FORT WAYNE – Indiana hospitals will receive millions of dollars less this year from the state for treating poor children, pregnant women and people with disabilities.

But without generous year-end bonus packages or other obvious places to cut spending, executives are looking at improving efficiency to trim costs.

State legislators’ November decision to reduce Medicaid reimbursements by 5 percent for the next 18 months is one in a series of disappointments that has pushed health care providers to run leaner organizations, they said.

Local hospital executives say Indiana has underpaid Medicaid reimbursements for years, failing to increase the rates since 1993.

Mike Schatzlein, CEO of Lutheran Health Network, said that even before this 5 percent cut, the state was paying only about 20 percent of actual treatment costs.

“We’re already essentially donating the care to Medicaid patients, anyway,” he said. The 5 percent cut, scheduled to last until June 30, 2011, “hurts, but it’s not a back-breaker. We will get over it.”

“It’s not going to affect our ability to care for those patients or other patients,” Schatzlein said.

Marcus Barlow, spokesman for the Indiana Family and Social Services Administration, said the agency had to make cuts because the state has seen its tax income plummet during the deep and enduring recession. Medicaid reimbursements were one of the last places the agency looked to save money, he said.

“A 5 percent cut isn’t something we wanted to do, but nobody’s becoming insolvent because of this,” he said.

Complaining about reimbursement rates is a little “disingenuous,” Barlow said, because when the state implemented the Healthy Indiana Plan in 2007, hospitals began receiving relatively generous payments for treating more patients who previously didn’t have medical insurance. That change increased hospitals’ income, he said.

Jeff Francis, Parkview Health’s chief financial officer, said 14 percent of the non-profit organization’s total revenue is from Medicaid, including state payments to hospitals and physicians’ offices. Parkview Health expected an operating margin of about $45 million this year – that’s the revenue left after expenses are paid, spokesman John Perlich said. He didn’t provide total 2009 revenue.

Although 14 percent is a relatively small amount of the organization’s income, a 5 percent cut from that wedge of the revenue pie equals “several million dollars,” Francis said.

Medicaid reimbursements account for less than 10 percent of Lutheran Health’s overall revenue. The network, part of Tennessee-based Community Health Systems Inc., doesn’t publicly report separate financial results, spokesman Geoff Thomas said. The percentage varies by individual hospital, Schatzlein said.

The rival health care executives were adamant about what won’t be compromised to cut costs: patient care.

“Our whole mission is to make sure we take care of the patient,” Francis said.

That means Lutheran Health is “definitely not” looking at higher ratios of patients to nurses. The organization doesn’t plan to cut any type of positions. And it won’t release patients before they’re healthy enough to go home. Some medical advances allow patients to recover faster and be released from the hospital sooner, Francis said.

Acceptable ways to trim costs include renegotiating contracts with some suppliers, something Lutheran Health did after commodity prices fell, and trying to make sure the staff uses appropriate supplies rather than something more expensive, he said.

Administrators are also looking at cutting “work-arounds,” including situations where staff members have to click three or four computer screens to reach the one they need. A direct link saves time, Francis said.

“We’ve had to redouble our efforts (at cost-cutting) because of changes in the economy” that have left more people uninsured and on Medicaid, he said.

More than 49,500 Allen county residents were covered by Medicaid as of December 2007, according to the Family and Social Services Administration. The state’s fiscal 2007 Medicaid budget was more than $5.1 billion, the most recent number available from the Henry J. Kaiser Family Foundation.

The current budget, fiscal 2010, totals $7.3 billion, with $4.8 billion coming from the federal government and $2.5 billion from the state, Barlow said.

The Lutheran Health staff takes time to help the uninsured apply for Medicaid. The organization’s staff treats such patients – even though they don’t know whether the person will be approved and, thus, don’t know whether they will be paid for the service.

Schatzlein, the CEO, said getting paid is “not the point” of helping people fill out the paperwork, so he doesn’t worry about adequate return on the staff time invested. He’s looking to cut other fat from everyday routines.

If you can improve a process while keeping customers and employees happy and cutting costs, “that is free money,” he said.

Schatzlein steals from lean manufacturing’s playbook. If you reduce the variation, you control quality and cut costs, he said. He’s convinced it can also be done successfully in a service industry that deals with people who have many different needs.

For example: organizing an operating room and preparing a patient for surgery. Although surgeries vary, parts of the process can be standardized, which saves time, improves safety and allows caregivers to focus on specific needs of each patient.

“That increases reliability and safety and also reduces waste and excessive cost,” he said.

Lutheran Health’s pharmacy robot is a good example, he said. Bar-coded medicines are stored, dispensed and checked by the robot, increasing safety and letting nurses interact more personally with patients. The robot, bought for $800,000 in 2000, operates 24 hours a day and can fill up to 10,000 doses a day.

Another opportunity for efficiency lies in getting patients ready for surgery, Schatzlein said. The organization studies all the steps a nurse must take to retrieve supplies and paperwork. It does something called a “spaghetti diagram” by placing chalk or ink on the bottom of a nurse’s shoes and then studying the pattern created.

By rearranging supplies and procedures, administrators can reduce the number of steps taken by up to 90 percent, he said.

“Processes are a holy grail thing for me,” he said.

Fifteen years of successive growth – as measured in admissions – has also allowed Lutheran Health to absorb some cost increases and revenue decreases, he said.

Lutheran Health Network admitted 43,366 patients to its eight hospitals in 2008. During the same period, Parkview Health reported 31,466 admissions.

Francis, Parkview Health’s CFO, said his employer is a member of the Indiana Hospital Association, a lobbying group that has been asking state officials to increase Medicaid reimbursement rates. The hospitals have been underpaid since long before the recession hit, he said.

When asked whether the state has been balancing its budget on the backs of hospitals, Francis said: “It definitely seems like that.”

But the health care executive knows he won’t get much sympathy from others in this economic environment.

“It’s a challenge all the time” to cut costs, Francis said. “But that’s no different than most other companies.”

sslater@jg.net