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Cost transformation is imperative, but hospital efforts are lagging behind, survey shows

Close to 60 percent of responding executives say their organizations have processes and structures in place to achieve cost transformation goals.

Jeff Lagasse, Associate Editor

Fewer than one in five healthcare executives have seen cost reductions of more than five percent in any priority area in the last year. This is one of many concerning findings in Kaufman Hall's new 2018 State of Cost Transformation in U.S. Hospitals and Health Systems: Time for Big Steps report.


A prior Kaufman Hall survey earlier this year revealed that CFOs rated cost reduction as the most important performance management activity for 2018.

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Most, however, said they have limited confidence in their organization's ability to manage the financial impact of evolving business conditions. Only 15 percent said their organizations are "very prepared" to manage evolving payment and delivery models with current financial planning processes and tools.

The cost transformation that has occurred so far has been in traditional cost reduction areas such as supply chain and other non-labor costs, where 64 percent of executives reported a reduction of three percent or more since 2017, according to the key findings. 

Little progress has been made in areas with the greatest potential for transforming cost structure, such as service rationalization, where 61 percent reported no progress in the past year, or reduction of inappropriate clinical variation (46 percent).

The numbers skewed even higher for organizations with more than 10 hospitals. Sixty percent reported no progress in reducing inappropriate clinical variation, and 57 percent said no progress had been made in improving physician enterprise management (versus 44 percent overall).

There's been a drop in the number of executives who say cost transformation is a "significant" to "very significant" need for their organizations. In 2017, 96 percent of survey respondents were in this category. In the 2018 report, that number dropped to 86 percent. 

The number of organizations which reported having set "no cost improvement goals" also trended in the wrong direction, from 25 percent in 2017 to 32 percent in 2018.


It's the firm's second annual in-depth look at the priorities and progress healthcare executives are making in reducing organizational costs. The 2018 version shows that hospitals will need to take big strides and tackle more transformative initiatives -- progress is being made on some fronts, but it's slower than what many think should be required of hospitals and health systems.

An example of progress is that 58 percent of responding executives say their organizations have processes and structures in place to hold health system leaders accountable for performance in reaching cost transformation goals. That's up from 46 percent in 2017.

The survey also found that 56 percent say their organizations make effective use of clinical pathways, protocols and guidelines to develop a common approach to treatment. That's compared 47 percent in the previous survey, and it shows a desire to reduce clinical variation, which can be costly for the healthcare system. 


"When you do this work, you've got to be able to identify the problems, but also track them and measure them," said Lance Robinson, managing director at Kaufman Hall. "For a lot of our clients, there's not a great structure or backbone in place to make that happen. What I find in many cases is clients are trying to do this internally and they're not successful, they don't have that accountability in place. That's not in all cases, but in many cases that's why these initiatives fail. It depends on where they are in their budget cycles, too. If they're ahead, they can implement some of these initiatives and track it in their budget."


Effectively communicating data to the physicians is one of the best ways to ensure a reduction in clinical variation, according to Robinson.

"If you think about the way physicians are educated and the way they're trained, they're basically data scientists," he said. "That's how they understand information. It starts with data, and then a very structured process to bring them along and show them what they can do to change their variation. It could just be something they're not even aware of."

He added, "They're not being incented, and that's important. You talk about aligning physicians, but it's also great if you can align your organizational leaders, because if it impacts your pocketbook personally, you're going to be more apt to perform."

Traditionally, said Robinson, people have looked at labor, non-labor and supply chain costs in a  vacuum. What's needed is to take a more holistic view of things.

"It starts at the top, honestly," he said. "If you don't have the right people supporting it, these things aren't going to be successful. It starts at the CEO level and cascades from there."

Twitter: @JELagasse
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