Avoid Common Pitfalls in Cost Management Efforts — Think Outside the Box

How often does this happen in your organization?

The executive team meeting agenda includes a decision on which of several competing projects to approve and fund.

Each initiative has a senior leader's support and addresses an operational area that all recognize as important. Each proposal has a pro forma business case to support it, but everyone knows the numbers may have been carefully chosen to support its acceptance. The financials will not support doing everything at once. Which will contribute most to the organization? How will each project affect the bottom line?

Comparing overall financial impact across projects during the meeting is difficult at best, and debates about the effects from each project in terms of hopeful versus problem scenarios often resemble a psychological projective test. The inability to bring hard numbers to bear usually leads to weeks or months spent on additional offline analyses and subsequent additional meetings. Decisive execution of solidly vetted projects is what will benefit the organization most. But the yes-or-no decision often comes down to who has the loudest champion in the room. Or who has lobbied best prior to the meeting. Or who can convincingly promise the effect on profits will be even higher or the cost reductions greater than originally projected. Conducting the business of healthcare like this is not a sound strategy in today's new healthcare delivery environment.

Today, multiple external factors are converging to rapidly push the current model for healthcare delivery to the brink. Demographic shifts, the 'silver tsunami' of baby boomers, the persistent number of uninsured patients, and escalating diagnostic and treatment costs are challenging the financial viability of many healthcare organizations. From the national perspective, payers continue to curtail reimbursement, squeezing operating margins closer and closer to zero.

Nearly all popular formulaic approaches to framing and implementing strategy and improving organizational performance have one thing in common — they create a new cost center in the organization, at a time when reducing costs has never been more of an imperative. New corporate departments are created, black belts and lean experts are hired, and expensive mandated meetings consume valuable time. The new project will be labeled as 'highest priority' just like so many others already in progress. Multifactorial effects of the array of proposed new programs are difficult to visualize and compare to other available options on the executive decision table.

Launching cross-system programmatic initiatives without a clear picture of what the effect on overall financial operations will run a high risk of waiting at the end of a long pipe and finding that what you expected isn't coming out.

Appropriate governance in this environment should insist on a concrete assessment of the effects on current and next year operations of suggested interventions based on the most recent data available in order to get more out of the infrastructure as it exists today.

Just as expectations for both lower cost and better quality have been ratcheted up, leadership throughout the healthcare industry needs to step up its response to such demands. The one-size-fits-all approach of reducing heads, leveraging system size and buying in to the latest program of the month won't be enough.

The outcome of these proposed projects often has one of these three forms:

  1. Authorizing the new project – or a part of it – and minimally resourcing it as a "try it and see" approach. However, this usually becomes an expensive and disappointing solution that no organization can really afford. It consumes personnel, dollars and time, all of which are in short supply.

  2. Taking a universal, systemic solution to current difficulties does not often help either. "Starting our Baldrige journey" or hiring black belts and training managers on the principles of Six Sigma are seldom able to reduce overall costs significantly and take valuable resources away from potentially beneficial projects.

  3. Postponing decisions by referring the proposed projects to subgroups for additional analyses and another follow up presentation loses opportunities for being first to market or chances for improved margins. Unfortunately, this is a frequent outcome of executive sessions.

So, how can this situation be optimized?

The most fundamental requirement for avoiding these pitfalls is a margin modeling tool that supports the evaluation of bottom line impact for a given diagnosis, service line or other slice of the organization. Ideally, such a model would be based on your own organization’s data and would use standardized algorithms to calculate the impact of factors that are under your control — and even help you anticipate the effect of some that are not, like rate of reimbursement and patient mix. Such an approach would put every intervention on an even playing field, and enable the team to judge each one on its own merit in real time.

Such an operational model would allow the executive team to explore various scenarios — both individually and together — in terms of individual diseases or conditions, service lines or even the overall organization! Effects of cost savings and increases, revenue changes, patient/payer mix and quality/safety impacts on the bottom line can be visualized in real time. All of this with data from existing databases.

The need for objective assessment of the fiscal operating environment has never been more acute, and time is not on your side. Everyone has ideas for improving operations, but you need to put your money where it matters most. It's time to think out of the box about cost management.

Michael Abrams is managing partner, and Glenn Mitchell, MD, MPH, is a senior consultant, at Numerof & Associates, Inc., a strategic management consulting firm working with clients across healthcare to sharpen strategic focus, increase revenues, reduce costs, and enhance customer value. 

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