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How Hospitals Can Shape Sustainable Cost Control

Karen Minich-Pourshadi, for HealthLeaders Media, 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.

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