Skip to main content

How Hospitals Can Shape Sustainable Cost Control

 |  By kminich-pourshadi@healthleadersmedia.com  
   June 13, 2012

This article appears in the June 2012 issue of HealthLeaders magazine.

It is among a healthcare leader's greatest challenges: how to make truly sustainable, long-term cost reductions instead of annual, tactical cuts. The frustration to move from the immediate and into the long-term cost-reduction phase is perhaps best summed up by these comments from a physician organization CFO who participated in the November 2011 HealthLeaders Intelligence Report Cost Containment: Overcoming Challenges: "We can't get beyond the idea stage. We run around like Chicken Little—the sky is falling—we must reduce costs now. Then, we get absorbed into the next crisis and forget all about cost reduction. We need to appoint a leader, create a plan with measureable goals, get buy-in, implement, and then monitor and reassess. We're just too busy some days to reduce costs."

The need to control costs is vital to the long-term success of organizations in an era of healthcare reform. In fact, in the same Intelligence Report, 55% of leaders said that even with annual costs savings from initiatives over the past three years, they need to pull an additional 4%–10% out of their operating budgets, and 23% said they need to pull an additional 11% or more. To achieve this magnitude of savings—and maintain it—requires organizations to shed reactive, tactical approaches in favor of deliberate, well-planned approaches. Several healthcare systems have achieved financial and clinical rewards through different approaches—using a value management methodology, sharing costs with partners, redesigning inpatient care, and leaning on Lean process techniques.


Putting value back into value management
Beaumont Health System is a three-hospital regional healthcare system in southeast Michigan. With 1,726 licensed beds and 3,700 physicians, BHS had 2011 net revenue of $2.1 billion. It has a diverse payer mix and a sizable geographic area to cover, yet the system cut average patient care costs by 11% over four years from 2007 to 2010, according to Hospital Compare data.

"[We're] focusing on why patients seek care and the way practices give care as the right way to move the business," says Gene Michalski, president and CEO for Beaumont Health System.

Focusing on the patient pathway is an idea that led the organization to pursue a diverse set of care outlets. Beaumont also operates a network of medical centers, family and internal medicine practices, nursing centers, home care services, and a hospice. It is a clinical partner of the Oakland University William Beaumont School of Medicine and the Beaumont Research Institute, plus the organization has an affiliation with Premier Health Care Management, a Broomfield, Mich.–based provider of geriatric and long-term care services.

But having access to so many inpatient and outpatient avenues, Michalski says, didn't mean that care was more accessible or less costly. The journey to make these changes began with Lean and Six Sigma process efficiency initiatives. The organization conducted thousands of kaizens, or rapid improvement events, over the past few years to find ways to boost efficiency. And while the efforts bore some financial fruits, simply practicing Lean techniques isn't enough for long-term, sustainable cost reductions, Michalski says.

"My philosophy is you can't focus on cost all alone. It's about value management as a strategy. We have to find better ways to deliver quality, safety, and service at a much lower cost," says Michalski.

He defines value management as high-quality care at low cost, with value meaning providing the highest documented and demonstrated quality, through the best patient experience, resulting in the best clinical outcomes at reasonable cost. He says value management is process-of-care management. It's not project management, and it includes value-stream mapping that looks at expediting care and eliminating wasted steps in the process to enhance value.

"We've had a long history of pruning the tree, but about every three years or so cost creep occurs, so getting perpetual cost-saving involved pruning the tree frequently. For us that [pruning process] evolved into share-of-saving and value management," he explains.

In 2007 Beaumont conducted a remapping exercise for patient experience, with an eye on efficiency. For instance, project teams looked at the Beaumont Breast Care Center from the patient's perspective. The team learned that a patient may come in three to four times over several weeks or months based on a single mammogram test. The old process entailed a patient coming in for a routine mammogram, then going home without results. Then the patient would be called back in for a separate ultrasound visit if there was a question regarding the results. After that test, the patient would go home and wait for those results. If there were questions on that test, the patient would be asked back for a third visit for a biopsy, and again go home and wait for results.

