Healthcare organizations should set multiyear savings goals in the range of 25-30 percent over a five-year period.
Despite pressure to make healthcare more affordable, Kaufman Hall’s 2017 survey of more than 150 senior hospital executives found that meaningful cost reductions and the associated organizational changes are largely missing. The report, 2017 State of Cost Transformation in U.S. Hospitals: An Urgent Call to Accelerated Action , indicates healthcare leaders understand the need for significant cost savings, but many have not set aggressive multiyear goals or implemented cost-reduction strategies. Kaufman Hall recommends aspiring to savings of 25-30 percent over a five-year period.
Survey respondents overwhelmingly agree that transforming costs is a “significant” or “very significant” need. Nearly 80 percent of respondents cite the need to proactively align their cost structures with the transition to value-based care, and nearly 70 percent acknowledge they must close gaps between their financial plans and current operating performance. Yet more than 50 percent of responding executives have no cost reduction targets for the next five years or have a goal of 1-5 percent—a range that is far below what is required to transform cost structures.
Awareness of the important work to be done is high. More than 60 percent of respondents believe their delivery networks are not highly effective or aligned with the needs of the populations they serve. More than 50 percent are concerned their organizations are not making effective use of clinical pathways, protocols, and guidelines or are neutral on these issues.
Despite this recognition, 60-70 percent of respondents are relying on traditional cost-improvement initiatives such as labor cost/productivity, supply chain costs, and revenue cycle enhancement as their key cost-transformation strategies. Actions with the potential to yield substantially higher savings, such as service-line efficiency, physician enterprise management, and clinical and workforce redesign, are not being pursued aggressively. As one survey respondent stated, “We are cost cutting, but not really changing the way we operate.”
Barriers to Progress
What is getting in the way of progress? Survey respondents report that the absence of good data to inform cost reduction efforts is a common impediment to advancing cost structure changes. Other challenges include cost-accounting methods, processes, and tools that lack credibility, with only 25 percent of respondents expressing confidence in their current solutions. With limited access to cost-related data insights at the patient and service line levels, informed decision making and goal setting are suboptimal at best.
Jump Starting Cost Transformation
As outlined in a recent Kaufman Hall Report article “Getting Serious about Costs” by Kenneth Kaufman, chair of Kaufman Hall, urgent action in four areas is required to fast track the changes that will be required to achieve significant cost savings.
Adopt a new mindset and ensure accountability. Executive and physician leadership must break down past barriers, set meaningful goals, instill cultures of accountability, and empower teams to build agility through cost transformation. Envisioning future organizations and making decisions about divesting, converting, or closing services and facilities that don’t meet financial and clinical standards must be within their purview. These same groups must be held accountable for ensuring those actions produce tangible and measurable results.
Develop a cost improvement roadmap based on data- and analytics-based planning, processes, and tools. Goal-driven plans for advancing cost-reduction measures must be developed and implemented and should include both immediately accretive cost-saving opportunities and longer-term clinical cost transformation projects. Plans must be grounded in reliable data and projections that are broadly acknowledged as accurate. Top-down and bottom-up planning ensures that leadership and staff are empowered to own implementation of change. High-quality data, analytics, and cost-accounting tools are required.
Rethink business and service portfolios. Demand and performance of every facility and service area must be scrutinized as leadership teams evaluate which services should be offered in each location and at what scope and scale. Objective and fact-based decisions must be used to divest or consolidate failing services and facilities.
Redesign the care model and workforce. Redesigning care models and rethinking the caregivers that work within the models has the potential to dramatically reduce costs while improving quality, outcomes, and patient and provider experiences. Frontline caregivers must be deeply involved in envisioning delivery possibilities at consistently high levels using carefully matched staff to perform required tasks.
“In a time of great uncertainty, a no-regrets strategy for hospitals focuses on core principles. And for healthcare, the dominant principle is the need to reduce costs—dramatically,” Kaufman says.