Refocusing on Cost Drivers

This article appears in the December 2012 issue of HealthLeaders magazine.

In September 2012, HealthLeaders Media held its second annual CFO Exchange, bringing together 30 finance leaders from hospitals and health systems nationwide. The gathering in Kiawah Island, S.C., served as a unique opportunity for finance leaders to discuss with peers how their organizations are tackling some of the more demanding healthcare mandates in history while maintaining a grip on the purse strings.

Topping the agenda for these CFOs were discussions of how to:

• Identify and reduce true costs
• Develop strategies related to the financial shift from fee-for-service to population health
• Capture financial data and use it to impact business analytics and processes
• Optimize the revenue cycle
• Recognize and respond to the impact of accountable care organizations on clinical and business integration

In this piece, we highlight event discussions in which nine CFOs take a deeper look at how they are assigning costs and driving them out at their respective organizations. Top of mind for these leaders is where they are turning to uncover costs and what to do about reducing them, and many feel the challenges are substantial. CFOs note they are grappling with declining Medicare reimbursements, value-based purchasing penalties, and a shift in inpatient volumes, while continuing to fund huge technology initiatives and expansion through physician acquisition or employment.

Healthcare reform is influencing everything from the hospital cost accounting systems to decision support and how physicians are compensated. CFOs are mindful that while getting at their true costs may be the only path that helps uncover the deep budgetary cuts needed for their respective organizations’ long-term survival, it is a complex and elusive undertaking. 

Though consumer-directed healthcare is driving patients to become more participatory and decisive healthcare consumers, healthcare organizations are not much closer to knowing the actual cost of care. Healthcare organization boards of directors and executive leaders are now equally interested in having a more accurate picture of how much everything costs, and they’re calling on financial leaders to explain how costs are assigned for everything from pens to procedures. Our CFO panelists indicate they still haven’t mastered the nuances of this renewed pursuit of cost assignment and reduction, and they wonder how it will be influenced by bundled payments and population health.

Until these new models of care begin to bear financial fruit, many CFOs are taking a fresh look at all their expenses and adapting old approaches to reduce costs. They are looking at administrative centralization, repurposing real estate to optimize beds, growing market share through physician employment or acquisitions, developing alliances to bring about greater economies scale, physician preference and utilization, as well as all labor opportunities. Only time will tell if these efforts will drive out the 20% of costs most need in order to endure the healthcare transition from volume to value.

Robert S. Shapiro
Senior Vice President and CFO
North Shore–Long Is land Jewish Health System
Great Neck, N.Y.

"[When it comes to true cost] honestly, you can't get to any—there is no end zone. You just keep sorting the data and going through your biggest problems. And the interesting part is, as you're fixing one, there's a problem going on that you may not realize yet."

Michael Burke
Senior Vice President and Vice Dean, Corporate CFO
NYU Langone Medical Center
New York City

"Our volumes have shifted, so we're definitely looking at space costs and allocation. We're in a growth mode as we're providing more care in ambulatory settings. Previously you might have inpatient facilities running at 65% or 70% occupancy, but now we're providing more care in ambulatory facilities.  On the inpatient side, we are renovating and reconfiguring our space to provide private room–focused care as opposed to semi-private rooms."

Roland L. Thacker, MBA, FHFMA
Senior Vice President, Treasurer, and CFO
Columbus Regional Healthcare System, Inc.
Columbus, Ga. 

"The term directional is a very good term that we use that all the time to describe this [effort to get at true cost]. When we pushed our data out to our physicians about five or six years ago, we had to be very careful because they'd pick it apart and find all the errors—especially when you're driving down to the doctor-level within a service line. We are careful to say, 'This cost data is directional, and our goals here are to have incremental improvements over the current numbers.'  And we use ratios for doctors against their peers and then we say, ‘We want you to just get better.' But this doesn't mean that's the exact number they have to hit, but we want it to move in the right direction."

Benjamin R. Carter, CPA, FHFMA
Senior Vice president and Chief Financial Officer
Trinity Health
Novi, Mich.

"Costs change over time, so the cost accounting system is only good as the assumptions that go into it. Cost accounting systems have to be maintained constantly, and there is still an art to it, although some executives think these costs are absolute numbers."

Rick Hinds, CPA
Executive Vice President and CFO
UC Health
Cincinnati, Ohio

"We continue to squeeze everything you 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."

Mike O'Malley
Associate CFO
Denver Health and Hospital Authority
Denver

"We're in the middle of an extensive workforce management initiative to look at all aspects of labor costs. We brought in a consultant to help us understand more about our hours per patient day, but even further than that, just simply [whether we are] following our own internal policies in terms of PTO [paid time off], no lunch breaks, clocking in at an assigned location. If we knock those costs out, it's amazing the amount of money it translates to."

Jeffrey D. Limbocker, FHFMA, MBA
CFO
Our Lady of the Lake Hospital
Baton Rouge, La.

"I'll call it a sort of the cost of doing business in this era of healthcare right now. We just installed EPIC on the outpatient ambulatory side, and I can see it's going to take a few years, but I can see some real benefits. It may hurt some areas a bit in the meantime in terms of productivity but the benefits to the patient, the revenue cycle, and care management should drive out costs."

Aaron Coley
Vice President of Decision Support
MemorialCare Health System 
Long Beach, Calif.

"Our biggest success has been on the labor side, driving out variability and managing it daily versus biweekly or monthly. We've taken benchmark data and pushed it down [to the clinical staff] over the past three or four years, and now we're seeing some significant savings. It's tough; we have mandated nurse ratios and it limits some of the creativity."

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This article appears in the December 2012 issue of HealthLeaders magazine.