Three Ways to Thrive Under a Leaner Reimbursement Environment

I've been hearing that the current rate of inflation for healthcare costs is unsustainable for about as long as I've been covering the industry—about 10 years.

I'm sure those of you who have been around longer than that have heard the same refrain for three and four times that long. In fact, it's been said so much, and yet, we continue to spend more and more of our gross domestic product on healthcare each year, far outpacing the inflation rate. It's kind of gotten like the boy who cried "wolf." No one pays attention anymore because it hasn't happened yet.

So what's different this time? Well, many hospital C-suite executives are starting to believe, and their actions say much more than any words from Washington ever could. Take Frank Perez, for example. He's CEO of Kettering Health Network in Dayton, Ohio. Perez and his team have been experimenting with ways to prepare for lower reimbursements for years.

Kettering was one of the baseline hospitals in the QUEST: High Performing Hospitals program that was developed out of Premier's CMS hospital quality demonstration project. Kettering's metrics measured in the top 10 of the program, which is aimed at developing the next generation of quality, safety, and cost metrics to improve healthcare nationwide. But his efforts didn't stop there.

During recent conversations with CEOs, I've learned that Perez and others are onto something in preparing for reimbursement that's nowhere near as generous as it has been in the past. Even if legislators are crying "wolf" yet again, long term, we have a major problem. In light of that, it seems logical that hospitals and health systems might do well to emulate these broad strategies.

1. Cut supply chain costs
This can be elementary or extremely complex. But the bottom line is that hospitals are spending outrageous amounts of money unnecessarily because they haven't worked with their physicians to standardize supplies. For many physicians, there are good reasons for having 10 varieties of a similar implant available for their use in the OR, for example, but certainly, there are at least equally good reasons to standardize for quality's sake, if not for the volume discounts hospitals can receive. Of course, physicians have to come together as a group to decide on these standards, but it's low-hanging fruit. Further, many savings can be generated from just-in-time inventory. Other industries have made great strides in electronic tracking of inventory, but hospitals haven't always followed.

2. Employ as many physicians as you can
It's a controversial subject, but physician employment seems a road many regulators and lawmakers want hospitals to pursue. This ensures unity of mission and purpose and largely eliminates many of the perverse incentives in healthcare that lead to waste and overutilization. At least that's what the feds say, and they are controlling the purse strings. Problem is, as CEO, you can get skewered if you try to encourage this too early. Eventually, many physicians will approach the hospital about partnering because their income levels have been reduced through cuts in their ancillary revenue streams. This is your time to strike. These days, it's smart not to do any joint ventures without at least exploring the possibility of employment.

3. Make do on Medicare reimbursement rates
Like many other forward-thinking hospital and health system administrators, Perez is operating under the assumption that his hospital needs to figure out a way to make do on Medicare reimbursement levels. He's not waiting on the legislation, figuring adapting to that new world might be too late.

"We know two things. We'll have higher transparency and lower reimbursement," he says. To work diligently on cutting costs, he incentivizes his managers with an internal pay-for-performance model based on keeping Kettering's costs at or below Medicare payments, "because one day, that may be all there is."

"When we put that in six years ago, I had some unhappy executives," he says. "They thought it was draconian, that I was mean and didn't like them, but the fact is that it also applies to me, so they can't say I was doing unto others what was not done to me. Now they are thankful they have been on this journey for over five years now. We can't cost shift like we used to."

These strategies are not cure-alls. But following these examples can help ensure your hospital isn't the one that ignores the "wolf" cry when it's finally the real thing.