Health systems are ramping up the urgency in their pursuit of operational enhancements and cost-cutting measures.
At the Becker's 14th Annual Meeting in April 2024, Terri Welter and Michael Biggs, both partners with ECG Management Consultants, shared a list of key operational areas that health systems should prioritize for improvement efforts.
"The options of continuously having to work on your health system are no longer options anymore," said Mr. Biggs. Here are five of the operational areas that Mr. Biggs and Ms. Welter encouraged health system leaders to prioritize in their continuous improvement efforts due to their outsized impacts and potential for immediate value creation.
1. Non-labor expenses. "We typically find, looking at non-labor, that there is 3% to 7% of trapped cost that can be taken out, in typically nine to 12 months, of an organization focusing on those efforts," said Mr. Biggs. Non-labor expenses include supplies, purchased services, pharmacy and lab expenses, and consumable expenditures.
2. Physical and capital space. Many health systems continue to overlook opportunities to optimize their space. "As much as 30% of the square footage that you have allocated for ambulatory and physician space is unutilized or underutilized," said Mr. Biggs. "So thinking about redeploying that very limited asset is a very, very easy thing to do and it also drives immediate value."
3. IT departments. Many organizations overlook the significant costs of their IT departments, often resulting in bloated expenses and inefficiencies. "A lot of trapped value is in the cost for technology departments, which has ballooned to the point where a lot of organizations don't realize how big their organization's IT costs are and whether or not they are actually still scaled properly for your current operation," said Mr. Biggs. He emphasized the importance of comparing an organization's IT spending with that of its peers, suggesting that many organizations tend to overspend in this area without evaluating whether the allocated funds are justified in relation to operational expenses.
4. Data-informed health plan negotiations. Ms. Welter noted the challenges health systems are facing during payer contract negotiations, particularly regarding margin issues that haven't kept pace with inflation costs. She said data is increasingly important in these tense contract negotiations, which often grapple with questions about value. "You have to be at the table with the data or else they're going to have that data and they're going to perhaps have to tell a story that may not be complete," Ms. Welter said.
5. The fundamentals. Ms. Welter and Mr. Biggs encourage health systems to take a pragmatic approach to operational improvements over chasing novel or silver bullet solutions. They stressed the necessity of resetting the operating baseline due to the permanent shift in operating costs and stagnant revenue growth. "It is just blocking and tackling and trying to reset your operating baseline, because the days of your operating costs three or four years ago will never return and your revenue has not caught up to your cost increase," Mr. Biggs said.