3 Insider Tips on Cutting Costs without Strangling Growth

You can't cut your way to profitability. The CEO of a 12-hospital system divulges how to achieve both growth and cost cutting. He ought to know. He's slashed $165 million in costs while investing in growth.

You're so focused on cost cutting that you might be strangling the opportunity for your organization to grow.

How do I know?

Dan Wolterman, president and CEO of Memorial Hermann Medical Center in Houston, told me so.
 
I'm working on a story about growth strategies for healthcare organizations for an upcoming issue of HealthLeaders magazine, and I had an interesting interview this week with Dan. I'm hopelessly over budget in word count as so often happens, but even though it won't fit into the magazine, some of what we talked about is too important not to share.

As I try to do with all the folks I interview, I ask them at the end to think about what we've talked about generally, and to think of advice they would give their leaders at other organizations. In this case, we were talking about the difference between cost control and growth strategies.

The challenges of surviving on less reimbursement are daunting, so it's tempting to rely on a strategy that offers near-immediate results: reduction in headcount, salary or hiring freezes, supply chain work, and administrative overhead reductions.

Some or all of these strategies may be necessary, but it's easy to get lost in them if you don't have a disciplined strategy of where to invest some of those savings on growth.

Part of that is difficult because developing strategy for growth means taking huge perceived risk while a lot of uncertainty rules the business environment. That's also known as vision and entrepreneurship, and more of it is needed in healthcare today.

Back to Wolterman. He knows of what he speaks. His 12-hospital system cut out $165 million in costs through a variety of strategies. But they didn't forget about investing in growth, and when well planned and executed, some of those strategies can achieve both growth and cost cutting.

Wolterman had three pieces of advice for those who are doing their best not only to shore up the balance sheet for today, but to ensure their organization's long-term future is bright. Here's what he said:

1. Don't be too consumed by cost cutting

"You can't cut enough costs to get yourself to profitability over the long term. You may get it for a couple years. But if you're not maintaining the revenue side, you're eventually down to core fixed costs and you can't get rid of them.

We cut out $165 million in costs about four years ago in an effort to get our cost structure down. All of that was administrative overhead and some nice, but not necessary things.

That jumped our profitability up. But if that's all we did and for the foreseeable future we let the market cut our revenues and volumes because of utilization going down, we would be in trouble. You can't just focus on one dimension of your plan."

2. Learn to cut costs by investing

"[You] fall short in not looking at other ways to cut costs. For instance, how to use evidence-based medicine to wring out costs from falls or hospital-acquired conditions. What about working on your pharmacy formularies and physician preference items that don't have good spend control?

Those can really help improve your system and can increase your margin. A lot of folks are just looking at traditional things that administrators can directly control, such as supply expense and headcount."

3. Prove your quality and outcomes; get enhanced revenues

I don't think folks are really aggressively looking at how to get after enhanced revenues in their market for the same level of volume. By that I mean a lot of stuff you read in your magazine and others is that the price we get for episodes of care is being ratcheted down by payers. Woe is us.

Well, that may be, but if you have a strong accountable care organization or clinical structure, it is possible for you to take control of that. Payers tell us they're surprised we have the highest charges in terms of what they're contracted to pay us, but they also say when they look at total cost of care data, we are lower and our quality and patient safety is better.

That's what the game is about. Another example: We earn an ACO agreement with Aetna and when they sell it I get 100% of that volume. I accept a reduced revenue per patient, but I get fourfold more volume. That's why growth is so important. With systems like ours, we have high fixed costs, and you have to cover that."