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Q&A: Banner CEO on 'Getting the Cost Out'

 |  By Philip Betbeze  
   December 13, 2013

In a wide-ranging interview, Banner Health president and CEO Peter Fine details the executive team's role in nearly half the $70 million in savings the organization achieved between 2012 and 2013, and lays out a prescription for success in a dynamic future for healthcare.



Peter Fine, President and CEO of Banner Health

Since he arrived at Banner Health in 2000, president and CEO Peter Fine has preached the cost-cutting and expansion gospel as payers and government have first slowly, and then quickly started to squeeze healthcare organizations for efficiencies through the blunt tool of reduced reimbursements.

That resolve was never more needed than during the financial crisis, when Banner, similar to other organizations across the country, experienced substantial declines in patient volume combined with reimbursement reductions amounting to hundreds of millions of dollars.

In a state where Medicaid pays only seven cents on the dollar for the cost of care, Banner had to streamline itself using tools and tactics borrowed from industrial engineering, Lean, Six Sigma, and business process reengineering. As importantly, the case had to be made that the initiative was critical to the organization's mission and culture, engaging clinical and administrative staff across the organization to collaborate in the process.

In Banner's case, the executive team played a key role in its most recent drive to bring an additional $256 million to the $5 billion (revenue) organization's bottom line by 2017. Rules of engagement were as follows:

  • Cost-cutting would be done by empowered, cross-functional teams, whose recommendations would be respected and accepted whenever possible
  • Changes that could negatively affect care delivery or patient experience would be unacceptable
  • A soft landing would be provided for any employee whose job was eliminated

With these rules in place, eight cross-functional teams—each composed of middle managers, a consultant guide, and a sponsor from the leadership team—were formed. During an intensive eight-week pilot, each team was trained. Then they analyzed the cost structure of one function and recommended cost reduction tactics.

The pilot culminated in a day-long meeting of the senior leadership in which 123 recommendations were reviewed and 116—valued at $104 million to $133 million annually or 18% to 24% of Banner's G&A expense—were approved. Among the approved recommendations were opportunities to save nearly $4 million in HR administrative costs by deploying more self-service technology supported by a shared services organization, nearly $8 million from insourcing second physician reviews of inpatient charts, and up to $3.5 million by creating an internal facility for drug compounding and packaging.

Fine's happy to boast of the results so far. In a wide-ranging interview, he details the executive team's role in nearly half the $70 million in savings the organization achieved between 2012 and 2013, and lays out a prescription for success in a dynamic future for healthcare.

HLM: Why is cost cutting so important for today's hospitals and health systems?

Fine: Clearly the pressures on reimbursement and the reduction of the use of services that are a driving force in today's environment—whether fostered by federal programs or large businesses—require us to reach a level of efficiency not only from a cost but a clinical outcome perspective at levels we have not historically performed at in this industry. I don't believe these pressures are going to change.

HLM: I think I know part of the answer, but why did you as an executive team decide to focus on general and administrative expenses first?

Fine: Because the opportunities to spread fixed overhead over a big base are undeniable. In a large system, back-office functions, if they are going to meet the needs of the direct caregiving environment, have to function at a high level for the customer base.

I define the customer base as either frontline parts of the organization who are in the direct caregiving environment or an external customer who is trying to interact with our organization for some service. We're measuring everything we can. Doing it with data offers a great opportunity to find improvement.

Most people think what they're doing must be right. If it wasn't they wouldn't be doing it. What that means is it becomes very difficult to self-analyze in looking for opportunities. We've developed a culture where that's ingrained. We see ourselves as a company that is looking to enhance reliability and reduce variability in order to produce better clinical outcomes. One of the key ways to reduce cost in any organization that is producing some product or service is if you reduce variability, you increase reliability.

HLM: What did you mean when you guaranteed a "soft landing" for any employee whose job was eliminated in this process?

Fine: One, we have good employees and we want to keep them. The question becomes if we are going to do something that gains efficiency but results in a reduction in workforce, how do we reallocate resources? We will continue to grow, so we can retrain or find new opportunities for them in Banner's sphere of influence. So it's definitely not a guarantee, but what the "soft landing" really means is identifying where they can contribute.

HLM: As you've gone through this process re-engineering journey with your employees, what is the most surprising thing you've learned?

Fine: I think there are three surprising things. One, I've learned how hard it is for people to self-analyze the work they do. Also how difficult it is to identify and apply data to establish a set of actions to be implemented and it's very difficult for people to maintain their objectivity.

Some of the changes we made in our corporate areas, we're asking people to redeploy assets related to work they've become comfortable with and used to doing. Anytime you upset the status quo when people honestly believe what they're doing is logical, it's difficult.

So how can you affect their thinking and cause them to look at things differently? We used Booz & Company as outside consultant to help with that, which is unusual for us; we try to do the work ourselves. But we'd capped out our ability to influence the change processes and needed much harder data than we were producing ourselves. Doing this is less about a magic formula and more about the data.

HLM: Were there any areas where you achieved more than you thought possible? Less?

Fine: There were some things we've talked about where we achieved at a level we didn't expect, but also some things where we went too far and had to pull back. When it came to the issue of recruiting, for example, we strained ourselves rather than enhanced. We've corrected that.

In most cases, we've been smart enough to figure out what didn't work. We've taken hundreds of millions of [dollars of] overhead out by combining back office functions. This is a highly chaotic, ambiguous, and complicated healthcare environment, which I strongly believe will lead to massive consolidation over the next five years.

Because of reduction of resources and revenue, people have no choice but to figure out ways to reduce overhead. And the fastest way to do that is through combinations in an operating company model whose stated purpose is to reduce overhead.

HLM: If you were starting this over again, what's one thing you would do differently?

Fine: In any process like this, you have to bring people along. We did a good job of prepping people on the front end, but if there's one thing we probably could have done better, I would focus on more in-depth information gathering. We did that up to a point, but I'm not sure we always thought through implementing things—the outcomes didn't necessarily match what we thought.

Maybe if we'd done a deeper cut of information we might have identified things in a more appropriate way. The problem with that is you get analysis paralysis. There is no perfect data and we had to be willing to accept some degree of non-effectiveness. Overall it was the right decision because the things that didn't work were far outweighed by the things that did.

HLM: Many of these are obviously one-time gains. You were one of the first CEOs who mentioned that you thought the bogey for cost-cutting was being able to make a margin on Medicare rates. Have you achieved that, and if not, what's standing in your way to getting there?

Fine: We can't do it universally yet, because until you find the fully insured piece of the business that will fully support Medicaid, which pays seven cents on the dollar in costs, it will be hard to operate the whole company on a Medicare reimbursement rate level.

The fully insured are still subsidizing the shortfalls of Medicare and Medicaid. The only way you can get capital and margin without better reimbursement is through reduced overhead.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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