It’s time for U.S. hospitals and health systems to slim down their bloated budgets, especially as healthcare systems move through a period of heavy consolidation.
Irrespective of failed congressional efforts in Washington to replace the Patient Protection and Affordable Care Act (ACA) and change how healthcare in reimbursed, hospital administrators should act now to gain the type of efficiencies that have become commonplace elsewhere in corporate America.
Putting politics aside, the U.S. Senate’s Better Care Reconciliation Act and the ACA, commonly called Obamacare, sent the same message to hospital administrators — there is no new money in U.S. healthcare for health providers (and insurers) and there will be even fewer dollars per capita in the future to provide services. Put plainly, the days of bloated and growing healthcare expenditures are over.
That’s a good thing: Americans spend more than $3.2 trillion annually on healthcare. That’s an amount equal to 17.8 percent of the size of the entire U.S. economy, but despite that lavish spending, our health outcomes are not the best on the world. Now, as hospital administrators consider the future, they should prioritize two things — cutting administrative spending, and consolidating locations where specialist services are offered to patients.
When it comes to cutting costs, hospitals should categorize spending into two classifications – those that differentiate their services and those that don’t. What distinguishes how services are delivered are the quality of physicians, nurses, clinicians and clinical protocols. Great doctors and innovative ways of giving patients better care and improved outcomes are worth investment. Everything else is administrative spending, an area that is often so bloated that it can crowd out spending on what really matters.
In the United States, physicians account for less than 9 percent of total healthcare costs, a level that’s lower than most other wealthy economies. By contrast, administrative expenses in the United States were the highest among eight countries in a study published in Health Affairs. Administrative costs were on average 25.3 percent of total hospital spending and were on an upward trajectory, more than in Canada, England, Scotland, Wales, France, Germany and the Netherlands.
Hospitals should trim those administrative costs, using a combination of job cuts, contracting third-party vendors for back-office functions, outsourcing jobs and services, and finding ways to share duplicative costs with other hospitals and health systems.
Hospital administrators can take a leaf from the playbook of private equity investors. These investors typically buy assets and, over a period of 3-5 years, work to squeeze out all operational inefficiencies with a goal of selling the assets for at least twice their investment. A role model for hospital administrators is the airlines business, which has outsourced all manner of functions, from reservations systems, cargo and baggage handling, as well as check-in and aircraft preparation services.
Hospitals and regional health systems should outsource everything that isn’t core to what they do. Of course, that cost-cutting must be done carefully, seeking detailed requests for proposals to ensure that contract vendors help the company and don’t hurt the firm’s brand. For example, medical debt collector Accretive Health was sued in 2011 for being too aggressive in collecting payments by doing such things as demanding payments from patients in the emergency room, creating a public relations nightmare for hospitals using its services.
Hospitals can find ample room to cut administrative costs of such back-office functions as negotiating with insurers, billing patients, reducing facilities costs by making better use of real estate, and outsourcing services like catering, security and information technology services.
Having captured those cost savings, administrators should focus on improving their core services by housing specialist services in centralized locations. Systems can capture significant savings by setting up specialized centers of excellence for tertiary and quaternary services — specialized, advanced diagnosis, treatment and surgical facilities for everything from heart surgery to renal care. Demand for these highly profitable services remains exceptionally high and housing them in centers of excellence helps set regional health systems apart from the competition.
Primary physician services should continue to be located locally and systems should also use telemedicine services to facilitate clinicians serving more patients across a greater geographic area at a lower cost. Patients, especially younger patients such as Millennials, are increasingly comfortable with travelling as much as 20 miles to receive specialized services so long as their primary needs are met locally.
In the end, some healthcare systems may find that the best way to gain greater efficiency is by merging with a health insurer — the Kaiser Permanente model — or forming their own insurance companies to become the health manager for patients within a specific community. In the meantime, as Washington tinkers with healthcare reimbursement, regional healthcare providers should prioritize cutting administrative costs and centralizing specialized clinical care.
(Tony Colarossi leads Plante Moran’s acute healthcare consulting services.)
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