Intelligence Report: Controlling Costs

Healthcare leaders are embracing transparency and process redesign while striving to better grasp their true cost of care.

This article first appeared in the June 2016 issue of HealthLeaders magazine.

The strategic imperative of achieving sustainable cost control is one of the healthcare industry's important challenges—without a clear and effective strategy, many healthcare organizations will find their financial viability at risk. Traditional cost containment and revenue cycle approaches based on purchasing and supply-chain efficiencies and enhanced revenue collection activities can only achieve so much, particularly in the face of declining reimbursements and requirements for higher levels of clinical performance.

This is not to say these activities lack value—far from it. Driving down costs through frugal spending and more efficient operation on one hand, and maximizing revenue collection through the use of disciplined practices and IT-based capabilities on the other, are a necessity. But there are other more sustainable avenues to pursue, such as process redesign and care standardization, to name just two.

The transition from fee-for-service to value-based care encourages healthcare organizations to embrace a new financial and clinical mission: providing high-quality care at more affordable costs. One of the fundamental competencies of this new model is being able to determine the true cost of providing care. Unfortunately, more than half of respondents to the 2016 HealthLeaders Media Strategic Cost Control Survey say the biggest barrier to sustainable cost containment is lack of data on the true cost of care, so there is work to be done. Having a complete knowledge of costs allows organizations to operate in more strategic and sustainable ways, and this will be critical as healthcare organizations adopt risk-based reimbursement models.

The good news for both providers and patients is that healthcare reform appears to be having the desired effect on cost containment: 50% of survey respondents say that the transition from fee-for-service to value-based care has either improved or somewhat improved their cost-containment efforts, and only 16% say that this has hindered or somewhat hindered their efforts. Positive change is coming, although more slowly than many would prefer.

Biggest barriers
Healthcare leaders are clear that the lack of data on the true cost of providing care is the No. 1 barrier to sustainable cost reductions; it is the only response cited by a majority (57%) and is nearly 20 points ahead of the next-highest choice.

The second level of responses regarding barriers are tightly clustered, and include insufficient integration with care partners at 39% and, at 32% each, lack of patient engagement in their care, lack of technology in place to achieve goals, and unsupportive organizational culture. Responses are fairly evenly spread across the remaining barriers, which indicates that achieving sustainable cost reduction is a complex undertaking that touches on all aspects of the organization.

While most of the challenges are organizational matters, providers also need to do better engaging patients.

Greg Poulsen is senior vice president and chief strategy officer at Intermountain Healthcare, an integrated healthcare network located in Salt Lake City, and the lead advisor for this Intelligence Report. He says that patient engagement is critical to meeting clinical and cost-containment objectives, and it's one of his organization's top challenges.

True cost of care
Most providers understand that they must determine the true cost of providing care; however, actually being able to obtain the data is another matter. Only 6% of respondents say that they are able to determine the true cost of providing all care, 29% say they can do this for most care provided, and 51% say they do this for some care provided. The response for those who have no true cost data for any care provided comes in at 15%. These responses are very similar to the ones in last year's survey, with slight improvement, but variation of no more than three percentage points.

Although more than one-third (35%) of healthcare organizations have determined the cost of care for either all care provided or most care provided, it is somewhat disconcerting that 15% are operating in the dark in terms of costs. On a positive note, 51% are at least able to determine the cost of providing some care, meaning that—with some work—these organizations should be able to increase their knowledge of costs over time.

Poulsen says that Intermountain has been collecting cost data since 1983, and has a standard cost database that allows the organization to analyze clinical costs in a granular way across the continuum of care. Part of Intermountain's need to track costs this closely relates to its payer role of insuring more than 750,000 covered lives.

"We know what procedures cost us at the most fundamental level. And we know what it would cost us to do two different modalities of care. So, for instance, it may be that there are certain patients for whom you could legitimately and medically say it would be equivalent to do a stent versus a bypass surgery. We know what the actual costs are for each, and not just the cost of the in-hospital component, but the follow-on component: the home health, if there are readmissions, and what the cost of those readmissions are. In our data warehouse, we have a longitudinal perspective on basically all the people that we've cared for over the years, so we can bundle them into different categories at a very finite level," he says.

"Ultimately, we think about costs from the perspective of taking care of a whole group of people, and trying to keep them healthy. We may have four different alternative mechanisms for treating people, and knowing each of those costs is very important, and it helps us to rationalize early interventions," Poulsen says. "So if we can do something that costs a few hundred dollars today in order to prevent something that not only costs a lot of money in three or four years, but may also prevent them from having to miss work, to be away from their family, to become less active, and, therefore, potentially the subject of further health problems, we think all of those are great investments."

Value-based care
One of the goals of healthcare reform is to drive improvements in both quality outcomes and more affordable costs. Therefore, it is encouraging that 50% of respondents say that the transition from fee-for-service to value-based care has either improved or somewhat improved their cost-containment efforts, and that only 16% say that this has hindered or somewhat hindered their efforts. Twenty-four percent say that the transition has had no impact.

According to respondents, it appears that greater percentages of large organizations are deriving cost-containment benefits from value-based care than medium and small ones. For example, based on net patient revenue, a greater share of large organizations (71%) than small (44%) and medium organizations (45%) say this has either improved or somewhat improved their cost-containment efforts. Likewise, a greater share of small (20%) and medium (17%) organizations than large organizations (4%) say that this has hindered or somewhat hindered their efforts. Further, a higher percentage of small (25%) and medium (32%) organizations than large organizations (16%) say that this has had no impact.

