Research & Reports | Operations Management

5 tips for building an effective cost reduction program

Sponsored by Strata Decision Technology
Research & Reports | Operations Management

5 tips for building an effective cost reduction program

An HFMA-Strata survey found only 6% of hospitals characterize the effectiveness of their cost reduction programs as extremely effective. One commonality among the most successful programs? Formal, ongoing cost reduction processes.

Nearly 89% of healthcare organizations have some type of cost reduction program in place; however, only 6% say their program is extremely effective, according to a recent HFMA poll.

This trend was identified in a 2022 survey of 185 healthcare finance, accounting and revenue cycle executives, sponsored by Strata Decision Technology. Other findings included:

  • The majority (85%) of respondents say their cost reduction process or program is executive sponsored.
  • The majority (80%) of respondents say service line, clinical and/or operational leaders have shared accountability for cost targets.
  • The majority (72%) of respondents say their overall culture of accountability around cost reduction programs is acceptable, good or excellent.
  • Only about 8% of respondents set a margin improvement target of over $100 million. The majority (86%) set a target of less than $50 million.
  • Smaller hospitals and health systems are less likely to have formal and successful cost reduction programs.

Why don’t most respondents feel their programs are successful?

“I think it has more to do with efficiency and the expectations of a new program versus a more mature program,” said Alina Henderson, senior director, advisory services at Strata Decision Technology. “It’s about formalizing processes so you can sustain them over time. In the absence of this formalization, organizations may feel their cost reduction programs are lacking — and they’re right. Ad hoc processes don’t produce maximum results, and they end up costing more in the long run.”

Formal, ongoing cost reduction: Why now?

Every organization is on a path toward financial recovery coming out of the COVID-19 pandemic, and many have realized they can achieve a strong level of collaboration during a crisis, said Henderson.

“This is the time when leaders need to be thinking about taking the momentum of working together during the pandemic and scaling it to make it part of the operating model,” Henderson said.

Based on their observations of best practices leading hospitals and health systems have employed to effectively reduce costs, Henderson and her colleague John Baker, senior director, continuous improvement at Strata Decision Technology, offer the following tips for organizations seeking similar results.

1 Identify a priority for savings. There are several ways healthcare organizations can ensure their cost reduction programs are well targeted on the areas where the programs will make the biggest difference. For example, having both an executive sponsor and a program owner is critical for this purpose, Baker said. He also emphasized that the program owner’s role should be to ensure the organization operationalizes its data insights through one or more cost reduction initiatives that translate to real savings.

“Together, these individuals can create the burning platform that the entire organization can rally around in terms of cost reduction,” Baker said. “They can incorporate the target savings amount into a narrative that resonates with the entire workforce.”

Henderson agreed.

“Institutions where cost reduction programs work effectively are those in which the programs are part of the fabric of the organization,” she said. “Everyone is looking for savings and opportunities.”

One important consideration: Choosing a mathematically defendable savings target.

“An arbitrary target will get sniffed out by the workforce, and if it’s not real, and they can’t connect to it — or they don’t see the urgency and need — they won’t do it,” Baker said.

2 Establish a governance structure and secure the right resources. Governance is the process by which organizations define who will do the work and how, including identifying opportunities for cost reduction, prioritizing projects and tracking results, Baker said. For example: Who will talk to physicians about their utilization? Who will negotiate more favorable vendor contracts? Who will implement productivity protocols system-wide? Will there be a dedicated internal team, or will the organization bring in outside consultants to lead the effort?

It’s about being intentional about cost reduction efforts and responsibilities, Henderson said.

“Successful organizations establish governance because they realize they’re not going to reduce costs in an organic way,” she said. “Defining a specific and clear model brings clarity to the organization and demonstrates the importance of this function.”

Henderson also emphasized the importance of governance for preventing rework and helping organizations promote sustainability if employees leave.

Baker noted that the mechanics of the cost reduction program are critical, especially when it comes to physician engagement.

