Jeni Williams

In a time of shrinking margins and increasing demands on healthcare resources, hospitals across the country are taking creative steps to contain costs while enhancing the quality of services. Here, three organizations share their unique-and effective-approaches to cost containment.

At a Glance

Cost savings lessons learned by the hospitals featured include the following:

  • Build diverse work teams to foster fresh ideas for improvement.
  • Trust in the ability of staff to respond to an organization's challenges.
  • Establish accountability for sustaining savings.
  • Provide talking points for leaders to use in explaining initiatives.
  • Support physicians during and after vendor negotiations.
  • Respect the passions of all team members involved.

In 2007, Sacred Heart Hospital, Eau Claire, Wis., knew it would soon face a significant decrease in revenue-and that it needed to act quickly to continue to meet the needs of its community. Physicians on the hospital's medical staff were beginning to move their ancillary services out of the hospital and into their own practices. In addition, one large, multispecialty clinic, supported by half the physicians on Sacred Heart's medical staff, planned to build its own imaging and surgery center. Sacred Heart projected a $7 million loss in revenue.

"That group of physicians is important to us, so we did not go about demonizing any physicians as a result of their decision to build their own imaging and surgery center," says COO Faye Deich, RN, MS. "Rather, we tried to help our staff understand: 'This is what clinics are doing, and we were given sufficient notice by this clinic. We need to be proactive and respond.' We did not think that we could reduce our expenses by $7 million all in one step, so part of our strategy was to grow revenue, and the other part was to reduce expenses."
Sacred Heart set a goal of reducing its controllable operating expenses by 5 percent, or $5 million. The hospital developed a collaborative approach to identifying and following through on cost savings opportunities, creating teams with representatives from diverse departments. It then established target goals for cost reductions based on the combined percentage of expenses for which the departments composing the team were responsible.

The result: Sacred Heart achieved $5.1 million in savings-and was able to rely on this team-oriented approach to cost savings again in late 2008, when the hospital determined it would need to drive out another $1.4 million in expenses within a year. Staff were very responsive during both initiatives, Deich says.

"We feel very fortunate now as we look at other health systems that are scrambling, trying to figure out how they're going to reduce expenses," Deich says. "We see a lot of hospitals that are telling various departments, 'This is the amount you need to cut from your budget; this is the number you need to reach.' At our organization, directors worked together to determine where savings could be achieved-and there was a name and timeline associated with each action, so senior leaders would know who was accountable for the savings and how it would be achieved."

Today's hospital leaders are challenged to enhance quality of care and maximize value in their operations at a time when the financial resources to support improvements are dwindling. A report released by PricewaterhouseCoopers' Health Research Institute in December 2009 found that healthcare cost control is the overarching imperative for hospital leaders in 2010, with an emphasis on reducing costs and creating greater value.

As hospitals across the country search for ways to reduce costs across their organizations, many are finding they need new approaches for generating cost savings. Here, Sacred Heart and two other hospitals share unique approaches that have enabled their organizations to realize significant cost savings-quickly.

Sacred Heart Hospital

Sacred Heart Hospital's unique team approach to identifying areas for cost reduction involved creating seven cost-savings teams with representatives from diverse departments. Team members worked together to provide suggestions on ways to achieve established target goals for cost reductions. The target goals were based on the combined percentage of expenses for which the departments composing the team were responsible.

"For example, if the team was composed of surgery, maternity, plant services, and one of the nursing units, and their expenses added up to
18 percent of the expenses of the hospital, they were given a target of 18 percent of the $5 million in cost reductions that we hoped to achieve," COO Deich says. "What is valuable about this process is that rather than tell everyone, 'Go cut 5 percent out of your departments,' it involved a great deal of discernment regarding where we would get these dollars and how we would make these cuts based on the input we received at a departmental level."

The hospital made sure each team reflected a variety of personalities (introverts and extroverts), tenure, and total expenses by department.