Poulsen says that value-based care has a positive effect on cost containment. "We have been thinking about it from a value-based approach for a very long time because we've been paid for a big portion of our patients on a prepaid basis. It increases hugely the opportunity for wellness. It increases hugely the opportunity for informed decision-making about utilization decisions. Those were tools that were not available to hospitals in the past, by and large. The only thing they could do is to reduce the cost of an x-ray or reduce the cost of a hip replacement. We think the vastly more important question is, is the x-ray necessary? Is a hip replacement, in fact, beneficial?"

Price transparency
There has been a lot of industry discussion about the relative merits and drawbacks of price transparency and its ultimate impact on cost containment. Can price transparency have value without quality transparency as well? Does price transparency matter when most of the cost is typically paid by insurance, or is the trend toward high-deductible plans changing the equation?

Nonetheless, survey results show that most respondents have embraced price transparency. Forty-three percent of respondents say that they provide price transparency to patients for all or most care provided, 42% say they can do this for some care provided, and 15% are unable to do this for any of the care they provide.

Results are mixed when analyzing the data by setting. Although a greater share of physician organizations (23%) and hospitals (20%) than health systems (10%) say that they provide price transparency to patients for all care provided, a greater share of physician organizations (20%) and health systems (19%) than hospitals (9%) also say they are unable to do this for any of the care they provide.

Results for being able to provide transparency to patients regarding payers' share of the cost of care reveal that this task is slightly more challenging, likely because the source of the information comes from outside respondents' organizations and also the difficulty of knowing whether a given patient has met out-of-pocket deductibles. Forty-six percent of respondents say that they provide transparency to patients regarding payers' share for all or most payers, 25% say they can do this for some payers, and 28% are unable to do this for any of the payers.

Operations activities
Operations or administrative activities that drive the highest-dollar value in cost-containment contributions have typically been led by purchasing and supply chain efficiencies, and it tops the list again in this year's survey at 64%. The next highest response is for process redesign (58%). These results are identical to last year's report, which shows the value of both tried-and-true efficiencies as well as new processes.

While some in the industry believe that purchasing and supply chain activities are starting to reach the point of diminishing returns and that process redesign will eventually take its spot at the top of the list, for now, both traditional and innovative efforts represent relatively equal parts of most cost-containment strategies.

Poulsen says that, while process redesign has been Intermountain's top cost-containment contributor for many years, purchasing and supply chain efficiencies still play an important role. "I think there's still value there, and it would be unwise to discount how important that kind of work is. We break costs into three categories, and that would fall into the first one, which is efficiency. We've got to be effective and efficient at what we do, and to me the whole supply chain—because there's so much money in supplies—there's more mining to be done and there's more value to be extracted there."

Digging into the data, we see that responses for purchasing and supply chain efficiencies are highest among respondents who say they can determine the true cost of care for some care provided (72%), followed by all or most care provided (63%), and only 45% among those who have no data on the true cost for any care provided. In a similar vein, responses for process redesign are highest among respondents who say they can determine the true cost of care for some care provided (62%), followed by all or most care provided (58%), and only 48% among those who have no data on the true cost for any care provided.

Organizations that are able to determine the true cost of care are in a better position to reduce costs. Note that it's not simply having an understanding of the cost data that confers a cost-containment benefit—the cost data increases the effectiveness of an organization's cost-containment initiatives. The data alone confers limited benefit; it's what you do with it that provides the value.

Cost-reduction programs
Survey respondents say that they are continuing to have success in reducing costs in their organizations. Forty-nine percent of respondents indicate that cost-reduction efforts yielded year-over-year savings of 5% or more for the most recent fiscal year. At the upper end of the range, 9% of respondents had reductions of 11% or more.

As mentioned earlier, organizations that are able to determine their true cost of care tend to have more effective cost-reduction initiatives. For example, there is a correlation between the level of savings respondents say they receive from cost-reduction programs and their organizations' abilities to determine the true cost of care. Fifty-one percent of those who are able to determine the true cost of care for most or all of their care report year-over-year savings of 5% or more, while just 38% of those who are unable to determine the true cost for any of their care are achieving such deep savings.

There is also a relationship between the level of savings respondents say they receive from cost-reduction programs and their views on the cost-saving benefits of the transition from fee-for-service to value-based care. A greater share of respondents who say the transition from fee-for-service to value-based care has either improved or somewhat improved their cost-containment efforts (54%) than respondents who say this has had no impact on their efforts (40%), or who say this hindered or somewhat hindered their efforts (40%), report that cost-reduction efforts yielded savings of 5% or more.

After years of cost-cutting, the outlook for further reductions remains consistent with current savings levels. Forty-nine percent of respondents expect average annual cost reductions of 5% or more over the next three years, and at the upper end of the range, 12% of respondents are expecting reductions of 11% or more.

Ultimately, organizations that have a deep understanding of their cost of providing care are better prepared to drive down costs in a variety of areas, while those lacking cost data have more difficulty executing on this mission. Clearly, the first step for most organizations is to determine their true costs, if not for reasons of transparency, then for reasons of financial viability.