Hospitals are inching toward reducing costs, but they are far from meeting the goals of executives, according to a recent report from Kaufman Hall.
Cost transformation efforts among healthcare organizations are a major priority, particularly as hospitals and health systems attempt to remain competitive in the current environment. Executives are also spurred to generate savings to fund strategic growth initiatives, and, most of all, to be proactive in refining their cost structures as they transition away from fee-for-service toward value-based care.
With new competitors like Amazon entering the industry, hospitals and health systems are under pressure to make headway with cost-reduction goals.
“The specific future for legacy hospitals and health systems may be hazy, but we know its direction,” Kenneth Kaufman, chair of Kaufman Hall, said in the report. “Meaningful actions can and must be taken immediately.”
The report is the second annual in-depth look at the priorities of healthcare executives and their progress in reducing organizational costs. The findings are from an online survey completed in June and July 2018, with responses from nearly 190 senior executives of U.S. hospitals, health systems and other healthcare organizations.
Key findings
Cost savings are important for many organizations—either a significant or very significant need for 86 percent of respondents—but few are making much progress. Just 17 percent cited a reduction of more than 5 percent, while 64 percent cited a reduction of 3 percent across supply chain and other non-labor costs. Across service rationalization, 61 percent cited no progress. Efforts elsewhere are also lacking progress, even as hospitals and health systems undergo significant consolidation with the expectation of synergies.
“Many larger health systems appear not to be achieving progress toward the economies of scale available through physician enterprise management, service line efficiency, and reduction of inappropriate clinical variation,” the report reads. “Mergers have occurred, but true operational synergies may not have been realized in many cases.”
However, some progress is being made; more executives cited improvement targets and processes and structures for accountability compared to the prior year. More organizations were also making more effective use of clinical pathways and finding efficiencies and alignment in care networks.
Executives also aren’t interested in making care more affordable for patients as part of their cost-cutting goals––41 percent of executives did not cite this as important to their cost transformation efforts, according to the report. However, organizations should keep this in mind as outsiders aiming to disrupt the space could upset current pricing practices.
“With ‘skin in the game’ due to higher deductibles and co-payments, and through consumer-engagement technologies, healthcare consumers are increasingly price sensitive,” the report reads. “They will be incentivized to look beyond hospitals and hospital outpatient facilities for non-emergent, elective services.”
Beyond focusing on why they should work on cost-reduction measures, healthcare executives need to look at how they will accomplish these goals, including realizing the effort may take an “extreme shift” in mindset.
“This will require overcoming entrenched incrementalism and political sensitivities to make progress with the hardest cost-reduction work—namely business and service line rationalization, physician enterprise management, clinical redesign, and workforce redesign,” the report reads.
Strategies
While many health systems and hospitals want to reduce costs, specific goals are lacking. Nearly one-third of executives said goal setting was absent from their organizations, while only 22 percent said modest targets of 1 percent to 5 percent existed for their organizations. The majority—57 percent—also said cost-reduction targets exist only at the enterprise level, rather than at other focused operational levels. Also of note, 42 percent said they don’t have processes in place to hold leaders accountable for cost transformation goals.
To combat these issues, healthcare organizations should ensure disruptive forces are on the radar of leaders and put processes and structures in place to hold leaders accountable to meet cost-reduction goals, according to the report.
Furthermore, organizations need to focus on all contributors to cost improvement and focus on the physician enterprise.
Among cost-reduction priorities, 72 percent of executives cited labor cost and productivity and supply chain and other non-labor costs as key focus areas. Areas that are not being addressed with the same attention include service rationalization, physical enterprise management and physician engagement. Less than half of organizations reported delivering quality, cost and patient experience reports to physicians—a top strategy for engagement.
In addition, a “lack of good data and insight into costs and where savings opportunities exist” was the top-cited impediment to cost transformation. Organizations can invest in high-quality analytics tools and processes to meet this need.
Amy joined TriMed Media as a Senior Writer for HealthExec after covering home care for three years. When not writing about all things healthcare, she fulfills her lifelong dream of becoming a pirate by sailing in regattas and enjoying rum. Fun fact: she sailed 333 miles across Lake Michigan in the Chicago Yacht Club "Race to Mackinac."