Over a period of three months, team members met twice a week to identify, from their respective departments, where expense reductions could be achieved. "Each director presented his or her department's budget to the team, and was asked questions about the department's budget," Deich says. "What was valuable about these discussions was that some of these leaders had never really worked together before, and they were able to ask very open questions in a respectful manner."

Each week, the teams provided a weekly report to the senior leadership team regarding the areas they were considering for expense reduction. All cost savings ideas required approval by the senior leadership team before they could be enacted. "The director who put the dollars on the table to be cut had to have a plan for doing so, and it had to be measurable, and we had to be able to account for the savings," Deich says. "Our consultant used the term 'dark green dollars'-each item that was cut had to result in a decrease from what we were originally spending."

Some cost savings ideas were dismissed as impractical or potentially damaging to employee morale, Deich says.  "But for the most part, the ideas that surfaced through this process were really eye opening," Deich says.

"For example, we discovered the syringes we were purchasing for pain-controlled analgesia contained a preservative that had a long shelf life, and this preservative made the syringes very expensive," she says. "When we evaluated how frequently we turned our inventory, we realized we could buy exactly the same syringe with a different preservative-one that did not have such a long shelf life-and save $60,000 a year."Sacred Heart identified $5.7 million in cost reductions through this process, and an audit one year later revealed that $5.1 million in savings had been achieved (see the sidebar for examples of the types of cost reductions Sacred Heart achieved). The process is used throughout the organization whenever the need arises.

The cost reduction steps undertaken in 2007 have helped Sacred Heart today as the economy has changed, increasing the pressures on hospitals to reduce their expenses. For example, in late 2008, when Sacred Heart announced to staff that the organization would need to drive out another $1.4 million in expenses within a year, staff responded well. "There wasn't a lot of moaning and groaning," Deich says. "Our leadership team and our staff had the attitude of, 'Okay, this is what we need to do.'" This time, the hospital was able to reduce costs without cutting staff."I think this process has helped to develop an agility in our leadership team," she says. "Our leaders are able to proactively respond to the challenges our organization faces and develop effective action plans for improvement as a team."

Unity Health System

Nearly one year ago, Unity Health System in Rochester, N.Y., paired analysts from its finance department with small groups of clinical managers to review operating budgets for major departments and cost centers once a month. This finance/clinician team model has resulted in reduced supply expenses and a better understanding of labor needs for care delivery processes.

"Giving managers the right tools to manage their data helped to bring finance and clinicians on the same page, which has resulted in a number of positive benefits for our organization," says Jane McCormack, MSN, RN, senior director for nursing and patient care at Unity Health. "Through this collaboration, there has been mutual growth in learning from each other's area of expertise, with a common goal of capturing cost savings or enhanced revenue opportunities."

In Unity Health's surgery department, finance analysts have worked closely with clinicians and physicians to reduce the cost of physician preference items through group purchasing opportunities and aggressive negotiations with vendors.

Key to the initiative: sharing data on implant use and cost with individual physicians. For example, the dollars saved on hip and knee implants and a neurosurgical implant were achieved by informing the individual surgeons of the costs of the devices they were using as compared with the costs of similar devices used by other surgeons. The surgeons were then brought into negotiations with vendors to reduce the costs of the implants for the hospital-and when vendors refused to decrease the cost of their products, physicians supported decisions to move their implant business elsewhere.

"We had one surgeon who had used a particular vendor for some time, and this vendor refused to move on price, because he believed the surgeon would stay with his products," McCormack says. "When this high-volume surgeon agreed to switch to another product based on the vendor's unwillingness to work with the health system on pricing, it was a real eye-opener for the vendor. Ultimately, that vendor did come back to the table and work with us on reducing the cost of their products."

Collaboration between finance analysts and clinicians at Unity Health also has led to a greater understanding of how to budget for orientation expenses-and how to reduce orientation costs. "Before finance analysts and clinical managers began to meet, our clinical managers were unable to really quantify their orientation dollars-and we found that each department budgeted for orientation differently," says Candace Smith, MPA, RN, vice president, nursing/patient care services, for Unity Health. "Often, we found that clinical departments couldn't meet their budget targets because they were over on orientation costs, and those variances occurred primarily because managers were challenged with forecasting and explaining how many vacancies they would have to fill and the financial impact of filling those positions. We were able to help clinical managers to map out a plan for their orientation dollars in advance-and also standardized clinical orientation processes based on these discussions."

