Though there are fixed and variable costs in healthcare, more than 80 percent of a hospital’s costs are fixed expenditures associated with buildings, salaries, equipment and other overhead. Fixed costs, for the most part, remain the same regardless of how many patients the hospital receives each year. Variable costs include medication and supplies, which change based on the number and acuity of patients treated. Unlike a traditional business that can alter operations associated with fixed costs, most hospitals are limited in how much they can change. Because of this, the high ratio of fixed-to-variable costs creates a liability for hospitals when they are faced with reduced admissions. It is up to a hospital administrator, often educated with a Master of Business Administration (MBA) in Healthcare Management, to find a solutions to this issue.
Fewer patients, risky business
Fixed and variable costs in healthcare are risks to hospitals in healthier communities, because fewer patients not only represent less variable costs but also less revenue. In some cases, the depressed revenue is not enough to meet the fixed costs of running the hospital, leading the hospital to a net loss. Properly managed hospitals led by a hospital administrator with an MBA in Healthcare Management are able to adapt to the reduced demand by adjusting fixed costs. For instance, reducing the hours of auxiliary healthcare personnel and outsourcing services like lab work and radiology are a few ways to alter fixed costs without overly decreasing a hospital’s effectiveness.
Widening the fixed-cost basis
Another approach that hospital administrators have taken recently has been to integrate services horizontally, either by absorbing or cooperating with neighboring clinics or facilities to increase scale and spread fixed costs over a larger revenue base. One way is to create a healthcare system, which is two or more hospitals managed under a central organization. Another is to create a healthcare network, which is two or more hospitals that work together toward the benefit of a community. This strategy gives healthcare providers a stronger position during negotiations with insurers.
Effects on patients
Ultimately, hospitals are limited in how much they can charge patients because insurers are in the mix, limiting payouts. Hospitals in systems or networks, however, can leverage their volume and market dominance in a region in order to negotiate better rates. In these situations, the patients in that area may face higher premiums or copays. Fixed and variable costs in healthcare have steadily gone up over the years. Some reasons for the increase include expensive new drugs and technologies, unhealthy lifestyles and an aging population with chronic illnesses.
Hospital administrators must take an active role in keeping their hospital afloat. For some, the solution relies on building a coalition with other hospitals in a region to form a network. For others, creating a healthcare system is the best option. In any case, the best solution is tailored to the needs of the hospital and of the local community. An MBA in Healthcare Management can provide healthcare executives with the knowledge and tools to find ways to keep costs down.