Over 50% of Orgs Lack Adequate Healthcare Cost Reduction Goals

September 19, 2017 - An overwhelming majority of healthcare executives (96 percent) stated that cost transformation is a significant need for their hospital or health system. Yet, over one-half of organizations either do not have a healthcare cost reduction goal or have a small goal that will not transform cost structures, a recent Kaufman Hall survey showed.

One-quarter of over 150 senior executives in hospitals and health systems stated that their organization has no target for decreasing costs.

Single hospitals were most likely to have no healthcare cost reduction goal, with over 40 percent stating that this was the case.

The survey also found that about 26 percent of respondents said their hospital or system has a cost reduction goal between 1 and 5 percent and another 29 percent have a target between 6 and 10 percent.

Researchers noted that these modest goals will not be enough to “lower cost in an organized and deliberate way.” The cost decreases also will not keep pace with annual inflation.

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“Financial realities demand a new way of providing care,” stated Walter Morrissey, MD, Kaufman Hall Managing Director. “This is not business as usual, involving incremental change. To meet community needs under healthcare’s new business imperatives, and to participate as a provider of choice in narrow networks developing nationwide, organizations must have a strong value proposition and a cost position that is significantly lower than competitors.”

Despite a lack of adequate goals, executives agreed that lowering healthcare costs within their organization is imperative as the industry shifts to value-based reimbursement. Almost 80 percent of participants said that their organization needs to refine its cost structure for the transition away from fee-for-service.

Other popular motivators for lowering healthcare costs included:

• The need to close the chasm between the organization’s financial plan and current operating performance with 68 percent of respondents

• To remain competitive with 61 percent of respondents

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• To generate capital to fund strategic growth initiatives with 51 percent

While lowering healthcare costs topped executive priority lists, most organizations are not seeing their cost transformation strategies producing positive results. Three-quarters of executives reported that their cost transformation success was average to below average.

Single hospitals and small health systems were particularly skeptical about their cost transformation success, with 82 percent and 92 percent respectively saying their results were average to below average.

Conversely, health systems of 10 or more hospitals stated that their cost transformation success was better than average to very successful. Larger system executives also perceived their organization as successful across a range of targets, even in the over 20 percent cost reduction range.

Hospitals and health systems may not be realizing significant cost savings because their leaders are primarily focusing on traditional priorities that just scratch the surface, researchers pointed out.

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Between 60 and 70 percent of executives said that their organizations see labor costs and productivity, supply chain and other non-labor costs, and revenue cycle optimization as key areas for lowering costs.

“Progress is slow because traditional areas will not yield the magnitude of cost reduction required to transform an organization’s cost structure,” stated researchers. “Business and service initiatives and clinical and workforce redesign actions are required.”

However, healthcare organizations are not widely addressing more advanced cost transformation efforts. The survey showed that few executives are focusing on business and service initiatives as part of their cost transformation strategy, with just 41 percent looking at service line efficiency, 38 percent prioritizing physician enterprise management, and 18 percent focusing on service rationalization.

Yet, over 60 percent of participants stated that their delivery networks are not highly efficient or misaligned with the needs of their organization’s patient populations.

In terms of clinical redesign and workforce reconfiguration efforts, only 40 percent of executives said that workforce optimization was a key area for cost transformation and another 36 percent identified clinical effectiveness as a focus.

Despite low adoption of clinical redesign and workforce configuration efforts, over 50 percent of executives thought that their organization was not adequately leveraging clinical pathways, protocols, and guidelines to create a common method for treatment.

“These data signal concern about clinical quality and cost,” the survey stated. “Clinical practice guidelines, based on the best research evidence available, minimize inappropriate variations in practice in order to improve efficiency and quality of care.”

Hospital and health system leaders stated that their organizations are not meeting cost transformation goals because of a lack of accountability across the facility. The survey showed:

• About 54 percent of executives said that their organizations do not have strong processes in place to hold leaders accountable, or they were neutral on the issue

•21 percent think savings opportunities are too “politically sensitive” to implement

•47 percent stated that their hospitals and systems do not distribute goals across the organization, or are not sure

•59 percent reported that their organizations only set cost reduction targets at the hospital level and not at the vice president, service line, or department levels

Although, leaders at health systems of 10 or more hospitals felt that their organizations had leadership accountability, with three-quarters of this group agreeing that they had processes in place.

Executives also explained that a lack of good data and analytics tools impeded their organization’s ability to significantly lower healthcare costs. Only one-quarter of participants expressed confidence in the accuracy of their current cost accounting solution.

Most executives stated that they have a costing system but it lacks data credibility (54 percent). Another 16 percent of respondents said that they still use a rudimentary, Excel-based system for cost accounting and 5 percent have no tools in place.

Without overwhelming confidence in their data analytics solutions, cost and profitability reports are not widely distributed and used to support decision-making. About 63 percent of participants said there is no or very limited sharing and use of patient and service line cost reports.

Consequently, 91 percent of leaders said that their organization should be taking more action to leverage financial and operational data to support strategic decision-making.

To implement successful cost transformation strategies, Kaufman Hall recommended the following leadership actions:

• Establish a new mindset and ensure accountability by creating organization-wide improvement teams, engaging executives and providers throughout the organization, and creating a cost transformation steering committee

• Create a cost improvement roadmap based on data analytics that addresses total cost of care, links cost goals to an integrated strategic-financial plan, combines top-down and bottom-up planning, and pinpoints cost reduction opportunities and sets appropriate targets

• Redesign the organization’s business and services portfolios, including eliminating inefficient service lines and facilities as well as those at risk for poor patient outcomes, consolidating services performed at multiple facilities, and ensuring broader access services (ie, primary care) are delivered in lower-cost settings

• Align care models and workforce with quadruple-aim goals

The four strategies should help healthcare organizations to not only reduce healthcare costs, but transform the way organizations operate.