The number of steps in the cycle and the time used for caregivers and patients was unnecessary, says Michalski. The process was revamped so the patient waits and gets the mammogram results during the first visit and proceeds as needed for other care that same day. "We eliminated the wasted time waiting for the patient and the clinicians. We can provide faster service and better quality, and that drives out cost and waste," he says. In this instance, Michalski says, patient satisfaction scores were already very high, averaging 4.8 out of 5.0, prior to the steps taken to expedite the breast care program. Though they changed the process for patients, these high scores were maintained.

"For patients receiving expedited care, the team was able to produce an 18% reduction in screening to diagnostic mammogram cycle time and a 40% reduction in duration from diagnostic mammogram to biopsy. In addition, we were able to expand capacity and capture additional volume in the form of downstream business related to additional imaging biopsies, surgeries, and oncology referrals," Michalski says.

Beaumont used this patient-focused process improvement approach on numerous departments, including heart and vascular, orthopedics, women and children, neurosciences, and digestive diseases. Smoothing out these processes to eliminate unnecessary steps was only the first phase, however; Beaumont wanted to make sure the changes stuck, which requires accountability, Michalski says.

Teams targeting individual areas report data to an enterprisewide data management tool that uses dashboards for easy tracking by the executive team. The dashboards show comparative quality metrics offered by the Centers for Medicare & Medicaid Services, the Agency for Healthcare Research and Quality, and when applicable, by commercial payer. It tracks cost and provides benchmark data to compare that information. Also, so everyone rows in the same direction, the top leadership team's incentive is tied directly to the key performance measures. Michalski explains that while the management incentive plan is developed around team goals (quality, safety, service, financial success, growth), incentives are individually based. Unfortunately, he notes, the incentives have not been paid on this plan in the past several years while the organization recovers financially from the 2008 economic downturn.

"We have team metrics, too, so we rise and fall as a team. And as the organization does well in three or four key measures, those are the ones we use across the health system and at each individual hospital," Michalski explains.

The organization is also using data and comparative benchmarks to analyze its clinical resource management in an effort to spot practice patterns for successful disease management. "We are looking for overuse or misuse of imaging and how it affects the patient's length of stay. For instance, did the patient get an MRI on the last day in the hospital prior to discharge, when they could've gotten it as an outpatient?" explains Michalski.

Beaumont also uses the clinical data to show physicians their individual cost per case based on disease state and by resources. Michalski says the metrics are tracked quarterly including cases, average charges, average net revenue, average direct cost, average total cost, and average net income; data is sorted by physician, by department, and by specialty or subspecialty. 

It's the combination of all of these efforts, Michalski says, that led to a 9.4% decrease in the organization's inpatient patient care costs from 2009 to 2011, and the numbers continue to decline; average total inpatient cost is now $9,415, and inpatient length of stay has gone from a high of 5.03 days in 2008 to 4.81 in December 2011. Additionally, the overall direct patient care costs also declined on a case mix–adjusted admissions basis (which factors in both inpatient and outpatient activity and patient acuity).


Targeting the top
Neighboring St. John Hospital and Medical Center in Detroit also has been making strides in cutting its average patient care expense—reducing it by 8.6% from 2007 to 2009, according to CMS Hospital Compare data. The 772-licensed-bed teaching hospital is a member of St. John Providence Health System, one of the largest providers of inpatient care in southeast Michigan with more than 125 medical centers and five hospitals spanning five counties. St. John Providence Health System is also part of Ascension Health.

To bring patient care costs down through sustainable change, the system took a Lean process improvement approach, and it started at the top. St. John Providence's journey began by taking the scissors to nonclinical corporate and administrative expenses. Patricia Maryland, DrPH, president and CEO of St. John Providence Health System and the Michigan ministry market leader for Ascension Health, says doing so was a test to demonstrate how the organization could be more efficient from the top down.

To reduce the financial burden the hospitals faced from escalating costs, St. John Providence began using best practice benchmarks at the corporate level. The organization created 20 transformation teams to identify opportunities to take nonclinical costs out of the system with minimal impact on patient care. More than an effort to find low-hanging fruit, Maryland says they analyzed data and consolidated facilities.

