Innovation and Disruption

Why re-evaluating past decisions can save health systems big money

October 3, 2019 10:53 pm

Healthcare innovation around the idea of payment reform gets a lot of attention in the industry media these days.

Sure, the incentives of fee-for-service payment have long been noted as a cause of healthcare cost inflation and the target of many a regulator, insurance executive or television reporter. However, until the payment mechanisms that create such incentives change, the discussion of payment reform is effectively moot.

But what about the incentives that underlie our need to push for continuing fee-for-service payments? Government payments that do not cover costs force providers to cross-subsidize those losses with margins from commercial plans. In some instances, the cross-subsidy we seek creates those so-called surprise bills for out-of-network providers that garner so much media attention.

Another way to approach innovation

Maybe that attention is an indicator for our next call for innovation. Let’s look at the past for a different perspective on how we might be innovative in addressing these problems.

Much of what has been written about innovation in recent times has been forward-looking — thinking about how to change things in the future by trying something new. But it can be equally useful to look at current practices and the value they are or are not adding to patient care.

Some healthcare organizations are quick to jump on the bandwagon of a trend without revisiting the practice to determine its value. Others might be prone to build additional overhead into their budgets to address a need without reassessing the need down the road. Initiatives like those most likely represent a fixed cost, creating a need for a larger contribution margin from all payer classes. I have been looking at the burden of overhead costs in hospitals and presented some preliminary results of this study of U.S. hospitals to a group of fellow health economists in Europe in August. The results indicated most of our payer classes generate a razor-thin contribution margin of about 2%. (Some Medicaid state programs are exceptions.) Based on these preliminary numbers (and I stress preliminary), fixed-cost burden may be our opportunity. Thus, our opportunity for innovation.

For organizations with such a chance, the challenge could be to innovate by elimination. If a fixed-cost investment is not bringing value, then yesterday’s innovation could be today’s opportunity for improvement. Healthcare organizations would be wise to look at program initiatives and fixed-cost departments and ask if they are needed, or if there are innovative ways to build the cost into other parts of the organization’s cost structure. It also may be wise to fund the initiative as a variable cost that indexes to volumes. I have seen many organizations pour a lot of money into initiatives aimed at increasing HCAHPS scores, but the ROI isn’t always significant. Another area could be population health initiatives. Does the organization have the right mix or resources, or are those programs overbuilt?

I am not here to cast aspersions on well-intended initiatives that people work hard at implementing. But the industry has been involved in things like HCAHPS score and population initiatives long enough to give them a serious look. Innovation can streamline these efforts.

4 questions to help evaluate past decisions

As organizations evaluate programs and those overhead costs, these questions may be helpful.

1. Are functions that are essentially on “autopilot” being supervised? Do we have supervisors overseeing functions where a little bit of employee autonomy could come to the same conclusion — and save some fixed salary?

2. Is the work being done in a department necessary? Some folks will do a great job of telling you how critical they are to the organization. But do those dollars saved add up to more than you are spending for that work? It may be time to compare costs of some audit or compliance functions and verify that you are getting more in return than you are spending. I’ve put a pencil to a few such initiatives and kept saying, “Well, it seemed like a good idea at the time.”

3. Do you use liaisons or coordinators? The call for positions like these to act as intermediaries between departments or functions was well founded at the time when facilitating communication was needed, but they may not be necessary now.

4. Have you put off taking needed personnel actions? This question is closely related to my second one: Do you have people who are underutilized? I have observed way too many cases where people you often see in the hall or in the cafeteria are also the ones who are quick to step up and volunteer to help on projects or organize an event. Usually that volunteerism is a symptom of a deeper challenge: not enough work to do. I’ve struggled with efforts to cut costs that include taking a close look at everyone’s favorite event organizer. But if we are trying to get costs in line with payments, those are hard but also essential conversations to have.

Innovation is not just about coming up with something new. Sometimes it is looking at something that was new and asking if it is still worth having. Times change, and our common approach of budgeting by increment has made it far too easy to make permanent our past decisions, and add more to the overhead burden that leads us to the revenue decisions we have to make. How many times have we asked staff why we do things some way and been frustrated by the response, “We’ve always done it that way”?

Maybe it is time to be frustrated at our inertia on past innovations. After all, a key element of innovation is change — applying better solutions than the ones we used to use. When we struggle with how to pay expenses, maybe that is our call to upgrade a past solution to the one needed today. 


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