Goodbye cost reduction, hello transformation

With reimbursement ready to reset under the Affordable Care Act (ACA) and in light of the ongoing federal budget debate, hospitals are scrambling to reduce costs even further. And, with more than 40% of consumers postponing care because of costs, hospitals must be competitive.¹ The traditional low hanging fruit savings of labor productivity and supply cost reductions have largely been picked over. Healthcare companies must instead embark on full-scale transformation efforts to redesign how they deliver care.

Retooling labor management

Hospitals and health systems have historically focused their productivity efforts on broad-based staffing benchmarks instead of tackling underlying issues such as workflow. In designing new processes, hospitals now face pressure to use the most appropriate venue for care, which is often lower-cost settings. This may require redeployment of existing staff and investment in continuing education and training.

Successful transformation addresses how and by whom care is delivered. To maintain high quality while implementing sustainable cost reductions, health systems are involving clinicians, staff and even patients in redesigning the delivery of care. The Mayo Clinic created a Center for Innovation that relies on a diverse design research team to connect evidence-based practices with consumer research. The center uses technology that allows it to simulate leading practices and adjust them to fit the clinic’s environment. This approach helps Mayo Clinic to understand the needs of its consumer base while developing a positive and cost-effective experience.²

Reigning in supply costs

Transforming organizations often requires increased stakeholder involvement and new alliances. Health systems have traditionally focused on standardizing and reducing costs of commodity supplies such as bandages and IVs, through group purchasing contracts while tiptoeing around politically charged issues such as physician preference items and the comparative effectiveness of products. Hospitals are now employing more physicians and have more influence in managing physician preference purchases.

Some innovators are building upon group purchasing contracts to create regional supply chain cooperatives with other provider organizations. For example, the Texas Purchasing Coalition, a 27-hospital partnership, expanded and forged a hybrid contract with a national group purchasing organization to not only reduce supply costs but also to standardize distribution and improve decision support. As a “power buyer” with over $800 million in combined supply costs, the coalition achieved $54 million in savings in the first 18 months.³

Implications

• Before embarking on full transformations, healthcare companies should first master general cost management, particularly in non-patient care areas, and assess the effectiveness of management layers in patient care and administrative areas
• Transformation requires long term, data-driven efforts with a perpetual focus on efficiency. Hospitals may want to create a permanent project management office to lead and sustain these efforts. Chief innovation or transformation officers are emerging to lead the charge and determine which initiatives will have the greatest impact across the enterprise.
• Top leadership must approve which transformation projects move forward, focusing on projects that have broad impact and the ability to be scaled across the organization. Having a formal process, possibly through internal social media, for employees to suggest improvement projects is also critical.
• Hospitals must align individual incentives with organizational incentives which are ultimately aligned with payment incentives. If ACOs or other contracts require organizations to meet quality and efficiency targets, then clinicians and staff need to have similar incentives. Health systems need key performance indicators that measure progress and connect to compensation models.