U.S. hospital care is projected to consume nearly one-third of the nation’s $4.1 trillion health spending in 2020. This reality keeps intense pressure on the nation’s hospitals and health systems to reduce costs, while meeting other goals, including improved quality, outcomes, and access. Specific pressures include:
- Medicare, Medicaid, and commercial payment constraints, consumer expectations, new competition, and regulation, which have the potential to lower demand for core inpatient services, making it even more imperative to reduce costs to alleviate shrinking hospital margins
- New approaches to care delivery, such as retail clinics and telehealth, which have emerged to offer consumers high-volume services at lower prices and more conveniently than hospital outpatient facilities
- Powerful new players, such as the venture formed by giants Amazon, JPMorgan Chase, and Berkshire Hathaway, which possess the intellectual and capital investment capabilities to overhaul significant pieces of the health/healthcare business
These forces could minimize the role played by traditional hospitals and health systems. “The specific future for legacy organizations may be hazy, but we know its direction,” notes Kenneth Kaufman, Chair of Kaufman Hall. “Meaningful actions can and must be taken immediately.”
A new report based on survey results from nearly 190 hospital and health system executives indicates that some cost-reduction progress has been made on some fronts, but overall, progress has been slow.
Findings suggest that to accelerate cost reduction and achieve cost transformation, hospitals will need to take big steps to tackle more transformative initiatives. Such undertakings remove significant cost from the system by eliminating, repurposing, or redesigning capital-intensive, inefficient structures, programs, and processes.
Initiatives include service rationalization, clinical/care redesign, physician enterprise management, and the reduction of unwarranted clinical variation. The efforts are critical not only to contain the costs of providing existing services, but also to free up resources to compete with new care models against new players.
This paper identifies 10 survey findings and offers commentary related to them on how hospitals can speed cost-transformation progress.
Cost Transformation Priorities
Traditional priorities currently dominate hospital leadership attention, while areas that will contribute to changing foundational cost structure are not being addressed aggressively. For example:
1. 72 percent of executives cite labor cost/productivity, and supply chain and other non-labor costs as a key focus area, yet only 29 percent of executives cite service rationalization and 45 percent cite physician enterprise management. The latter will yield permanent, structural cost transformation.
Traditional and transformative cost reduction effort should be additive, not mutually exclusive, so tackling the hardest areas must be firmly on leadership radar screens as well.
For example, with service rationalization, a change in mindset is needed to adapt to the reality that both high-tech and high-margin services can be packaged and delivered in more convenient locations, with nontraditional amenities that interest patients. Health system leaders have long relied on the hub-and-spoke model, where community hospitals funnel patients to the flagship facilities. “Rethinking service lines as cost centers, rather than points of care that must be protected, will help bring the objectivity needed to thoroughly examine all services on a level playing field to right-size and right-place service delivery,” notes Walter W. Morrissey, M.D., a managing director of Kaufman Hall.
Accountability
The cost transformation imperative is well-recognized by current healthcare executives, but the processes and structures for accountability need to be developed and implemented in many organizations.
2. 86 percent of executives say cost transformation is a “significant” to “very significant” need for their organizations today, but. . .
3. 42 percent of executives say their organizations do not have processes and structures in place to hold leaders accountable to performance for cost transformation goals, or do not know whether this is/is not the case.
All leadership and governance teams must put or have in place the structures and processes required for cost transformation accountability, and hold senior executives accountable for setting and achieving transformative cost reduction goals.
Goal Setting
4. Executives in nearly a third of organizations (32 percent) say that goal setting for cost reduction is absent in their organizations, and modest targets (1 to 5 percent) exist in about a quarter of represented organizations (22 percent).
5. More than half of executives (57 percent) say that their organizations set cost-reduction targets solely at the enterprise level, and not at the vice president, service line, or department level, where the operational cost transformation work takes place.
The absence of cost-reduction goals, which increased 7 percentage points from 2017, the lack of significant targets beyond 1 percent to 5 percent, and the lack of goal setting at the level where work takes place (up 22 percentage points from 2017) put organizations at high risk of diminishing financial performance.
Progress
Executives in many organizations cite zero progress in the hardest-to-achieve cost transformation areas.
6. 61 percent cite no progress with service rationalization; 46 percent cite no progress with reducing inappropriate clinical variation; 44 percent cite no progress with physician enterprise management; and 33 percent cite no progress with service line efficiency.
Current engagement of the physician enterprise in organizational cost transformation efforts appears limited.
7. The top-cited strategy to engage physicians in cost transformation is to regularly deliver to them reports on quality, cost, and patient experience, but this was cited by less than half of respondents (42 percent).
In our experience, organizations that are able to engage their physicians typically are the organizations with stronger strategic and financial performance. Most physicians want to improve their performance. By regularly providing them with relevant data, and enabling their view of their performance in the context of peer performance, physicians can identify improvement opportunities to pursue. Benchmarks provided to clinicians should be directional in nature – i.e., normalized based on an understanding of the relevant operations – and applied in the context of the system as a whole. All of the surveyed engagement strategies, as presented in the graph, should be used by organizations.
Roadblocks
Top-cited impediments to cost transformation remain entrenched, and consistent from 2017 to 2018.
8. “Lack of good data and insight into costs and where savings opportunities exist” is the top-cited impediment to cost transformation (25 percent).
9. 71 percent of executives do not have confidence in the accuracy of results of their existing cost accounting solution, and nearly half of executives (48 percent) cite no or a very limited distribution and use of cost and profitability reports to support strategic decision making and influence financial and tactical planning.
10. Data, tools, and processes for managing cost-transformation initiatives such as inappropriate clinical variation are lacking. Fifty eight percent indicate that that these enablers are not available or don’t know whether they exist.
More than others, the challenge related to absent or unreliable data, analytics, processes, and tools could account for the low cost reduction goals set by organizations, and limited progress toward achieving such goals. To succeed in reducing organizational cost structure, executives need a rich set of accurate data that gives them insight into their current costs and allows them to make informed decisions and how to reduce costs going forward. The data and analytics must extend beyond financials to include clinical and other operational data sets. Reporting of cost and profitability trends should extend widely to support strategic decision making. Executives can achieve transformative cost reduction by ensuring that their organizations have reliable cost data, analytics, and tools to facilitate setting, monitoring, and achieving targets.
Where to Focus Going Forward?
To reconfigure their businesses for a much more cost competitive future, healthcare leadership teams must thoroughly tackle traditional initiatives, while also ensuring a “profound refocus” on lower forever initiatives and their enablement through reliable data, analytics, processes, and tools.
Lower-forever initiatives permanently remove or reshape capital-intensive structures, models, and processes. They do so through redesigning care, rationalizing/right-sizing services, and reducing unwarranted clinical variation to continuously remove utilization and its cost from the system. These core strategies require strong resolve and physician engagement, but are necessary to truly bend the cost curve. If implemented correctly, organizations will begin to see the year-over-year benefit sustained over time.
Lance Robinson ([email protected]) is managing director of Kaufman, Hall & Associates, LLC, and leader of the firm’s performance improvement practice.
