Accounting, on the other hand, teaches us to increase revenue while either reducing or maintaining our operating expenses.  One of the major differences between cost accounting and throughput accounting is how labor is treated.  Cost accounting treats labor as a variable cost while throughput accounting treats labor as a fixed cost, which it is.  Way back when cost accounting came into existence, labor was a variable cost, back when labor was paid based upon piece rates.  But this is no longer how labor is paid.

Anyway, I thought you might be interested in this article.

Bob Sproull

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