develop strategies around four forces that will affect their financial
performance in the next five to 10 years.
Hospitals and health
systems will face a variety of financial challenges over the next decade,
including pressures related to the economy, healthcare reform, and increased
demand for care. Addressing these challenges will require, at a minimum, an
understanding of the costs associated with care delivery. It also will require
that healthcare organizations develop an ability to control—rather than
simply understand—their costs.
Hospitals and health
systems will need to conduct more in-depth analyses of the cost implications of
care processes and delivery than most have done to date. In particular, they
will need to concentrate on four forces that will affect their future costs:
- The impact of demographic changes on the Medicare Trust Fund
- Medicare spending patterns
- Morbidity in the non-Medicare population
- The complex nature of the healthcare market
Action Steps for Providers
Hospital and health
system leaders should take the following steps in developing a fiscal strategy
that will lead their organizations through the challenges of the next
ability to control—rather than simply understand—the organization’s
costs. There are only five drivers of an organization’s healthcare
costs: case mix, volume, resources used per case, cost of a resource unit, and
fixed costs. Unless hospital leaders and physicians have a good understanding of
their costs—and unless they design good systems to control their costs—they will
be at the mercy of entities higher up in the healthcare food chain.
One of the most
dramatic efforts to address resources per case was made in Grand Junction,
Colo., where leadership by the primary care community resulted in a “culture” of
incentives for cost control—a culture that was reinforced by withholding 15
percent of fees from physicians to create a risk pool managed by the Mesa County
Physicians Independent Practice Association. When a physician’s costs were kept
low, the physician received the withheld fees at the end of the year, which
provided an incentive for cost containment.
To better control
resources per case, the Grand Junction primary care physicians gathered data on
the cost profiles of specialists and reduced their referrals to those who were
high-resource utilizers. Primary care physicians also led the way toward the
regionalization of services and support “robust” (and lower-cost) end-of-life
care, with an emphasis on hospice services rather than inpatient hospital care.
The results were
impressive: Grand Junction saw a reduction in high-cost surgical interventions
(with CABG and inpatient coronary angiography rates dropping to 60 and 55
percent of the Medicare national average, respectively), and a decrease in
inpatient days during the last two years of life to 61 percent of the national
average (with hospice days rising to 174 percent above the national average and
deaths in hospitals declining to half the national average).
senior managers and line managers throughout a healthcare organization are
solidly behind—and deeply involved in—the organization’s cost-control efforts.
Controlling costs in hospitals and health systems requires the
involvement of managers at all levels in the organization. Healthcare accounting
professionals can be helpful in establishing transfer prices, designing a budget
formulation process that relies on the five cost drivers discussed here, and
preparing analyses of variances from the budget using these same cost drivers.
However, both senior managers and line managers throughout the organization need
to be solidly behind—and deeply involved in—the organization’s cost-control
physicians in cost control. Physicians are the only ones who can both
establish clinical pathways and monitor their colleagues’ use of them.
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