4 Means of Sustainable Cost Reductions

There's an expression that every obstacle presents an opportunity. The leaders at Denver Health and Hospital Authority in Colorado can relate. For while Denver Health has a less-than-ideal payer mix—35% Medicaid, 28% uninsured, 10% Medicare, and 28% other—and faced rapidly increasing costs, they used these challenges as an opportunity to get creative and come up with sustainable cost-saving measures.

Denver Health is a safety-net system and the largest provider of care to uninsured and Medicaid patients in Colorado. In 2010 it averaged $374 million of billed charges from uninsured patients, or nearly a third of the system's total billed charges.

As any healthcare financial leader knows, collecting from the uninsured is a challenging task. Denver Health's collection rate on the $374 million was roughly 5 cents on the dollar, with the rest categorized as bad debt and charity care. Healthcare leaders bemoan such losses, but they can also inspire creative thinking, because if a healthcare organization isn't making money from its patients then it needs to save money elsewhere.

Denver Health CFO Peg Burnette, CPA, says that back in 2005 the organization's cost growth rate was becoming unsustainable; bad debt and charity care were draining the bottom line, while the cost per unit of service was increasing. Under the direction of CEO Patricia Gabow, MD, the organization began seeking creative ways to contain costs. Beginning with the revenue cycle, Denver Health chose the Lean Production Model as the performance improvement methodology to turn things around.

"The consequence of issues with our financial viability could've been dire. If we couldn't eliminate the waste, we might have to do across-the-board cuts," says Burnette. "Those cuts are popular at hospitals, but we'd rather do targeted cuts. And we view layoffs as a last resort, as you have to maintain staffing ratios. So we were very interested in slowing the rate of growth and cost through Lean and other initiatives."

The Lean initiative was just the start. Over the last seven years, Denver Health has moved from low-hanging fruit to the long-term sustainable cost reductions that every financial leader seeks, Burnette says. She lists four measures for sustainability:

• Continually and fully engage organizational leadership on what costs need to be cut and the role each person plays in the process.

• Review each contract for every vendor annually. "The key is to look at your contracts and ask, ‘Why is this in here? Do we need it?'" says Burnett. "Look at the financial terms of the agreement, look for potential cost savings, and renegotiate."

For example, this past month Burnette and her team extended terms with two vendors. In return, one vendor made concessions worth $420,000 over the term of the contract. The second vendor gave Denver Health equipment and supplies, which meant avoiding the cost of purchasing those items—a savings of about $2 million in equipment and $1.3 million in supplies, she says.

• Install automated programs for electronic invoices and requisitions to maximize the billing system.
• Focus on the pharmacy, especially for Medicaid managed care members. "If you're not managing it, it gets quite expensive," Burnette explains. "We've done several Lean events around this area that have resulted in the average amount paid for a prescription decreasing significantly. Whereas in March 2010, the average per prescription cost was $76, by February 2012 it had dropped to $43, with a net savings in the millions.

Seven years after embarking on the Lean transformation, the financial results are enviable. Since 2006, Denver Health has uncovered a total of $70 million in savings or increased revenue. Of that, $17 million comes from the revenue cycle alone.

Denver Health consistently has the lowest cost per adjusted discharge in the 380-hospital UHC consortium of academic medical centers, which includes Denver Health. Moreover, Denver Health has increased cash collections per 100 discharges by 44%, from $1.036 million per 100 discharges in 2005 to $1.492 million in 2010. Bear in mind that cash collections have increased even as rates from Medicaid—the hospital's largest payer—declined significantly.

In seeking cost reductions, CFOs should ask themselves a key question: Are we going around the problem and looking for short-term savings only, or have we adopted an approach that hits the cost reduction problem head-on and will continue to uncover sustainable reductions?

"Although we're a public hospital, we have to stand on our own for financial purposes, and we put that message out to our staff," says Burnette. "We want to avoid haphazard cost-cutting, as it can hurt morale and patient care. We want to save costs by eliminating waste, and that resonates with our people and our leadership."