Cost of Care

‘Service Rationalization’ the Most Stubborn Cost Challenge: Hospital Survey

October 16, 2018 8:23 am

Hospitals also continue to struggle to establish standards for accountability, which is key in driving improved financial results.


Oct. 15—The area where hospitals struggle most to find savings is in efforts to reduce or eliminate services.


It is such a tricky—and politically fraught—area that six in 10 hospitals made no progress at all in that area over the last year, according to a new survey by Kaufman Hall.


Service rationalization—the process of reducing or eliminating services that are redundant, low volume, or lack local demand—has the greatest potential for sustainably transforming hospitals’ cost structure, according to Kaufman Hall. But forgoing the revenue such services generate in the short term is hard.


Efforts at service rationalization are commonly found when a health system with multiple care delivery locations aims to eliminate similar service lines at nearby sites.


“There’s opportunities to rationalize the services from a delivery standpoint to only deliver those services that generate the most margin or serve a community need,” said Lance Robinson, managing director and leader of Kaufman Hall’s Performance Improvement practice. “You’re creating centers of excellence and not being all things to all people.”


After traditional cuts to labor costs/productivity and supply chain/other non-labor costs, “next wave” savings that hospitals are finding include those derived from minimizing clinical variation and length of stay and from managing the physician enterprise, Robinson said in an interview.


But hospitals are not all advancing in those areas, either. Specifically, 46 percent of hospital executives said there was no progress at their organization in reducing inappropriate clinical variation, 44 percent were unable to address physician enterprise management, and 33 percent failed to obtain service line efficiency.


Cost-cutting success was even less likely at large organizations. Specifically, among health systems with more than 10 hospitals, 60 percent failed to reduce inappropriate clinical variation, 57 percent had no improvement in physician enterprise management, and 60 percent garnered no improvement in service line efficiency.


The Kaufman Hall report noted that an ongoing wave of hospital mergers appears to have failed to generate “true operational synergies.”


That echoed a 2017 study conducted by the Deloitte Center for Health Solutions in collaboration with HFMA that found that, on average, acquired hospitals experienced a post-transaction decline in operating margins, revenue, and expenses that typically lasted two years.


Overall, cutting costs is a top priority for hospital leaders, with 70 percent of respondents citing it in the survey.


“You can never spend too much time on cost transformation,” Robinson said about the priority, which also was dominant in Kaufman Hall’s 2017 survey of hospital executives. “Given the compression on margins for many of our clients, it continues to be a focus for healthcare leaders.”


Operating margins for not-for-profit hospitals fell to 1.6 percent in FY17, the lowest level that one rating agency has ever found in its tracking.


Accountability Needed


Also reflected in the latest survey results was hospitals’ continuing struggle with accountability, which is key in driving improved financial results.


Specifically, 32 percent of executives said no cost-improvement goal was set at their organizations for the next five years. That was an increase from 25 percent in the 2017 survey. The survey’s authors wrote that those organizations are “not trying to lower cost in an organized and deliberate way. This puts the hospital or health system at high risk for diminishing financial performance resulting from inflationary pressures and slowing or declining revenues.”


The survey found 22 percent of respondents had a cost reduction goal of 1 to 5 percent, 25 percent had a goal of 6 to 10 percent, and 21 percent aimed to cut costs by 11 percent or more.


The relatively common absence of savings goals was echoed in a lack of executive accountability at many healthcare organizations.


The survey found 42 percent of the organizations lacked “processes and structures” to hold leaders accountable to performance on cost transformation or didn’t know whether such processes were in place. Additionally, improvement targets were set only at the hospital level at 57 percent of organizations, instead of at the vice president, service line, or department level.


“The only way to measure and monitor and build accountability is to build those initiatives from the ground up,” Robinson said.


Some Improvements


There were several areas where hospital executives reported some improvement over their 2017 responses.


For example:


  • 73 percent said improvement targets have been distributed across the organization, up from 53 percent last year
  • 58 percent said their organizations have processes and structures in place to hold leaders accountable to performance for cost transformation goals, up from 46 percent
  • 56 percent said their organizations make effective use of clinical pathways, protocols, and guidelines to develop a common approach to treatment, up from 47 percent
  • 49 percent say their care networks are efficient and aligned with the needs of served populations, up from 39 percent



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


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