Healthcare leaders should ask four questions before embarking on an operational strategy that promotes cost optimization.
As finance leaders seek ways to alleviate continued downward pressure on margins, some make the mistake of confusing cost optimization with cost containment. While cost containment is focused on eliminating expenses, the aim of cost optimization is to reduce overall costs and improve patient care to maximize value.
Put another way, cost optimization involves more than cutting a set percentage from the traditional targets, such as labor, real estate, or IT. Cost optimization is an enterprisewide effort, requiring forward-thinking leaders to reset their operational strategies and align with value-based payment models.
Answering 4 Questions
When embarking on an operational strategy that promotes cost optimization, leaders should ask the following questions.
Who do we want to be? Before embarking on cost-optimization efforts, it is crucial to understand the desired future-state operating model. Should the organization be an operating company versus a holding company? What is the right balance of inpatient versus outpatient services based on service lines and markets? The answers to these types of questions will provide the necessary direction for cost optimization.
What growth scenarios fit with the vision? As the race for scale fuels healthcare industry mergers and acquisitions, organizations have an opportunity to gain new services and optimize their cost structure. Alliances and joint ventures provide another avenue for hospitals to gain economies of scale and leverage in the market.
How can we achieve the necessary ROI to sustain that vision? Using focused and prioritized plans for achieving cost optimization goals ensures that important future operations or clinical outcomes are not minimized by cuts or reductions in services. There are many new levers that can be pulled to achieve margin goals, including robotic process automation (RPA), utilization of digital platforms with patients and vendors, and high-reliability organizational models to improve patient outcomes.
What should our service portfolio look like? As more care shifts to the ambulatory setting, hospitals and health systems may wish to consider adding post-acute services to help increase value and reduce the use of high-cost care settings, or they may want to add services to improve clinical outcomes. For example, the addition of physiotherapy services to support orthopedic surgeries.
Defining the Area of Focus
Where finance leaders start their cost optimization journey depends upon their strategic vision. If organizations are primarily focused on operational efficiency, they might look at ways to optimize their supply chain or revenue cycle operations. If leaders have moved on to focusing on clinical excellence, they might want to direct resources toward reducing care variation, capacity management and patient throughput, quality, and safety reporting, or physician enterprise management. If an organization is ready to move to a more value-driven model, their focus should be on broad strategies, such as using analytics to drive performance and becoming a high-reliability organization.
For example, Johns Hopkins Medicine tackled operational efficiency and clinical excellence by developing an operating strategy that governs how employees work together to eliminate harm, improve patient outcomes, and reduce waste. The organization also has developed clinical risk evaluation tools to help staff proactively identify potential patient harms.
Another example is Intermountain Healthcare, which has improved patient care and optimized costs by leveraging its robust analytics infrastructure. Recognizing that data can drive better results, the health system embeds data teams in most of its clinical programs. By keeping analysts close to the “action,” clinicians are more likely to develop queries that lead to effective approaches and support value-driven models.
Building an Operating Model
When organizations are driven to improve clinical and financial outcomes together, the results can be transformational. For example, one Michigan health system reduced the rate of bloodstream infections in its ICUs by 40 percent, avoiding $34 million in costs while saving more than 500 lives.
Developing aligned incentives is critical to engage financial and clinical leaders and create sustainable changes. According to our recent value-driven care survey, 51 percent of physicians reported frequent or constant feelings of burnout, which presents an obstacle for finance leaders working on cost optimization. Physicians at every level should be incentivized to the right behaviors, which might include practices such as increased generic prescribing or adherence to evidence-based protocols.
Heeding Lessons Learned
Finance leaders should consider the following advice when focusing on cost optimization in their organizations.
Start with a clear purpose. Transformation requires a commitment from management teams. Department leaders need to understand why they should focus on cost optimization initiatives, particularly if organizations want to sustain financial and even clinical benefits over the long term. The C-suite can help to articulate a purpose-driven vision for the change that goes beyond achieving a larger margin, such as a desire to improve the consumer experience and clinical outcomes of patients.
Assemble the people and tools to make analytics a core competency. To make sustained changes, organizations need skilled analysts and robust analytics platforms that require continued investment but also provide information to improve margins.
Establish population management alliances with community-based organizations. As more care shifts away from the inpatient setting, hospital leaders need to collaborate with public and private organizations to build their service portfolios. This may include links to nontraditional partners, such as shelters or transportation services, that help address health social determinants.
Anticipate how connected technology could optimize costs. As digital innovations like wearable devices and mobile apps collect more patient data, providers—and payers—will have more information to design effective treatments and reduce costs. In addition, RPA can help increase efficiencies across healthcare systems, accelerating business processes and reducing costly errors by removing manual processes.
Demonstrating Sustainable Value
Straddling two different payment models—one based on volume and one based on value—can make it difficult for organizations to develop strategies that go beyond cost cutting. Although it is unclear when value-based payment will become the dominant model, organizations should make sure their operational strategy values both clinical and financial performance. Better clinical outcomes are a win for everyone. For patients, they mean better care and better health. For providers, they mean better Centers for Medicare & Medicaid Services Star Ratings, reduced costs, and better performance under value-based contracts.