Sacred Heart Hospital used a unique team approach to identifying areas for cost reduction-and the lessons learned could be applied at your organization.
In 2007, Sacred Heart Hospital, Eau Claire, Wis., knew it would soon face a significant decrease in revenue. Physicians 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 the resulting loss in revenue would be $7 million per year.
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"That group of physicians is very 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. "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. To do so, the hospital worked with a consultant who specializes in strategic cost reduction to develop a collaborative approach to identifying and following through on cost savings opportunities.
Establishing Cross-Department Targets
Sacred Heart created teams with representatives from diverse departments. In addition, Sacred Heart also made sure the teams reflected a variety of personalities (introverts and extroverts), tenure, and total expenses by department.
Sacred Heart then established target goals for cost reductions 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," 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," Deich says.
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."
Identifying the Best of the Ideas
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 '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 the exact 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; an audit one year later revealed that $5.1 million in savings had been achieved.
A significant portion of the savings can be credited to more aggressive contract negotiations with vendors. Examples include:
- $100,000 in savings on telephone contracts
- $500,000 in reduced costs for surgical implants
- $250,000 in reduced costs for blood products
Other examples of the expense reductions that were achieved include $46,000 from moving print-based journal subscriptions to online-based subscriptions and a 50 percent decrease in the cost of candles that the hospital's chaplains use during mass services.
Driving Out Additional Costs
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, Sacred Heart determined it would need to drive out another $1.4 million in expenses within a year. Sacred Heart used the same team-oriented approach to reducing costs that the hospital incorporated in 2007-and found that staff were very responsive to the hospital's needs.
"When I made the announcement to our leaders two days before Christmas last year that we needed to cut another $1.4 million in costs, and let them know we'd begin this process again right after the holidays, 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.' I think this process has helped to develop an agility in our leadership team. Our leaders are able to proactively respond to the challenges our organization faces and develop effective action plans for improvement as a team.
"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."
There were a number of lessons that Sacred Heart learned through the initiative.
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," Deich says. "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."
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."
Trust in your staff's abilities to respond to the organization's needs in times of crisis. "If you give people a very specific target and you give them the tools to do their work, they will rise to the occasion," she says.
Jeni Williams is a senior editor in HFMA's Westchester, Ill., office.
Publication Date: Thursday, October 01, 2009