“Removing an item from a formulary or order set is not the way to do it,” he said. “You can’t just say, ‘stop using this product.’ You need to take a collaborative approach. Explain the cost differentials, and ask physicians to help you understand why they prefer one product over another. Ask them whether they’ve looked at the product’s impact on length of stay, readmission and infection rates. Show them the data, and go back and forth.”

Formality and governance around cost savings needn't be complicated, Henderson added.

“They need to be reflective of the organization,” she said. “Define how the governance structure should look, identify a narrow area of focus to start and continue to tweak the approach as your reach grows.”

As an example, Henderson suggested smaller organizations could include cost reduction conversations in their quarterly forecasting meetings. They can use that time to hear from leaders across the organization on ways they can find cost savings and assign ownership to ensure you can bring ideas to execution.

Baker agreed and added, “My advice, especially for smaller organizations, is that you’re closer than you think. You just need to harness the data more effectively and a governance structure can help.”

Both experts emphasized, however, that following through with these initiatives is critical.

“Where we see things fall apart is where organizations don’t set clear expectations,” Henderson noted. “Closing the loop is really critical to sustaining the process.”

3 Leverage the right data. Successful cost reduction programs give leaders access to critical data for making informed decisions. But it’s not just about access, said Henderson.

“You need to equip people with the data but also think about what is going to help them make that data useful,” she said. “How do people consume the data, and what will make it easier for them to analyze it and get into the details? For example, can the organization provide superuser access for costing analytics? Foster greater partnership between finance and service line leaders?”

Another important consideration is whether people trust the data that’s provided.

“There needs to be socialization and democratization of the data,” Henderson said. “People need to be comfortable with the cost accounting data.”

Gaining this trust may simply require staff education about the data and how to use it. However, it might also require stakeholder input regarding changes to the cost accounting system.

“If you skip over this part, start to roll out analytics and say, ‘Tell me why your costs are so high,’ you’re creating a much more combative dialogue than a collaborative one,” Henderson said.

4 Create a culture of accountability. “Cost reduction programs can’t and shouldn’t be solely about labor reduction,” Baker said. “Labor reduction causes battle scars. It’s easier to reduce resources than it is to get doctors to start using a single item. But just because it’s easier from a GL [general ledger] line-item perspective doesn’t mean it should be the default tactic pursued.”

Henderson said reducing costs also shouldn’t fall solely on finance executives.

 “The sense of finance sitting in some parallel universe is gone,” she said. “It’s important for leaders across healthcare institutions to understand everyone plays a role in the financial stewardship of that organization. This includes clinical care delivery, environmental services, food services and others. All roles have some level of accountability. This needs to be tied into the culture of the organization and what it wants to achieve.”

Helping employees understand their specific role in cost reduction is paramount.

“The most successful organizations are able to connect the dots between their strategic intentions and what this means in terms of financial accountability,” said Henderson. “You can pull this thread all the way through every different role.”

5 Avoid common mistakes. One of the biggest mistakes organizations make when trying to create a successful cost reduction program is to not include all of the foregoing elements.

“They may design a governance structure, but they don’t have the resources to get the work done. Or they establish a cost reduction target, but they didn’t mobilize a governance structure to harness data insights,” Baker said. “It’s like baking a cake. They follow two-thirds of the recipe, and they’re surprised that a beautiful cake didn’t come out of the oven. Everything is necessary to have the desired outcome.”

Another common mistake? Taking a ‘one-and-done’ approach.

“What if instead of trying to eliminate $200 million in two years, it was a few million dollars every year over multiple years? Then it’s not a septic shock to the system,” Baker said. “It’s just the new way of doing financial stewardship. It’s a sustainable, long-term way to manage financial health.”

A cultural imperative

Creating and sustaining a successful cost reduction program is about identifying and overcoming organization-specific barriers, the most common of which is culture.

“Cost reduction is a daunting task, but it’s certainly achievable with a well-defined, consistent process and a willingness to have honest conversations,” Henderson said. “In the same way that finance and decision support are required organizational functions, cost reduction should similarly be seen as an essential capability for all health systems.” 

About the Author

Lisa Eramo, MA,

is a regular contributor to hfm.

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