Over the past year or so, a central theme in my blogs has been just how hard it is to run an American hospital right now. So many good and talented executives are trying incredibly hard. The results that these efforts bring vary widely. Our financial data shows that some hospitals are making progress—they are moderating the growth of expenses and improving their revenue. However, the numbers also demonstrate that other organizations are not making progress, with an alarming 40% of hospitals losing money from operations in 2024.
The question is what to do about the need to improve financial performance in a highly complex environment. As an executive team, you can’t do everything. You confront hundreds of problems and opportunities, and you have hundreds of ideas. Eventually, you run out of time and energy.
It is necessary to develop some operational priorities. The executive team has to focus on something that they know they can spend time on and get some real results from, something for which the probability is high that if you make improvements, the organization will yield significant and tangible benefits.
That is the definition of a no-regrets strategy.
One candidate for a no-regret strategy is the ever-present need to lower average length of stay. A recent analysis of our National Hospital Flash Report numbers identified lower-than-average length of stay as one of the top characteristics of hospitals that perform at a higher financial level than others.
I asked some of my colleagues to work up a scenario to show just how big of a financial impact a hospital could experience with a serious focus on lowering average length of stay. Those numbers tell a powerful story.
Assume that a 425-bed hospital has an average length of stay per patient of six days—a level by no means uncommon for the hospitals we work with, and a level that benchmarking generally indicates should be lower by at least one day.
If this hospital were to achieve the reduction of one day in average length of stay, it could realize three kinds of financial benefit.
First, it would reduce the costs associated with an unnecessary day of hospitalization. For our sample 425-bed hospital, that could mean saving more than $20 million in operating expenses over the course of one year.
Second, for hospitals that are operating at full capacity, reducing unnecessary hospital days could open space for additional admissions. For our example hospital, assuming an average margin of $4,500 per admission, reducing average length of stay from 6 to 5 days could bring the hospital about $20 million in additional margin by allowing the hospital to admit more patients.
Third, hospitals operating at capacity may be contemplating new construction to add beds. This is an expensive undertaking, to the tune of $2 to $3 million per bed in capital costs. No hospital wants to spend that money to build beds just to support unnecessary hospital days. If our example 425-bed hospital were to reduce its average length of stay by one day, it would reduce its need to build new beds and potentially save about $200 million in capital costs.
Over the past three or four decades, hospitals have always struggled with length of stay. And for good reason: it’s extraordinarily hard. There are so many things you have to do well, including patient status tracking, utilization management, care transitions, discharge planning, and on and on. And that complexity is why length of stay can get away from hospitals.
We also have learned over the past several decades that an intense focus on improving length of stay has always been a winner. Hospitals that put in place the structures, processes, and technologies; hospitals that have true executive commitment to this issue—these hospitals have a significant advantage when it comes to financial performance. The numbers in our Flash Reports bear this out. And the numbers in our case study do as well.
Our experience is that hospitals can, over time, accomplish what we lay out in this case example. They do that through a conscious decision to make length of stay a top operational priority. I have never heard, nor would I ever expect to hear, a single hospital executive ever express regret over that decision.