Unity also embarked on a strategic nurse recruitment plan that led to its highest nurse hire rate in 2009. Although the orientation for 60 new
graduates was a significant expense to the organization, it allowed Unity to fill all of its vacancies, which in turn led to a significant decrease in overtime utilization and virtual elimination of temporary agency nurse requirements. These results have added up to hundreds of thousands of dollars in reduced cost-and the savings have far outweighed the orientation spend.

The initiative has fostered a greater sense of teamwork between finance and clinicians. "Our finance analysts have been excited to learn more about the work that our clinicians are doing and vice versa," McCormack says. "It's a win-win initiative for our organization."


At ThedaCare, a community health system composed of four hospitals headquartered in Appleton, Wis., Lean management techniques have enabled the radiation oncology department to increase revenue, dramatically improve productivity, decrease waste, and improve patient and employee satisfaction.

Examples of the gains ThedaCare's radiation oncology department has achieved through this initiative include the following:

  • A $900,000 increase in gross revenue from 2008 to 2009 and a 24 percent increase in gross revenue since the initiative began in the department in 2006
  • A 63 percent reduction since 2006 in wait time from referral to treatment, down to six business days
  •  A 30 percent improvement in productivity
  • The ability to improve revenue and productivity without laying off staff (and to provide raises to staff last year)

The successes in ThedaCare's radiation oncology department stemmed from a series of "rapid improvement events"-short initiatives designed to improve performance in a short amount of time, such as one week-undertaken throughout the health system.

"Waste is pervasive in health care, and ThedaCare was no exception," says Kim Barnas, vice president for ThedaCare. "It wasn't that we weren't hitting our financial and productivity targets; we were. But when we reviewed our performance and found that we ranked in the 95th percentile among our benchmarks for quality, we felt as though the 95th percentile wasn't good enough. We stopped looking at the national benchmarks and concentrated on what we could do to provide a better experience for our patients."

Additionally, in 2007, ThedaCare's radiation oncology department faced a significant and exciting challenge. The department had just purchased an expensive technology called CyberKnife, which allows radiology oncologists to treat tumors noninvasively. "When I investigated what it would take to run that piece of technology, my initial estimates were that it would require four to five additional FTEs," Barnas says. "It was hard for me to believe that we couldn't support the implementation of this technology with our existing staff and minimize the need for new FTEs."

ThedaCare's radiation oncology department began with an initiative to decrease the time from referral to first treatment. Selected representatives from the department reviewed the process in segments, from the phone call a patient makes to schedule an appointment to the consultation with a radiation oncologist to the first appointment. Then, the team looked for ways to reduce the waiting time during each point of the process. 

The rapid improvement team created a new physician schedule that ensured that an open appointment with a physician would be available in fewer than three days; this move reduced the waiting time by one week. CT and MRI scans are required for each patient, and used to require a separate appointment in addition to the patient consultation. Now, the scans are provided at the time of consultation, thereby ensuring that a physician is present to verify that all the information required has been collected during the consultation. Then, the team looked for ways to remove waste from the treatment plan process. "Overall, these steps collapsed the time from referral to patient, increased employee productivity, and improved the overall outcome," Barnas says.

The department experienced immediate results from this improvement and others undertaken by the rapid improvement team since 2007. Results are shared monthly with the senior leadership team and daily within the department. "The work is ongoing, and it's done in experiments-'Let's try this. Did it work? Let's step back and look at this again'-and the team continues to work toward improving the processes," Barnas says. "As a result of our work in this area, gross revenue has increased 24 percent, our wait time from referral to treatment has decreased 63 percent, and productivity has improved by 30 percent. Both patient satisfaction and employee satisfaction have improved as well.

