10 costs for health systems to target as the ax hangs over the ACA

The coming months or years may bring the repeal and replacement of the ACA, or ongoing policy uncertainty. Either way, your hospital and health system will feel margin pressure.

"Under some of the scenarios our firm has modeled, the top-line hit the hospital industry would get would be in excess of $20 billion. The squeeze will happen across all payer segments," says Igor Belokrinitsky, principal with Strategy&.

Medicaid dollars may shrink based on reduction in coverage at the federal and state levels. Although Medicare is fairly safe and will even get a bump from MACRA, Medicare costs are growing faster than reimbursement, meaning it's increasingly difficult to break even. Finally, commercial dollars will get squeezed and hospitals will see intensified competition for commercially insured patients.

"This competition won't be just about who has the highest-rated clinical program. It will be about access, price transparency, narrower networks and bundles," says Mr. Belokrinitsky. "Price transparency in particular is a key part of most Republican repeal/replace/repair proposals, and to be competitive on price, you have to be competitive on cost."

Before diving into the 10 line items he recommends hospitals and health systems scrutinize in the coming months, Mr. Belokrinitsky first shared four actions that set successful cost reduction initiatives apart.

1. Deploy activity-based costing. You will not realize the full value of cost transformation until you have created cost transparency by accurately linking costs to activities performed. Many health organizations have made the difficult but worthwhile move to activity-based costing to gain better control over their costs

2. Deploy a team. The best cost transformations begin with a commitment to improve quality, safety and experience — and engage physician and nursing leaders. The most effective cost savings stem from cross-functional teams that examine processes, practices, units and protocols to identify wasteful work and spend. The result is more consistent, higher-quality health outcomes at a more predictable cost. Mr. Belokrinitsky also recommends showing how some of the savings will be reinvested in growing the organization to help motivate the workforce.

3. Understand the drivers of work. Benchmarks are necessary but not sufficient for a successful cost transformation. They are helpful in highlighting areas that stick out, but the next step has to be about understanding the drivers of work. "It's hard to sustainably cut costs without reducing the work, either through automation, delegation, standardization, optimization, elimination or other approaches," says Mr. Belokrinitsky.

4. Embed cost savings into your operations. Bake your cost savings into the next year's budget and link them to operational metrics. Otherwise, costs have a tendency to creep back in.

Now here are 10 areas Mr. Belokrinitsky recommends health systems target for double-digit cost improvement:

1. Manage the healthcare cost of your own workforce. Hospital employees are notoriously high utilizers of health services. Chances are, your own healthcare costs are climbing every year while the health of your workforce does not improve. Consider targeted programs for chronic back pain, depression and obesity to help reduce costs, improve employee productivity and morale and build a compelling story to establish credibility with employers in the community as you offer them direct contracting.

2. Eliminate subscale services. Each clinical service or offering has a minimum efficient scale, or MES. If the volume in this service is below the threshold, it is likely insufficient to cover the overhead costs of offering this service and its clinical and administrative components. It is also difficult to achieve and maintain high quality in a service without sufficient volume, which is critical. "Many health systems fail to consolidate, de-duplicate and scale up their services — for historical, sentimental or political reasons," says Mr. Belokrinitsky. "If you have purchased a small hospital and never fully integrated it, now is the time. Going forward, having sub-scale services may be a luxury you can no longer afford." 

3. Optimize service line spend. In line with the previous item, when it comes to allocated dollars for marketing, research, teaching, hiring of physicians, purchases of medical technology and other spending, your spend must reflect your service line priorities. It is often difficult to discern a system's priorities by looking at the way it spends.

4. Optimize IT spend. In line with item No. 3, an organization's IT spend should clearly reveal its strategic priorities, otherwise the dollars are being misallocated and misspent. "Watch out for 'temporary' IT staff who came in to implement your EMR and never left, and for 'shadow' IT that sits in clinical departments, builds and purchases its own applications and makes the enterprise security leadership nervous," says Mr. Belokrinitsky.

5. Flex the workforce. If you are not looking at labor, you are neglecting your largest cost category. Managing purely to a staffing ratio has the effect of averaging out overstaffed and understaffed areas. "This is bad for the staff as well as for the bottom line," says Mr. Belokrinitsky. "Demand-based staffing is harder, but it allows the organization to adjust the staffing dynamically to make sure there is the right number of the right kind of staff in the right place at the right time." Consider modern analytical tools that let health systems forecast volume and flex staffing with confidence — whether in a single operating room or across multiple hospitals in a metropolitan area.

6. Find the waste. Pick the highest-volume DRGs and identify variability in the outcomes and cost. A sizable subset of cases likely produce worse outcomes at a higher cost, which causes the system to lose money on the DRG even with commercial insurers. "A root cause analysis will reveal the culprits — unique physician preference items, challenges with timely discharge, unwarranted use of the ED, failure to close the loop and prevent a readmission, unneeded tests or lack of adherence to a clinical protocol," says Mr. Belokrinitsky. "Addressing these issues may require a tightening of policies, changes in EMR configuration and a frank conversation with some of your physicians. The good news is that your insurance company partner would be delighted to supply you with the necessary information about the variability in outcomes and costs — it hurts them too."

7. Reconsider capital spend. With hospital bed utilization on the decline, building more beds is not for the faint of heart. Many health organizations have found ways to convert their beds to post-acute, or hand them over to another organization to manage — thus turning a fixed cost into a variable one. Similar due diligence should be applied to capital-intensive medical technology; it may be possible to find a payment model linked to utilization instead of a lump sum.

8. Reduce the cost of leakage. How do the physicians in your community perceive your institution? This is a question you need to ask right now. "Chances are, some are dissatisfied with the access and the experience their patients encounter — and end up sending them to your competitors who advertise same-day appointments," says Mr. Belokrinitsky. Those patients have a choice about where they go because they have good insurance coverage —you cannot afford to lose them.

9. Reduce bad debt. The longer you wait to bill the patient, the less likely you are to get paid. With activity-based costing comes an ability to quote the patient a price upfront and collect the copay on the spot or make payment arrangements. Take advantage of these arrangements.

10. Avoid potential costs. Every health organization is exposed to a broad range of low-probability but high-cost events — from inadvertent statutory noncompliance to cyberattacks. Instituting the right controls can help save a significant amount of cost and bad publicity down the road.

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