Cost rebalancing: Four keys for a rebalanced cost structure

With declining reimbursement and a shift towards greater financial risk for providers, the health care industry is changing. Many organizations have begun to contemplate whether the place they occupy in their communities is sustainable.

Unable to adjust to changes quickly, many hospitals feel forced to consider strategic changes, closure or acquisition by a larger system. For providers with resource constraints that are looking to preserve their independence, they have the option to employ cost rebalancing strategies to improve financial sustainability.

Cost rebalancing is defined as maximizing the benefit of organizational expenditures through reduction of variation. Improving efficiencies in this way can be achieved through two approaches: making sure patients are treated in the right setting of care, with the right clinical, workforce and supply chain resources; and prioritizing capital expenditure to achieve improved financial performance.

A hospital’s greatest expense is employee payroll and benefits. But the hospital workforce is under pressure from the high cost of physician employment and increasing nurse retirements – all while new payment models require major cuts to care delivery costs. Supply expense makes up the second largest operational cost for hospitals. Despite this, the providers using the supplies and the supply chain management team do not always work together to optimize purchases.

Rising prescription drug costs have also been a growing concern to health care organizations. While awareness of prices is not enough to minimize costs, it highlights why physicians, supply chain leaders, and hospital administration need to collaborate to reduce the cost of care. The next evolution of cost reduction is in addressing how care is delivered. Reimbursement changes, patient volume shifts, and higher outpatient volumes demand a fresh look at resources and how they are utilized across the continuum.

By taking steps to gather data about the costs associated with the continuum of care, and by assessing and improving elevated costs within that system, organizations can make significant financial headway towards sustainability and independence. Four keys to help health care organizations rebalance their cost structure include:

1. Set the Strategic Direction: Properly calibrating an organization’s strategic priorities is vital for long-term success. Closely analyzing service lines, patient demographics, market shares and projecting patient needs can better reveal the appropriate service lines needed to fulfill the health needs of a community while being financially sustainable. During the examination of these factors, a few important questions should be considered:
a. What is the contribution of current service lines? And do opportunities for new services exist, providing the potential for positive cash flow for operations?
b. Are consumer behaviors and technological innovation negatively impacting service lines?
c. What are the market opportunities?

2. Adjust to New Payment Models: Either by becoming an ACO, participating in CMS’ Comprehensive Primary Care Initiative, or addressing population health management, organizations can assess readiness. Organizations should ask themselves if their hospital is financially positioned to participate in one of these population health initiatives. Are they operationally and logistically prepared? Does the organization have the technological components in place, and is the hospital ready to or already participating in some type of population health management program? In assessing readiness for population health initiatives, an honest and thorough evaluation of workforce expenses (salary and benefits), quality indicators and supply chain expenses is invaluable.

3. Assess Debt Structure: Determining whether the organization has sufficient capital is vital to assess organization priorities for growth opportunities. If the operating capital does not meet the investment needs, debt is another source of cash. But to access needed capital, providers must determine if they’re credit-worthy and attractive to lenders. With a strong financial position, providers can quality for debut with favorable rates, terms and debt covenants. On the other hand, a weak financial position can limit access to bank lenders and result in increased cost of capital from higher rates, terms and onerous covenants.

In addition to the cost of capital, debt capacity must be forecasted to avoid the taking of more debt than can be serviced. A starting point is to evaluate the hospital’s capacity for incremental debt by assessing organizational cash flow, historical and projected trends in financial performance, operational cost effectiveness and revenue cycle management.

4. Conduct an Organizational Service Line Analysis: Perform service line analyses for each of the organization’s key services to clearly understand their impact on the bottom line. Data sources include the hospital’s financial statements (audited and internal), utilization (physician practice utilization) compared to peer benchmark data, market analysis of the service line’s demand and market share, an assessment of the organization’s liquidity position, and an in-depth look at the hospital’s at-risk revenue streams.

This assessment will help to determine if the service line cash flow is positive, and if changes in reimbursement and market demand will result in the ability to continue to support the capital and operational requirements of the service. By taking a systematic approach to evaluating service lines, providers can better prioritize offerings to meet the healthcare needs of the community

Building an effective system for managing the cost of care ultimately begins with staff. Despite the direct relationship between labor and supply expense, employees utilizing hospital supplies rarely interact with the supply chain management team tasked with purchasing the supplies. Linking staff together is key to an effective management system. Urging staff to work diligently while remaining conscious of operational costs creates an organizational culture that aims to reduce the cost of care.

While the trend towards consolidation has hospitals wondering if their continued existence will come at the cost of their independence, a rebalancing of costs can help ensure continued autonomy. By taking steps to gather data about the costs associated with the continuum of care of an organization, and by using a systematic process to assess and improve upon the pockets of elevated costs within that system, organizations can make significant headway towards both sustainability and independence.

Michele Mayes is a demonstrated leader in health care who is passionate about working with health systems to achieve sustainable performance. She has nearly 20 years of experience in the health care industry from which she leverages research and data to generate and provide innovative solutions for clients. At Quorum Health Resources, she provides executive oversight to consulting teams that develop, identify and implement sustainable solutions to improve workforce management, care coordination and overall cost per case through process redesign. She has assisted both community-based standalone hospitals and multi-hospital integrated delivery networks (IDN) in developing and implementing complex strategies to succeed in the post-reform environment.

By Michele Mayes, Senior Vice President of Consulting and Quorum Purchasing Advantage (QPA), and Interim Chief Operating Officer at Quorum Health Resources

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