3 Cost-Cutting Skills of Smart Hospitals

Every hospital with hopes of a future has a number they use to project the amount of cost they must squeeze out of their organizations in the next few years. The lucky few may have a number that is in single digits, but most healthcare organizations are looking at double-digit cost reduction to match shrinking reimbursement levels.

We asked the members of our HealthLeaders Media Chief Financial Officer Exchange for their organizations' estimated percentage reduction of operating costs for the next 3-5 years. The average was set at 11%. In our just-released 2013 Industry Survey: Strategic Imperatives for an Evolving Industry, cost reduction was rated as the third-highest priority by the 823 respondents, close behind patient experience and clinical quality.

What strikes me as one of the more telling responses to our survey was that while 92% rated reduced reimbursements as the top threat facing their organizations, only 4% rated reduced reimbursements as an opportunity. That paints a picture of an industry scared of a future of forced efficiency and competition on value.

Granted, no one in a regulated industry that has only the most tenuous ties to a retail economy likes looking at a future in which its income streams are chopped by a combination of market pressures and government cutbacks. Still, often the best and only time for corporations to make a significant leap in their market position is when the underlying dynamics of an industry shift. That's when there are opportunities for innovative players to make a stake. Whether it's Walmart or Target reinventing discount retail or Southwest creating a new category of airline, industries are reshaped by a disruptor that focuses on the "turn" and not the "down" in "downturn."

It takes a special vision to compete without a net in a healthcare market where service, quality, and efficiency all have to hum at the same time. I would wager that the same 4% of health systems who view reduced reimbursement as an opportunity also understand that their view of cost containment has to evolve. The axiom that you can't cut your way to growth has never been truer.

To face a future where cost is an opportunity, healthcare systems must blend three values or skills:

1. Hardwired thriftiness. In an industry where even a midsized health system can have an annual budget approaching eight figures, it's tempting to chase only items with the largest opportunities for cost savings. That leaves too much money in the margins, as it were. Curt Kretzinger, chief operating officer at St. Joseph, MO–based Heartland Health, says his health system set a goal a while back to find $10 million or more in savings annually, which means they have to look harder each year. "To get the savings, we've had to find it in multiple smaller areas," he says. "We have one team that's looking at $2 million on a redesign of a technology. So we will still probably have one or two of that size, but the vast majority is smaller savings of $100,000 here, $80,000 there, and $300,000 here. When we start adding them all up, it becomes real money. It's a lot of small efforts that become a big win for the organization."


2. Data, analysts, and accountability. If you don't have the data to understand where you are really losing money, the analytics in your IT system to poke it out, and then the analysts who can translate those opportunities into a plan for transformation, your opportunities for cost saving are invisible. Heartland Health uses what they call PASTE teams—problem, analysis, solution, transition, and evaluation—to identify ground-level opportunities for reducing waste and shaving cost. When there is a need for more resources, including Six Sigma black belts, those requests are submitted to an oversight team where initiatives are prioritized and results tracked with an organizational scorecard.


3. A line to the patient. Cutting just for the sake of cutting poses risks. But the typical healthcare encounter has so much process waste that cuts can be made that also improve the patient experience. Savings have to pass the "voice of the customer" test at Heartland Health, says Dottie Bray, process leader for performance management. For example, in a typical primary-to-specialty referral, the patient may have to be the one who actually calls to schedule the appointment. When Heartland was redesigning its scheduling portal, it created a module so representatives in any office could see and schedule appointments in others within the Heartland network. It's better for the patient, Bray says, while also cutting down on the call volume (which equals time which equals money) in both primary and specialty care.

To be fair, I'm fairly certain a broad swath of healthcare systems have the vision to understand there is opportunity in the value side of delivery. I'm just not so sure there are many like Heartland—which was a 2009 Malcolm Baldrige National Quality Award winner—which have built the hard-won capability to contain costs that will enable them to compete in a high-quality, high-value care market.

To learn more about Heartland Health's journey, download the free HealthLeaders Media Live case study. To join our three-hour HealthLeaders Media Live videocast from Heartland Health on March 19 (noon-3 p.m. ET), please go to our registration page, where you can find a full agenda and list of speakers.