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A new Kaufman Hall report sheds new light on competitive pressures and key transformative cost areas.
Hospitals need to take bigger strides and tackle more cost transformation initiatives, according to a new report
The report from Kaufman Hall found that most of the cost transformation so far has been in traditional cost reduction areas, such as supply chain, and other non-labor costs, where 64% of executives reported a reduction of 3% or more since 2017. Little progress has been made, however, in areas with the greatest potential for transforming cost structure, such as service rationalization, where 61% reported no progress in the past year, or reduction of inappropriate clinical variation (46%).
“The findings show that executives can never take their eyes off of cost transformation,” says Lance Robinson, managing director and head of the performance improvement practice at Kaufman Hall. “Competition and the need to generate capital to fund an increasing numbers of strategic growth initiatives are driving the cost-transformation imperative in more organizations.”
Healthcare executives need to ensure all top disruptive forces-including Amazon, CVS, providers contracting direct with employers, mergers in the market, other non-traditional investors such as private equity firms-are on leaders’ radar screens and driving cost transformation. Executives should be transparent about the need to reduce costs with all key stakeholders, including physicians, staff, and the community at large, according to Robinson “Transparency of processes, responsibilities, and targets helps ensure communication and dissemination of relevant cost-reduction information,” he says.
Executives need strong reliable data supported by analytics to transform data into actionable information, according to Robinson.
“Physicians are data scientists at heart,” he says. “It’s part of their training. In order to get doctors on board with cost transformation efforts, executives need sound data to engage with physicians and demonstrate where variation exists, relative to other doctors in the health system and against benchmarks. They also need a physician champion in place, someone like the CMO, for example, who is highly respected and trusted to help drive change.”
Key transformative areas
The areas that can take cost transformation to the next level in an organization include:
“Executives need to strongly consider which services they should provide at which facilities,” Robinson says. “They should consider creating centers of excellence in obstetrics, orthopedics, and other specialties, thereby reducing overhead and fixed costs. Next, they need to look at the physician enterprise piece. Hospitals and health systems have acquired medical practices over the last few years in a defensive move, but they now need to be strategic and integrate these practices into their systems to reduce overall leakage. Health systems need to integrate them and operationalize them. Furthermore, they should look at what clinical variation costs annually. That’s the next wave of savings. They need to share actionable data with doctors and create alignment.”
Based on the report, Robinson offers five things that healthcare executives should know: