Margin + mission: A prescription for curing healthcare's cost crisis

The following is adapted from the introduction of the recently released book entitled Margin + Mission: A Prescription for Curing Healthcare's Cost Crisis by Dan Michelson and Liz Kirk.

Sister Irene Kraus was the founding chief executive of the Daughters of Charity National Health System, one of the largest nonprofit hospital chains in the country. And she was the only woman to chair the American Hospital Association.

Impressive.

But what she may be most remembered for is coining the phrase, "No margin, no mission" — a mantra that is a roadmap for healthcare and the inspiration for our book, Margin + Mission: A Prescription for Curing Healthcare's Cost Crisis.

Sister Irene believed that strong fiscal management, not just charity, is what hospitals needed to fulfill their mission. "In the United States in this day and age," she would say, "the way to do it is to run institutions that are financially solid." That is, in order to fulfill your mission, you must drive margin.

Never have the words of Sister Irene been more important than right now.

The healthcare industry is on the threshold of taking on what might well be its biggest challenge ever — financial stewardship. The topic is now front and center, not only within the industry, but on the national political and media stage as well. Wherever you turn, you hear about the runaway train of healthcare cost. On a per capita basis, the U.S. will spend twice as much as any other industrialized nation. In 2015, the healthcare bill will be over $3 trillion, about 18 percent of our gross domestic product.

To put that in perspective, that's over four times the amount we will spend on national defense. Ironically, the structure of our current business model in healthcare started with a war. During World War II, the federal government imposed wage and price controls to limit inflation and address a labor shortage. As a tradeoff, new benefits were introduced, including allowing employer-based health insurance to be excluded from taxable income. In response, the number of Americans with private health insurance exploded from 20 million at the beginning of the 1940s to over 140 million by decade's end. By 1965, the introduction of Medicare and Medicaid would add another 40 million Americans into a system that compensated healthcare providers based on volume — the more they did, the more they would make.

An entire industry — consultants, competencies, companies — arose to help healthcare providers take advantage of the new payment system by maximizing their revenue. With zero incentive for managing costs or increasing efficiency, the gains that transformed most businesses in the 1970s and 1980s bypassed healthcare altogether. American healthcare costs spiraled out of control. More equaled more.

It's no surprise then that 50 years later American healthcare is on life support. Hospitals, which have been the structural hub for healthcare, have seen their operating margins plummet to close to 2 percent in 2013. One in three hospitals carries negative operating margins, according to Standard & Poor's. Banking margins, by comparison, average 27 percent.

Without a big shift in approach, the future for hospitals and health systems is cloudy at best as they are facing a perfect storm — an unprecedented mix of challenges that endangers their financial viability. Patient volumes are decreasing as new structures like accountable care organizations focus on keeping patients out of hospitals, the most expensive care setting. Reimbursement from Medicare, which covers a majority of hospital services, is decreasing for the first time in decades. Competition and market consolidation are on the rise as more independent hospitals seek refuge within larger, well-funded regional health systems.

Meanwhile, insurance companies are increasingly switching to a capitated model that pays healthcare providers a set fee for each enrolled person, meaning providers can no longer rely on getting paid for every service they deliver. The effect of all of these changes is that hospitals' decades-old strategy of growing top line revenue is quickly becoming outdated. Reducing the total cost of care has become the number one strategic concern for healthcare providers, according to a 2013 survey by the Healthcare Information Management Systems Society. Many hospitals today have set annual cost takeout targets of over $100 million.

That amount of belt tightening for an industry that represents close to one-fifth of our GDP requires a massive change in mindset and skillset. Unfortunately, after 50 years of focusing only on generating revenue, most hospitals lack the skills and staff for the transition. Results from a July 2014 survey of 100 hospital finance executives show that while nearly nine of 10 have a cost reduction target, seven of 10 felt their efforts were falling flat.

Why? For the vast majority of hospitals, cost information is a black hole. They simply don't have it. A recent article in the Harvard Business Review, "The Strategy That Will Fix Healthcare," spelled out this problem in no uncertain terms: "For a field in which high cost is an overarching problem, the absence of accurate cost information in healthcare is nothing short of astounding," wrote authors Michael Porter and Thomas Lee. "Without understanding the true costs of care for patient conditions, much less how costs are related to outcomes, healthcare organizations are flying blind in deciding how to improve processes and redesign care."

At the same time, with one in five individuals in employer-sponsored plans now opting for high deductible health plans, consumer interest in the price of healthcare is at a fever pitch. Thirty-five states now require hospitals to make public what they charge for procedures and tests. While this sounds reasonable to those outside of healthcare, to those who work inside it represents an enormous problem. How can providers make their prices public when they don't know their costs?

By analyzing cost and margins as a baseline, administrators can begin to share data with clinicians and engage them in a process of continuous improvement: using algorithms instead of anecdotes to understand the cost of variation, waste, harm and other factors that drive cost up and then working together to drive cost out.

What is emerging is one of the great socioeconomic opportunities of our time — helping healthcare shift away from a revenue cycle model of maximizing the top line to an approach of managing the bottom line from a clinical and financial perspective.

That's why we wrote the book: Margin + Mission: A Prescription for Curing Healthcare's Cost Crisis. Our goal is to share ideas on how we can solve the cost crisis in healthcare and drive margin to fuel mission.

Hospitals and healthcare systems are the hub for healthcare, both physically and fiscally, representing close to $1 trillion of the total cost. This book focuses on the issue of cost (and what can be done about it) within that segment because of their ability to directly reduce cost in their own organizations, as well as their potential to influence the level of spend in the market.

Our hope is that this book provides inspiration, fuels conversation and drives action to make a meaningful difference in bending the cost curve. It won't be easy. Curing healthcare's cost crisis will require as much investment and energy devoted to delivering value in the next 50 years as has been spent driving volume over the past 50 years. But in the new world of healthcare, where driving margin can only be achieved by delivering high quality care and improving patient health, we will all benefit.

As Sister Irene outlined long ago, for healthcare to be healthy, margin plus mission must be the prescription.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

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