How to find $25 million in 10 days

The strategy is one of many that health systems are using to offset the widening gap between the cost of care and Medicare reimbursement; the costs of new payment models that reward more efficient and coordinated care; the expense of new technology, compliance and labor costs, and mounting patient bad debt as patients shoulder more of their increasingly pricey bills.

Typically, providers initially look to job cuts and labor-related savings to make up budget shortfalls. But once the low-hanging fruit has been picked, health systems have reshuffled management structures, outsourced certain processes through new partnerships, leveraged new technology to lower utilization and maximize revenue, and boosted clinical engagement in an effort to reduce unnecessary procedures and limit care variation.

Hospitals and health systems are at a crossroads, said Paul Keckley, a consultant and managing editor of the Keckley Report.

Executives expect that demands for greater price transparency, deeper discounts from insurers as well as falling government reimbursement levels will exert additional pressure on their cost structures.

Paths to a second round of cost-cutting include centralizing clinical programs, eliminating peripheral service lines and moving more care to outpatient facilities as well as finding cheaper ways to access capital, he said.

"Capital components are key," Keckley said. "Systems seem to be finding their optimal return on capital by deploying services where they get the most bang for their buck and getting others to do the rest." They have to look at cutting duplicative services or doctors ceding some control, which is "adding gray hair to the CEO's head," he added.

Sioux Falls, S.D.-based integrated health system Sanford Health restructured its management team in 2014 to reduce bureaucratic layers, positioning corporate leaders in each market to streamline decisionmaking, integrate the company more closely with its health plan and better align it to value-based payment models. The elimination of 66 positions coupled with other strategies has helped Sanford save about $26 million this year, said Nate White, chief operating officer and executive vice president of Sanford Medical Center Fargo (N.D.).

To further drill down on costs, Sanford worked closely with physicians, nurses and transporters to reduce average length of stay by about 3% over the past two years, he said. The organization commissioned workflow studies on how patients move through its system and how to work around the barriers that may unnecessarily lengthen a patient's stay.

Sanford also expanded its community dental clinic, partnered with homeless shelters to deliver respite care and provided an on-site medical professional at the city's detox facility—all of which lowered emergency department admissions, White said. "Having the right structure in place pays dividends," he said.

Albuquerque-based integrated system Presbyterian Healthcare Services also targeted hospital admissions with a home-care program for seniors where physicians and medical practitioners come to patients' homes for care and keep tabs on treatment adherence, which has helped cut ED and hospital admissions in half, said Dr. Jason Mitchell, Presbyterian's chief medical and transformation officer.

"It has dramatically bent the cost curve and they live longer and healthier," Mitchell said, adding that Presbyterian wouldn't be able to implement the program if it weren't an integrated system.

Many integrated systems like Sanford and Presbyterian have targeted more aggressive cost-cutting strategies. But they can be a much taller task for hospitals and health systems that do not manage all parts of the care continuum and don't have the capital to invest in mergers and acquisitions or new technology.

Once providers have implemented surface-level cost reductions, a lack of trustworthy data and other issues can slow further progress. A recent study from consulting firm Kaufman Hall & Associates found that a quarter of hospital and health system executives surveyed had no cost-reduction goals for the next five years. Twenty-six percent have a goal to reduce costs by 1% to 5%—a range that won't make a dent in transforming cost structures and makes it unlikely even to keep pace with inflation, researchers said.

If they are cutting costs, around two-thirds of the respondents said they are focusing on conventional priorities like labor and supply chain. As expenses start to overtake revenue gains for many not-for-profit systems, incremental cost-cutting strategies will not sustain organizations.

Hospital operating margins dropped 47.4% on average from 2015 to 2017 while increases in operating expenses outpaced net patient revenue 14.6% to 11.3%, according to an analysis of more than 2,000 hospitals by consulting firm Navigant.

"Scale is not paying off as quickly as systems hoped," said Richard Bajner Jr., the firm's managing director.

Part of the problem is that reducing clinical variation requires a lot of internal coordination and the proper incentives, said John Johnston, national partner of consulting at the Advisory Board Co. "Hospitals don't necessarily have a top-down strategy in place where they are looking at an entire organization and what priority should be placed on these initiatives," he said. "Many of the initiatives they are looking at will not get them very far."

Providers have a seemingly ever-expanding list of ideas on how to improve efficiency and outcomes, which can complicate the process of setting priorities. A recent Health Affairs study found that $586 million was spent in 2014 on 44 low-value health services in Virginia alone.

The Task Force on Low-Value Care, whose members come from across the healthcare industry, singled out five services that should not be purchased at any price—diagnostic testing and imaging for low-risk patients prior to low-risk surgery; population-based vitamin D screening; prostate-specific antigen screening in men age 75 and older; imaging for acute low back pain in the first six weeks of symptoms barring red flags; and use of more expensive branded drugs when generics with identical active ingredients are available.

Pensiamo, a supply chain venture recently formed by the UPMC health system and IBM, has worked with suppliers to decrease costs by reducing the number of on-site reps at hospitals. Instead, hospitals have trained their own staff to take on that task, which has helped providers negotiate better deals, said Greg Anderson, executive vice president of sales and marketing at Pensiamo.

"Hospitals and health systems have to create systemwide physician alignment and implement clinical governance structures that empower physicians to lead the change," he said. "When physicians understand costs and have the data, they make better decisions by working in concert with supply chain folks to arrive at the best standard path of care."

Many providers are also slowly wading into risk-based contracting, which has also held them back. They need to share data with payers and other entities and invest in technology that will establish an analytical foundation to venture into downside risk, said Karla Anderson, a principal at the consulting firm PricewaterhouseCoopers.

Policy reforms that encourage participants to take on downside risk such as the Medicare Shared Savings Program accountable care organizations, which use a variety of team members to coordinate patients' medical care, could lead to greater savings, according to a recent study published in Health Affairs. In 2016, participants generated approximately $33 million in net savings to the CMS out of $4.7 billion of expected expenditures.

"Tech system integration is fundamental to have visibility and transparency into data," particularly as systems continue to consolidate, PwC's Anderson said. "When technology is integrated and there is a standardized set of care pathways, you can track adherence to treatment, bring in assisted living and long-term care and an array of different services. Then you can maintain an incentive system to reward providers for (delivering care) in the right place at the right time."