Savings came through workforce reduction (primarily in nonpatient care areas), management restructuring and flattening, benefit changes, and an examination of operations and the way work was being done. Every aspect of support services was analyzed, including opportunities to consolidate service contracts, consolidate programs, streamline vendor relationships, improve supply chain, and cut waste.

The teams set a goal of permanently reducing costs by $85 million in one year, and while it didn't hit that target due to capital requirements necessary for implementation, it did net $67 million in sustainable cost reductions out of a $2 billion operating budget.

"Plus we earned the admiration of our medical staff by starting this initiative with corporate," says Maryland. Once the initial corporate-level reductions were made, however, the organization did turn its attention to the clinical areas with a goal of implementing a new approach to patient care.

"When you create a new model of care in a system of hospitals, you have to first believe that the way care is delivered today isn't the most efficient way. And that's where the hard work around utilization comes in. It's more than length of stay; it's about resource consumption and upsetting pathways and protocols that aren't evidence-based," Maryland says.

To break patterns of utilization and reduce patient care costs, St. John Providence created new comanagement agreements with physicians in three service lines (SJPHS East Region Cardiovascular LLC, SJPHS West Region Surgery LLC, and SJPHS Medical Neurology LLC) and hospital management agreements with other physician partners. 

"We agree to what we're going to monitor and target and then partner together to manage the patient base. Essentially the physician takes the lead with their peers. The most important part is the data and education; the provider directs utilization and resource consumption," explains Maryland. 

St. John Providence's comanagement agreement model created a joint venture management services company, formed as an LLC with the physicians; 50% physician owned, 50% hospital or health system owned. The management company's sole asset is a management contract for a given service line with the hospital or health system. The goal of the management company in managing the service line is to improve quality of services and outcomes, improve operational efficiency, and develop new clinical programs.

Physicians are compensated for their direct participation on the board and committees, as medical directors, and for projects. If performance incentives are achieved on quality, operational efficiency, and program development, the management company will earn a bonus from the hospital. All investors (both physician and hospital) will receive an equal share of the bonus.

For example, in May 2011 the existing performance for first-case on-time starts was performing a combined rate of 40% for Providence Hospital surgical locations. When measured in April 2012, performance stood at a combined rate of 82%. This improvement, Maryland says, can be attributed at least in part to 43 surgeons from 10 areas of surgical specialties working together with the hospital leadership team to develop new criteria and co-implement new expectations that promote increased awareness and accountability.

Although CMS' Medicare Shared Savings Program put a spotlight on this concept, the idea of shared savings between the hospital and physicians is a concept that's been slow to take flight. In the Cost Containment: Overcoming Challenges report, only 10% of respondents said their organization had implemented a bonus structure to share cost-containment savings among stakeholders, while 48% of healthcare leaders said savings were not shared.

"Changing behavior has got to be done peer-to-peer, with reports providing the information on a frequent basis so improvements can be made, can be tracked, and the physicians can hold each other accountable," Maryland says.

Since it began reworking comanagement partnerships in 2007, the success St. John Providence has had getting physicians aligned with the organization's goals has given birth to something larger. In October 2011, Partners in Care was formed to help manage the ongoing care of over one million patients in Wayne, Macomb, Oakland, Livingston, and St. Clair counties. The 50-50 partnership between St. John Providence Health System and the Physician Alliance, a 2,200-physician network in southeast Michigan, is the next step toward larger, sustainable cost reductions, Maryland says.

"We are moving toward population health management to get at overall cost; we have to track and manage the patient base," Maryland says. "It will be critical to have this alignment if we are to get control over the cost of care."

She says the organization expects to start reaping the benefit of population health as early as 2013.

Blue Cross Blue Shield of Michigan is providing a significant contribution to building the infrastructure for population health management for all of St. John Providence patients. Under the agreement, BCBSM will support the funding of infrastructure improvements necessary to better integrate care services between the Physician Alliance and the five hospitals under Partners in Care. Milestones have been established jointly between St. John Providence and BCBSM to ensure infrastructure work continues along with funding until 2013, when St. John Providence will include a performance-based reimbursement model into its next contract with BCBSM, explains Maryland.

