Hospitals will not be able to garner major savings from the traditional cost-reduction targets—labor, supply chain, and revenue cycle—according to the report.


Sept. 18—Although widely seen as a critical need, cost-control efforts are lacking or minimal at 51 percent of recently surveyed hospitals.

Kaufman Hall surveyed executives at 150 hospitals and health systems, including 30 percent from a health system with 10 or more hospitals, 26 percent from a stand-alone hospital, and 25 percent from a small health system with two to four hospitals.

Twenty-five percent of surveyed hospitals had no cost-reduction goals for the next five years, and 26 percent aimed to cut 5 percent or less.

“Lots of organizations say they are trying to do this, but many haven’t done much more than dip their toe in the water or pursued the low-hanging fruit,” said Walter Morrissey, managing director at Kaufman Hall.

The relative dearth of cost-reduction efforts worried Morrissey because such steps are seen as critical amid falling insurer payments and the proliferation of narrow networks, in which hospitals must compete to be included on the basis of their value proposition. Lowering five-year costs by 25 percent to 30 percent would be needed to become a local “provider of choice” for health plans, according to the report on the survey.

Most likely to fall short in cost-reduction efforts were stand-alone hospitals, 40 percent of which had no cost-reduction goal.

The cost-reduction alarm bells in the survey may appear surprising given recent positive news on hospitals’ success in restraining cost growth. For instance, the Health Sector Economic Indicators, a publication of Altarum’s Center for Sustainable Health Spending, recently cited slower hospital spending growth as a major factor in the decrease in overall national healthcare spending growth during the second quarter. Hospital spending grew 1.3 percent, compared with an expected 4 percent, marking the slowest growth in any major healthcare category over the past year.

But hospitals remain the largest category of healthcare spending and are expected to draw continued attention from private and public payers looking to restrict unsustainable spending.

“We think hospitals and health systems need to not just slow that inflationary cost per unit of service but bring that down so that each discharge for the same medical condition costs less,” Morrissey said in an interview.

Traditional Areas of Focus

The report also examined the areas where hospitals have focused cost-reduction efforts. Executives said their current cost-control initiatives included supply chain (68 percent of respondents), labor (66 percent), and revenue (60 percent).

Those findings are supported by other recent industry surveys. For instance, a recent Black Book Market Research survey of over 6,000 financial and business operations leaders at health systems found that almost three-quarters of struggling hospitals are prioritizing revenue cycle management over other initiatives, including data analytics.

Meanwhile, supply chain costs comprise nearly one-third of the average hospital’s overall operating expense and are predicted to surpass labor as the leading expense by 2020, according to projections by the Association for Healthcare Resource & Materials Management. A recent analysis concluded that hospitals could cut annual supply expenses by 17.8 percent through improvements in supply chain operations, processes, and product use.

Meanwhile, hospitals are facing historic labor costs following healthcare jobs booms in 2015 and 2016, when new hires across the industry averaged 32,000 per month and hospital job creation averaged 10,000 per month in 2015 and 11,000 in 2016, according to Altarum Institute. 

Morrissey cautioned that even pruning some of those recent hires will not get hospitals as far into cost reduction as they need to go.

“Many organizations feel like they have to tackle the traditional labor/supply chain/revenue cycle, but that alone isn’t going to get them past that 1- to 5-percent, 5- to 10-percent range,” Morrissey said.

Obstacles to savings identified by the survey and the report included a lack of credible cost data, unwillingness or inability to share data with physicians in a compelling way, lack of accountability, and unwillingness to tackle new areas of cost reduction.

“Most executives in this industry have not been in a position where they needed to face their true community or their physician community with the need to make real changes that are transformational but perhaps unpopular,” Morrissey said.

Many savings opportunities were too “politically sensitive” to pursue, according to 21 percent of hospital executives. Such moves can include closing small hospitals, reducing available facilities or service lines, and consolidating services.

“They’ve been reluctant to make those types of changes or even fully evaluate those,” Morrissey said. “In the rest of the industries across many facets of our economy, that is standard practice and required for ongoing success.”

Only 38 percent of hospitals have examined inappropriate clinical variation as part of their cost-reduction efforts. The report named that area as one of the largest potential sources of cost reduction.

“Most executives and boards haven’t wanted to point out how much unwarranted variation occurs among their physicians due to the political sensitivities associated with that,” Morrissey said.

Outlook for Small Hospitals

Some have wondered how independent hospitals and systems with just a couple of facilities can afford the expertise and time needed to identify some of the more advanced savings opportunities. And the survey demonstrated that smaller hospitals and health systems face some larger challenges in finding savings because they lack economies of scale. For example, IT and data systems require costly expertise, Morrissey said.

“That said, small hospitals and small systems can make some of the traditionally difficult decisions: attacking clinical variation and reducing or eliminating sub-scale programs,” Morrissey said. “Those have been challenging for systems, particularly for a small hospital.”

He highlighted the “tremendous community impact” that happens when a community hospital closes an obstetrics program with 300 annual deliveries.

“But that may be what’s best for not just the cost but the overall safety and outcomes for that patient population,” Morrissey said.

He suggested that hospitals with fewer resources pursue the higher-return cost-reduction efforts on a smaller scale before moving into more comprehensive efforts.


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Monday, September 18, 2017