"When we reduce the burden on our staff by eliminating waste, and when we increase productivity and improve quality, we enhance the value of the care and services we provide," Barnas says. "Our equation is that value equals quality over cost. I think initiatives such as these are appreciated by employees and foster employee engagement."

What Can Your Organization Learn from These Hospitals?

The hospitals profiled in this article identified a common group of lessons learned through their initiatives. The strongest theme among these lessons is the importance of systematic collaboration that taps not only the technical knowledge of all involved, but also their passion for excellent patient care services. The result: strategic cost management with the potential for sustained benefit rather than traditional across-the-board cost cuts that do not improve service. Consider how much your organization could lower costs and improve service by undertaking these approaches to cost management.

Recognize that diversity of work teams can lead to fresh ideas for improvement. "To have people who do not ordinarily work with each other come together to meet a challenge was a very valuable thing," says Sacred Heart's Faye Deich. "Our directors found that it helped to have a fresh set of eyes review their budgets and ask questions they might not have considered. It was also a new opportunity for managers to develop networking relationships within the organization."

Establish accountability for sustaining the savings achieved. "We put audits in place to ensure that the items or positions that were eliminated would not creep back in over time," Deich says. "Initially, we identified $5.7 million in reductions. An audit our organization conducted six months after the initiative took place found that we had actually achieved $5.1 million in savings. That's why we made sure there was an audit system in place: so that our finance department could track the reductions and ensure we were able to achieve the associated savings."

Respect the passions of all involved. For example, a sense of shared respect was critical at Unity Health when finance and clinicians collaborated to better understand the expenses in clinical departments and work toward cost containment. "The key to this initiative was learning to understand each other's language and passion, because finance and clinicians use different languages," says Smith, vice president of nursing/patient care services for Unity. "Respect for each other's passion fostered a team environment that led to positive results for our system."

Provide talking points to your leadership team to explain cost savings initiatives to staff. "We gave our leadership team talking points so that the message would be consistent across the organization: what we were doing, and why," Deich says. "The leaders left the initial kickoff with speaking points in hand so they could speak to their staffs about the kind of input we needed, so that they could participate and help."

Support physicians during and after vendor negotiations. After Unity Health's surgeons agreed to switch to other brands of implants based on the unwillingness of some vendors to reduce the price of their products, vendors put the heat on some of them to change their minds. Some vendors went so far as to wait for the surgeons in the medical staff parking lot to discuss the issue. "Our poor neurosurgeons told us, 'They're stalking us,'" Smith says. "You have to be very sensitive to your physicians' needs after such decisions are made, and you have to have a plan for how you're going to manage the vendor reaction."

Trust in your staff's abilities to respond to the organization's needs in times of crisis. "If you give people a specific target and the tools to do their work, they will rise to the occasion," Deich says.

Jeni Williams is a senior editor in HFMA's Westchester, Ill., office.


Cost Savings Achieved by Sacred Heart Hospital

Examples of the savings Sacred Heart Hospital, Eau Claire, Wis., achieved through its team approach to identifying potential areas for expense reduction include the following.

  • More aggressive contract negotiations with vendors led to:
     -$100,000 in savings on telephone contracts
     -$500,000 in reduced costs for surgical implants
     -$250,000 in reduced costs for blood products
     -$982,000 in savings on joint implantsa
     -$42,000 in reduced expenses for office supplies
     -$24,000 in savings on soft drinks
  • Moving print-based journal subscriptions to online-based subscriptions resulted in a savings of $46,000.
  • The switch to a different brand of candles for Mass in the hospital chapel led to a 50 percent decrease in cost. 
  • The switch to a new type of syringe for pain-controlled analgesia-one with a preservative that had a shorter shelf life-resulted in a $60,000/year savings. a
  • Moving dialysis billing in-house saved $33,000.
  • Switching to electronic paycheck notifications saved $16,800.

a. These savings comprised $500,000 in reduced hip and knee implant expenses in 2007 and $482,000 in reduced joint implant expenses in 2009.

Publication Date: Monday, March 01, 2010

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