Nearly all hospitals in the U.S. have set cost reduction targets and recognize their importance, yet fewer than one in four have achieved "most" or "all" of their cost transformation goals -- especially in non-traditional, high-opportunity cost reduction areas such as lowering unwarranted clinical variation.
That's according to a new survey from Kaufman Hall, its third annual in-depth look at the priorities healthcare executives are setting, and progress they're making toward improving organizational performance. This year's data was collected in partnership with Kaufman Hall/Axiom and the Healthcare Financial Management Association, resulting in a larger data set than in previous years.
The results indicate that hospitals should embrace opportunities for more meaningful gains, such as obtaining more valuable data insights, demanding greater accountability for performance improvement goals among leadership, and delivering better information to support physician engagement.
Hospitals face multiple revenue and expense challenges that underscore the need for cost transformation. Chief among the revenue challenges, according to the survey, are flat or declining inpatient volumes, which 30% of respondents listed as their top concern. Closely following are downward pressure on commercial insurance rates (27%), and an increasing percentage of Medicare and Medicaid patients (19%).
At the same time, almost one-half of respondents said rising salary and wage inflation, the result of a tight labor market, makes it more difficult to hold the line on expenses. Since labor costs account for up to 60% of a hospital's expenses, this trend is a direct threat to cost transformation efforts.
Additionally, 23% of respondents say that demands for capital to fund strategic initiatives are putting pressure on their bottom line.
"It really is about building the accountability structure within the hospital," said Kaufman Hall Managing Director Lance Robinson. "It's hard to implement changes, and harder still to maintain those changes over time.
"There are some successful case studies out there," he said. "Some sophisticated folks have figured out they need to consult external benchmarking and engage the staff, especially the clinicians, who are key to this whole thing."
One of the biggest pressures, he said, is the self-pay aspect of reimbursement. Patients are becoming more responsible for copays and reimbursement, and a lot of organizations aren't comfortable asking for payments upfront, which presents a significant challenge.
Pressures from employers with health plans are increasing, as well as a challenging Medicare reimbursement picture. But organizations are beginning to find some strategies to cope.
"Within the revenue cycle, it's about being more aggressive on the collections side, and having more leverage with scale," Robinson said. "That helps, obviously. I think it's just the basic blocking and tackling within the revenue cycle, being paid for what you deserve to be paid for. These are things you can do within the walls of your hospital."
With increasing pressure to control expenses, it's becoming more incumbent on healthcare organizations to control costs in ways that allow them to reinvest in the community, requiring a holistic view of the portfolio and a more aggressive approach to expense management than has been seen in the past.
"I equate it to ripping the Band-Aid off," said Robinson. "If you can jump in feet-first and have a cost structure built around the cost transformation journey, that's the key takeaway."
As the recognized need for cost transformation continues to grow, so does the focus on technology that will enable it. In fact, nearly three out of four respondents said they will invest in cost transformation technology within the next two years.
Yet when asked if their organizations have access to reliable, trusted costing data, as many answered "no" as "yes" -- 47% each, with the remaining 6% saying they didn't know.
Having reliable, trusted data is core to any analytics effort, and especially to one as complex as cost transformation. The report recommends that organizations pursuing a more detailed understanding of costs adopt a tiered approach -- matching intensity of effort with items that have the highest impact on decision making.
"As disruptors come into the market, having the right technology in place is important," said Robinson. "Investing in data and analytics is key. … We're competing with the Googles and Facebooks of the world. It's a seismic shift, and probably the tip of the iceberg. WalMart is opening up these clinics, and the headline there is they're going to provide care at 50% less cost and be more consumer-focused.
"There's been a shift from healthcare being a wholesale business to a retail business," he said. "CVS is already there, and combined with Aetna, they're a force to be reckoned with."
OPPORTUNITIES AND STRUGGLES
When asked in which areas their organizations had made the greatest strides in reducing costs, 36% of executives surveyed said "labor cost/productivity" and 32% said "supply chain and other non-labor costs" -- both traditional areas of focus. At the same time, 31% said they had the most difficulty in achieving their labor cost/productivity cost transformation goals.
One other major area of opportunity is reducing unwarranted clinical variation. While it was recognized as a high-potential opportunity, it was also identified as one of the areas where respondents faced the most difficulty in achieving their cost transformation goals. It was tied for last in areas where respondents had achieved their greatest cost transformation success.
"If you don't take care of the basics, you probably won't be in the game," said Robinson. "Getting physicians engaged is key, and establishing that accountability structure. A lot of (organizations) have talked about it, but a lot don't do a great job at it."
Focus on Reducing the Cost of Care
This month, Healthcare IT News, MobiHealthNews and Healthcare Finance News take a look at what all of this means and how technology, as always, is spurring innovative solutions.