In addition to changing its provider agreements, St. John Providence also examined how the community was using and benefiting from its assets—and how those assets supported the larger vision of the future. Michigan has excess capacity issues, Maryland says, so the organization needed to assess how many inpatient beds the community actually needed. The analysis of hospital use data led to the closing of one hospital—St. John North Shores Hospital, which was replaced with a new outpatient facility.

"The data trend demonstrated that the facility was dying on the vine and the alternative choice of an outpatient facility was better. At St. John North Shores, the only thing surviving was physical therapy and rehab; the medical and surgical beds weren't being used. It didn't make sense to continue on. But it was having the courage to say that this facility no longer meets the needs of this community," she says.

The system used a discernment process that included input from the legislators, physicians, administrators, and the community, along with occupancy statistics, to arrive at the decision to close the nearly 100-year-old facility. Inpatient service moved to another hospital and the replacement of the inpatient facility with an outpatient one caused a drop in cost for the system.

Maryland notes the most significant benefit of reconfiguring St. John North Shores came from relocating the inpatient rehabilitation unit to St. John Hospital and Medical Center, which allowed St. John Providence to open the new, state-of-the-art Cracchiolo Inpatient Physical Rehabilitation Center. A new outpatient facility in Harrison Township (the community that housed St. John North Shores Hospital) opened shortly after, which includes the outpatient physical rehabilitation services program relocated from North Shores, plus lab services, physician offices, and urgent care services.

"Asset reconfiguration is so important for sustainable cost reduction. Part of our transformational journey is a shift from inpatient care to population health management and to reduce the need for hospital beds except where appropriate," she says. That goal also led the organization to sell two nursing care facilities and then partner with those same facilities now under new ownership.

Maryland explains that while the nursing homes were not losing significant amounts from operations, they were capital intensive and the system felt the capital could be better deployed elsewhere within the system.

"The work is never done; transformation is ongoing and continuous. I think organizations that get stuck and never want to move forward and evolve are the ones that will face many challenges going forward," says Maryland.

Creating collaborative care teams
While St. John Providence was able to reduce patient care costs through comanagement agreements and asset reconfiguration, Dean Gruner, MD, president and CEO at Wisconsin-based ThedaCare found a way to reduce total inpatient costs by 25% over three years through the redesign of inpatient care.

"When we did this work we didn't start off with the primary purpose of reducing costs. We set out to improve safety, quality, customer satisfaction, employee satisfaction, and cost," says Gruner. "So we took metrics from all five of those categories. Then we tried to balance the focus across all areas, because if we just look at financial improvements, we have unanticipated consequences in other areas."

The five-hospital system spans nine rural counties serving about 250,000 patients and has more than 6,200 employees. Considered to be a leader in the application of Lean management in healthcare, ThedaCare adopted the methodology in 2003, but it wasn't until 2006 that the organization began value-mapping inpatient care.

Part of the reason ThedaCare opted to change its patient care approach was the decision to participate in the Institute for Healthcare Improvement's Transforming Care at the Bedside initiative. ThedaCare teams looked at value streams of patient care and discussed the attributes that an ideal hospital room and patient care model would contain. The discussion resulted in what the organization calls collaborative care, or a customer-driven, interdisciplinary collaborative care model.

The ThedaCare approach consists of three caregivers—a physician, a registered nurse, and a pharmacist, all of whom meet with each patient within 90 minutes of admission. Then the trio develops a care plan that's shared with the patient. Gruner explains that bringing together the three providers creates a more balanced care plan and ensures that all staff members know and understand that plan.

"We found that many of our admitted patients were on multiple medications and … a number of medication errors could be made within the first 24 hours, such as wrong dose or frequency or not adjusting for current weight or kidney or liver function. By adding the pharmacist to the team and using collaborative care we have now gone over four years without a single medication error," says Gruner.

Creating this type of care team brought about the need to reconfigure the patient rooms, too. There are computers at the bedside for immediate access to patient medical records and tests, and all patient medications are kept locked and in the patient's room for ready access. In addition to reducing medication errors,  the approach allows nurses to spend more time with the patients and reduces the amount of time they spend searching for supplies by 30%. In total, ThedaCare says the process has resulted in an approximately 25% reduction in the average length of stay, zero medication reconciliation errors for four years in a row, a $1,200-per-case cost reduction for inpatient care, and readmission rate reductions to less than 9%.

"By doing this we eliminated a lot of complications for the patient and prevented them from having to stay longer because we did the job right the first time," Gruner notes. "This process has reduced the length of stay, reduced our costs, and improved the satisfaction of our patients and our nurses," he says.

Although ThedaCare found a way to make a strategic cut to its bottom-line costs, the organization continues to look for more ways to improve patient care without increasing cost. "This is a marathon not a wind-sprint, and there's still more work to do."

Leaning on Lean
Though many in healthcare use Lean initiatives as a mechanism for uncovering waste and making swift slices to the budget, at Denver Health in Colorado, the Lean approach is the only way to operate. Patricia Gabow, MD, CEO at the 525-licensed-bed safety-net facility, says when the organization began using Lean in 2005 it set out to transform the quality of patient care and the satisfaction levels of "stressed-out, unhappy employees." Although the effort produced very little fruit in its first year, it has led to $144 million in financial benefit over the past seven years

Gabow, who has worked in healthcare for 40 years and spent the past 20 as a hospital CEO, says it was clear to her the organization "needed to step back and ask how to get this strategy right. At the end of the first year of Lean we decided there were multiple pieces of the puzzle we needed to fix if we were going to get the perfect patient experience."

One of the first areas Denver Health tackled was the supply chain, as the organization was seeing a steady increase in year-over-year cost of $1.7 million to $2.1 million. Gabow says after doing some Lean process analysis a simple fix saved millions. Everything in the engineering department supply closet was put in color-coded bins, with the things most often used placed in front for easy access; this prevented the unnecessary ordering of products already in stock—the kind of change that saved the system $3 million. However, it's that kind of sustainable change that has served Denver Health well over the years, Gabow says, considering the organization has added 35% more square feet yet maintained steady supply costs.

"So this is a simple thing that adds up to savings," she says. But, Gabow says, the organization knew there were greater savings that could come from digging more deeply into patient care. So, it turned to engineers, a consultant, and its 1,500 employees to do just that—starting with the operating room, access to care, billing, and outpatient and inpatient flow.

The organization held numerous rapid improvement events during the year, and changes from those events saved Denver Health nearly $144 million—about one-third from increased revenue, another third from cost savings, and the remainder from increased productivity, Gabow says.

The triple-digit savings came from eliminating waste through an operations restructuring to create a system of patient care joined by its information systems and processes. Patients have one ID number to use with any Denver Health provider, which gives access to all of the patient's data. The effort also standardized best practices for everything from blood anticoagulant use to rapid response.

For instance, rather than keep a 24/7 dedicated team on call for rapid response, the medical center staff generated a regular assessment schedule for nurses to monitor their patients, and criteria were written so nurses could determine whether a patient was at risk. If a nurse made that determination, then the staff had written protocols to follow for escalating up the chain of command if an attending physician was unavailable or the patient's condition failed to improve. Denver Health staff found that the number of non-ICU cardiac arrest incidents decreased with the new procedures, improved the patient's continuity of care, and lowered costs.

In total, all the changes Denver Health made to its processes allowed providers to see 30,000 more people in the community without increasing the number of staff.

"When you talk about sustainability, if you get rid of waste permanently, not only do employees like it, but you end up improving quality because wasteful processes don't improve quality," says Gabow. "We know this is sustainable [cost reductions] because the employee engagement is so high and we see results all the time, but it takes ongoing work."

And the work is continuing at Denver Health. Although Gabow is slated to retire this year, the organization has uncovered another $55 million in financial benefit in 2011 due to process improvements, a fitting departure gift for the woman who helped make Lean a way of life for the system.

Healthcare cannot cut costs at the expense of quality, and these four health systems are a testament that by using the patient as the guiding force in finding a solution, healthcare leaders can realize long-sought and enduring cost savings.

Reprint HLR0612-2


This article appears in the June 2012 issue of HealthLeaders magazine.

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
Twitter

Tagged Under:


Get the latest on healthcare leadership in your inbox.