More Execs Set Healthcare Cost Cutting Goals, But Targets Are Small
The number of executives with no healthcare cost reduction goals decreased to 4% this year, but most only plan to cut costs by 10% or less, a survey showed.
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By - More health systems are setting healthcare cost reduction goals, but their modest goals are leading to moderate success, according to a new survey conducted by Kaufman Hall and the Healthcare Financial Management Association (HMFA).
The majority of the 169 executives from hospitals and health systems surveyed in August and early September 2019 said their organization plans to reduce current costs by ten percent or less within the next three years to fund planned investments and remain financially sustainable.
Specifically, 44 percent said their organization has a cost cutting goal between six and ten percent and 40 percent reported a goal between one and five percent. Meanwhile, 10 percent have a goal between 11 and 15 percent and one percent have a goal between 16 and 20 percent.
Most hospitals and health systems are setting the bar low, but more executives reported having a healthcare cost reduction goal compared to previous surveys.
The percentage of executives saying their organization had no cost cutting goal decreased to four percent this year from 32 percent last year.
“This report demonstrates that while healthcare finance executives understand the need for performance improvement, the pathway to achieving these goals is still filled with obstacles,” Lance Robinson, managing director at Kaufman Hall, stated in a press release.
Hospitals and health systems are struggling to actually reduce their costs, the survey also found.
Fewer than one in four respondents (23 percent) stated that their organization has achieved most of their cost cutting goals. Meanwhile, the greatest number of respondents, 66 percent, said their organization met some of their goals.
The organizations are particularly struggling with non-traditional cost-savings opportunities, the survey found. For example, reducing unwarranted clinical variations was the second most selected cost-saving opportunity, but it also ranked toward the bottom of areas of success.
In contrast, executives reported success with more traditional cost-cutting opportunities. Thirty-six percent of respondents said their organization has had the greatest success with reducing costs related to labor and productivity, and 32 percent said they realized success in the supply chain and other non-labor cost category.
Labor and productivity may be the area most ripe for cost savings, according to the majority of respondents (39 percent). However, report authors stressed that hospitals need to push beyond those initiatives to make progress with cost containment, especially in light of revenue challenges.
Thirty percent of hospital and health system executives reported that their organizations are facing declining or flat inpatient volumes. Twenty-seven percent also reported downward pressure on commercial insurance rates and 19 percent said the increasing percentage of publicly insured patients is putting significant pressure on their organization’s revenues.
These revenue challenges spell trouble for organizations with modest cost reduction goals, the authors explained.
Kaufman Hall and HFMA recommend that hospitals and health systems break even at Medicare to address revenue challenges. The level of effort needed to break even at Medicare will differ by organization, but the authors agreed that it will take more than a cost-cutting goal of 10 percent for most health systems.
“For example, the CEO of a multi-state health system interviewed for this report said that even though they had continuously generated cost improvements of approximately $75 million per year for the past several years, they had calculated additional needed cost reductions of between $350 million and $400 million to break even at Medicare. With annual operating expenses of just under $2.5 billion, this computes to reductions of 14 percent to 16 percent of current annual operating expenses,” the authors stressed in the report.
Hospitals and health systems may want to set more aggressive cost cutting goals to break even at Medicare, especially as the population ages and the organizations rely more on the public program for revenue.
“Changing business models as more care migrates beyond hospital walls, combined with an aging population more reliant on programs like Medicare and Medicaid, make it imperative to control costs in legacy operations and free up resources to invest in the future. Better data and insights are key to helping healthcare leaders identify and prioritize both cost reduction and business growth opportunities,” Robinson explained.
