Intelligence Report: Cost-Containment Expertise

This report reveals how data analytics can drive meaningful cost containment strategies without negative impacts on quality of care or patient satisfaction.

This article appears in the December 2013 issue of HealthLeaders magazine.

Conventional wisdom is that cost-cutting is a painful, even futile, way to respond to reduced reimbursements. One can only cut so far before placing sustainability in jeopardy. Nonetheless, healthcare executives are very much focused on reducing the costs of providing care, with 39% saying their cost-cutting programs have resulted in savings of at least 6% every year for the past three years. More than half (56%) say they expect total cost reductions over the next three years to be 6% or more, as well.

Concurrent with conventional containment activities such as inventory and supply-chain monitoring, most organizations pursue other approaches to improve the bottom line such as workforce efficiency and smarter utilization. Success at cost-containment initiatives depends on measuring and monitoring and, increasingly, using data to guide decisions.

Labor costs, avoiding layoffs

While labor generally represents the largest portion of cost in the healthcare industry—60% for many—workforce reductions are avoided by most organizations in favor of workload balancing. Although workforce reductions are mentioned by 17% as the highest dollar value contributor to cost containment, the second most frequently mentioned technique in achieving staff-related cost reduction in this fiscal year, efficient use of labor, is a more common tactic.

Nearly half (45%) saw their best labor-related cost reductions through more efficient use of clinical labor, and an additional 8% achieved their highest labor-related cost reductions though more efficient use of nonclinical labor.

Vincent G. Capece Jr., president and CEO of Middlesex Hospital, a 180-staffed-bed nonprofit community hospital in Middletown, Conn., relies on productivity standards to optimize staffing levels. "Labor represents the largest percentage of our operating expense, but it's our most vital resource because we are the people who deliver care.

Our organization is the people. Our goal is to try to accomplish the expense reductions we have planned without having any layoffs. Instead, we're trying to manage much more tightly than we have in the past. Our managers get detailed reports on a shift-by-shift basis as to how many resources they're using, labor resources in particular, and how those resources compare to the resources they should be using. They have to explain variances."

Watch supply chain

Purchasing and supply-chain efficiencies are the most common nonlabor process-related cost-saving techniques, providing the highest-dollar-value reductions for 25% of respondents. In addition, nearly one-fifth (19%) see their biggest nonlabor cost savings through improved utilization of clinical resources—using tactics such as tighter inventory control and keeping close tabs on the use of lab services and imaging services.

Louis Papoff, CFO for physician services for the Chicago and Detroit markets of Dallas-based Tenet Healthcare Corporation, summarizes the economics of inventory. In addition to the outlay for the supplies themselves, he says, "You incur expenses for the storage of inventory. Additionally, you incur staffing expense to manage that inventory, and excessive inventory negatively impacts cash flow."

Inventory control initiatives depend on staff buy-in, so, as with labor efficiencies, communication and physician alignment can be keys to success.

For C.R. (Bob) Hudson, chief financial officer at Henry Mayo Newhall Memorial Hospital, a 238-staffed-bed, not-for-profit community hospital in Valencia, Calif., comanagement agreements have been pivotal in motivating the organization's physician corps. (Because of California's Corporate Practice of Medicine Act, Henry Mayo Newhall has no employed physicians.)

"We have comanagement arrangements with many physicians and surgeons that put money on the table for them if they help us significantly reduce our supply acquisition costs," he says. "The physicians get together and agree to use this one product or this one vendor. That gets our volume up. And by having the physicians in a position where they can get some skin in the game and get some rewards, we are seeing them work with us to get some real significant discounts. With bundled payments and with comanagement agreements and shared risks and rewards, we're finally in a position where we're starting to align the physicians' interest with the hospital's interest."

Assess clinical service cost, contribution

More than one-third of respondents (36%) say they are very or somewhat likely to drop clinical services in the next year to reduce costs or enhance operating margin. Both service lines and supporting clinical services such as lab and pathology services will garner additional scrutiny. Capece observes that "there are very few services that don't provide any contribution" to the organization's margin.

He notes that the healthcare industry is very fixed-cost intensive and most services help cover some portion of fixed cost. In addition, he says, "Even the least profitable services, for the most part, cover the direct cost of providing care. If you stop providing outpatient psychiatric services, for instance, how much overhead could you shed as a result of that? In most cases, it would be very little, if anything." So direct costs and variable costs stop when a service is discontinued, but most indirect costs and fixed costs continue.

Influence of IT

Healthcare leaders have to examine the care they provide in light of business realities. To do so, most organizations are actively pursuing the integration of clinical and financial data. Respondents have either integrated clinical with financial data already (10%) or have a development program underway to do so (58%), with the specific objective of using data to help reduce costs.

"It can be difficult to develop a system that allows you to tie clinical data with financial data," Hudson says. "But once you've got it developed, it's really beneficial to be able to drill down and tell what programs are profitable, what payers are profitable, and what doctors are profitable. You're able to really start focusing in on expense monitoring, productivity monitoring, and identifying areas that need attention."

IT will play a key role in helping leaders find cost-cutting opportunities. One-third of respondents (33%) say they will see the most savings via better monitoring of expenses and costs.

Reprint HLR1213-3

This article appears in the December 2013 issue of HealthLeaders magazine.