A new report suggests health systems are being too conventional in their approaches to cutting costs, which might be why they aren’t making much headway.
Labor costs/productivity and the supply chain were the areas 72% of respondents to Kaufman Hall’s latest survey said they plan to target when it comes to cutting costs.
But to succeed in a future that’s sure to be marked by disruption, it’s going to take a new mindset and a willingness to go well beyond the traditional areas of focus, the report said.
That could mean shuttering rural hospitals, reducing clinical variation and attempting to integrate the physician practices they’ve accumulated in recent years.
To truly reduce margin, health systems must brave tougher subjects, such as taking a hard look at which services they’ll offer at each location, said Lance Robinson, a managing director with Kaufman Hall and an author of the new report.
“We’re trying to convince our clients not to try to be all things to all people,” he said. “Drill down on the service lines you’re good at or that drive good margins for the hospitals.”
The report released Tuesday is Kaufman Hall’s second annual in-depth look at the priorities and progress healthcare executives are making toward lowering costs. Nearly 190 senior executives from hospitals and health systems took the 2018 survey, up from 173 in 2017. Of those, 21% were from health systems with 10 or more hospitals and 24% represented single hospitals.
Overall, the authors found progress has so far been limited when it comes to cutting costs. Fewer than one in five respondents cited cost reductions of more than 5% in any priority area.
Respondents have made the least progress in service rationalization, an area in which 61% cited no improvement. A prime example of that is health systems’ resistance to closing critical access hospitals, even when they’re operating at significant losses, said Lyndean Brick, president and CEO of the healthcare consultancy the Advis Group.
“That’s the next level of cost cutting: It’s difficult and controversial,” she said.
Hospitals also need to examine their clinical variation, Robinson said. Before sharing utilization data with clinicians, he cautions systems to be sure it’s real, actionable information, because they probably don’t get the ears of physicians often. He said health systems also need to identify champions, key leaders within specific service lines, as they work to drive down overall utilization of services and supplies.
Another problem area is when health systems acquire physician practices defensively to gain market share but don’t consider how to properly integrate them into their practices, Robinson said.
Seventy percent of executives cited the need to prepare for the transition to value-based care as their top cost transformation driver, down from 77% in 2017. Medicare’s transition to paying hospitals under the diagnosis-related group system in the 1980s spurred a drop in hospital revenue that never bounced back, Robinson said. Similarly, hospitals must prepare for a new revenue landscape under value-based care, and repositioning themselves will be an ongoing journey, Robinson said.
“It’s not a one and done; it’s a continuous process,” he said. “You’re always evaluating your cost and ways to do things better.”
Goal setting for cost reduction was absent in 32% of the organizations whose executives took the survey. Robinson said he found that surprising, as health systems should have established goals early on. Ideally, they can bake those into their budgets while they’re being set, he said.