Despite the recent election and campaign promises to repeal and replace, there is one area of health reform that is not up for debate: payments to providers will be dramatically reduced.
Over the next 10 years, providers are facing up to $200 billion in reimbursement cuts, penalties for failing to demonstrate "meaningful use" of health information technology and continued coding adjustments (known as the "behavioral offset") that will claw back payments made during the transition to the MS-DRG system. Taken together, analysis indicates that hospitals will need to cut expenses, conservatively, by 10% just to preserve today's already slim margins.
Providers that survive and thrive in this challenging environment will be those that address payment cuts and change their operating models by implementing sustainable, systematic transformation to bend the healthcare cost curve, not by implementing short-term incremental change. This transformation requires focus not only on eliminating expense and maximizing revenue but also on quality improvements that avoid payment penalties.
Following are key opportunity areas that will help providers to better "manage to Medicare" and achieve the cost savings and revenue enhancements to offset reimbursement cuts:
Under health reform, up to 8% of total payments made to hospitals will be tied to quality improvements based on a provider's ability to adhere to evidence-based care measures under value-based purchasing, reduce readmission rates and prevent hospital acquired conditions. To prevent losing billions in payment, providers must focus on clinical practice in order to reduce variability, improve quality and enhance the care model. Since penalties will be assessed based on hospital performance relative to others, providers should strive to bring mortality and HAC rates in line with top performing hospital benchmarks, and consider the implementation of clinical education processes with nursing and physician staff focused on quality improvement.
According to a PriceWaterhouse Coopers report, the U.S. health system wastes $1.2 trillion annually, half of the $2.2 trillion it spends each year. To reduce waste and lower the cost of care, providers should focus on the core activities that comprise the majority of its expense base:
Workforce management, i.e. "the staff" – Compensation and benefits for labor is the most significant hospital cost, comprising about 60% of a hospital's budget, or $322 billion annually, according to the American Hospital Association. Effective labor management offers multiple opportunities to reduce bottom-line costs without sacrifices to quality – or reductions in an existing employee base. Organizations with deployed, focused resources and installed processes related to labor management--in addition to the right measurement tools--sustain substantial savings over time. For instance, 150 hospitals and healthcare systems saved more than $120 million in labor and supply costs in one year as participants in a labor management program from the Premier healthcare alliance. These savings can be applied to other strategic priorities within the organization, such as improving patient outcomes.
· Sourcing to specification – Accounting for about 25% of a hospital's expense, the supply chain presents a vital opportunity to help offset reimbursement cuts. Sourcing to specification is a key strategy to reduce costs. Healthcare is the only industry where consumers (i.e., hospitals) do not determine the specifications of products. As providers using products, hospitals should get what they want and what they think is of the highest quality. Providers need to get away from the model of buying whatever is in the marketplace. This means not ordering or paying for features that aren't wanted or needed. And it also means having access to products from diverse geographies to ensure continuity of supply, as well as better forecasting around the use of and need for products. One Midwest provider was able to save more than $100,000 on exam gloves contracts by taking this approach.
· Resource optimization – The approach to supply chain improvement needs to extend well beyond price points; it should identify opportunities to change practice and purchasing patterns to simultaneously improve outcomes and reduce costs. This can be achieved through optimizing resources by way of resource utilization, standardization and aggregation strategies. Providers need to integrate both supply chain and clinical improvement data to produce actionable information around quality and cost improvement opportunities.Examining supply spend data, benchmarking departmental supply use and scrutinizing patient level resource use by physician are key strategies.
3. Revenue enhancement:
Given reform's adverse impact on revenues, special attention must be placed on having the organizational processes and systems in place to capture revenue. This means revenue cycle process improvements for pre-registration, registration, financial counseling, medical records and accounts receivable departments. Also, enhancements in reimbursement such as Medicare and Medicaid cost reporting, managed care contracting and coding will need extra focus.
4. Physician alignment:
Strategically, each of these areas are impossible to address without physician alignment. Many doctors feel squeezed by today's payment system, which features the pressure to see more patients and the burden presented by administrative requirements. Utilizing numerous available tools, hospitals must align physician's incentives in order to find and sustain cost savings and improve quality. Employment is only one of those tools. Others include co-management of service lines, clinically integrated physician-hospital organizations, and hospital affiliated physician groups. Because of the shifting reimbursement mechanisms, accountability for the quality and cost of patient care will widen. Successful hospitals will find ways to engage physicians in recognition of the impact of quality not only on safety and cost, but on reimbursement as well. Taken to its extreme, hospitals will have to share responsibility for designing, governing and managing health systems.
5. Collaboration:
As the old adage suggests, there is strength in numbers. As providers realize many problems are universal even though change is local, the popularity of peer-to-peer quality and cost improvement collaborative projects is increasing. The sharing of evidence-based best practices in this setting has been proven to yield positive patient outcomes and, in many cases, associated cost reductions.
6. Technology: To successfully address each of these components, there must be a mechanism in place to capture and monitor baseline and ongoing performance. QUEST participants cite three attributes that help them drive collaborative performance improvement and achieve results beyond what was possible to achieve alone.
These keys to success depend on the development of a common infrastructure—much of which can be supported by technology.
- A standardized set of common, well-defined metrics by which all participants agree to be objectively measured
- A set of clearly defined, stable targets that provide the ability to compare progress relative to peers
- The ability to share information and best practice across a collaborative
Wes Champion is senior vice president of Consulting Solutions for the Premier healthcare alliance. He may be reached at Wes_Champion@PremierInc.com.