Intelligence Report: Cost-Containment Expertise

Michael Zeis, December 18, 2013

For C.R. (Bob) Hudson, chief financial officer at Henry Mayo Newhall Memorial Hospital, a 238-staffed-bed, not-for-profit community hospital in Valencia, Calif., comanagement agreements have been pivotal in motivating the organization's physician corps. (Because of California's Corporate Practice of Medicine Act, Henry Mayo Newhall has no employed physicians.)

"We have comanagement arrangements with many physicians and surgeons that put money on the table for them if they help us significantly reduce our supply acquisition costs," he says. "The physicians get together and agree to use this one product or this one vendor. That gets our volume up. And by having the physicians in a position where they can get some skin in the game and get some rewards, we are seeing them work with us to get some real significant discounts. With bundled payments and with comanagement agreements and shared risks and rewards, we're finally in a position where we're starting to align the physicians' interest with the hospital's interest."

Assess clinical service cost, contribution

More than one-third of respondents (36%) say they are very or somewhat likely to drop clinical services in the next year to reduce costs or enhance operating margin. Both service lines and supporting clinical services such as lab and pathology services will garner additional scrutiny. Capece observes that "there are very few services that don't provide any contribution" to the organization's margin.

He notes that the healthcare industry is very fixed-cost intensive and most services help cover some portion of fixed cost. In addition, he says, "Even the least profitable services, for the most part, cover the direct cost of providing care. If you stop providing outpatient psychiatric services, for instance, how much overhead could you shed as a result of that? In most cases, it would be very little, if anything." So direct costs and variable costs stop when a service is discontinued, but most indirect costs and fixed costs continue.

Michael Zeis

Michael Zeis is a research analyst for HealthLeaders Media.

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