Execs Grapple with Healthcare Cost Problem

The HealthLeaders Media model is to combine research and conversations with healthcare leaders on the issues they face today. One of their biggest concerns is costs—how to get a handle on them, how to cut costs, and how to keep them down permanently.

In our newly released Industry Survey, available for free download on our website, healthcare executives tell us that cost reduction and process improvement is their number-three concern (ticked by 45% of the 823 qualified respondents), not far behind patient experience and satisfaction (54%) and clinical quality (48%).

So how much cost reduction are we talking about? Many healthcare organizations have a long way to go, according to the October 2012 HealthLeaders Media Intelligence Report on cost containment.

While 20% of healthcare leaders responding to the survey said their organizations needed to reduce operating costs by only 1%-3% beyond previous reduction efforts, 29% said that 4%-5% more costs had to come out, 26% said 6%-10%, 14% said 11%-20%, and 9% said they needed to cut more than 20% of operating costs!

That's a tall order, and the coming changes in healthcare won't make it easy. One of our Industry Survey advisors, Dennis Vonderfecht, president and CEO of Mountain States Health Alliance, a 13-hospital system based in Johnson City, TN, told us, "Our concern is, can we reduce our costs fast enough, as fast as reimbursements are coming down and as fast as volumes are coming down, and still have a positive bottom line."

Last fall, HealthLeaders gathered 30 hospital and health system finance leaders for our second-annual CFO Exchange, held at Kiawah Island, SC. In one of the breakout sessions, these CFOs shared their approaches for "Leading from Your True Costs, and Driving Them Out." You can read an edited transcript and view video clips of the comments of nine CFOs in our latest Impact Analysis report available as a free download.

The entire conversation is insightful and honest. I want to highlight a couple of the points that the assembled finance leaders discussed. The first is how they plan to pull out the necessary costs. There is no single answer, since different health systems face differing situations, but to begin with, many CFOs feel the need to get a better handle on income and spending. For this, they will need better IT systems—a significant expense in itself.

CFOs are poring through their expense sheets and looking for ways to reduce high-cost line items, such as lab services and patient sitter utilization. They examine labor costs—i.e., nurses—which are typically the number-one operating expense. Efficiency is the watchword.

It's for this reason that programs such as Lean, Six Sigma, and continuous improvement continue to find fertile ground in healthcare. Lean production methods and related concepts such as Kaizen became popular in American manufacturing two decades ago after Toyota Motor showed the way.

Six Sigma spread from Motorola in the 1980s. These efficiency methods have become standard in manufacturing and other sectors, but many healthcare organizations are still coming to understand the possibilities.

But will efficiency alone be enough? Or will another manufacturing trend—reengineering, that bugbear of the 1990s—be the next phase in healthcare? As one CFO Exchange member, Rick Hinds, executive vice president and CFO for UC Health in Cincinnati, noted, "We continue to squeeze everything we can out of today's cost structure, but then we've got to really step back and redesign the way we deliver healthcare to take out large amounts of costs."

I predict that costs will continue to be a leading priority, a main topic of conversation, and a serious headache for healthcare finance leaders for many years to come.