How to find $25 million in 10 days

Providers face cost-cutting crossroads

He gave them 10 days to find $25 million in cost savings.

Lindsey Bradley, former CEO of what was then Trinity Mother Frances Hospitals and Clinics in Tyler, Texas, had called a meeting in February 2015 to come up with a cost-cutting game plan. He told a group of the system's leadership that they needed to find a way to plug a giant hole that would be created when Blue Cross and Blue Shield of Texas made big changes to its PPO plans for 2016.

"He told us: 'In 10 days I need a plan of where we can find $25 million. I know you will be able to do it.' Then he walked out of the room. There was silence," remembered Todd DeRoo, associate vice president of supply chain at what is now Christus Trinity Mother Frances Health System.

The Takeaway

Hospitals and health systems are getting creative to slash expenses, offsetting the widening gap between the cost of care and Medicare reimbursement, as well as other rising costs.

Trinity Mother Frances, which was acquired by Christus Health in March 2016, learned that the Texas Blues had expanded its PPO network for employees in the Tyler market, while pulling its PPO plan from the health insurance exchanges in Texas. The change meant the system would lose its exclusivity for specialty procedures, so the loss represented a sizable hit to the organization's margin.

Virtually overnight, care shifted to other providers, DeRoo said.

Rather than hiring consultants, system executives including DeRoo and Ali Birjandi, vice president of performance improvement of Christus Northeast Texas, formed different teams spanning information technology, surgery, cardiac care, clinics, purchased services, pharmacy and laboratory services—each of which had individual financial targets. They brainstormed ideas with all levels of staff to cut costs in areas including revenue cycle, labor productivity, supply chain, length of stay and purchased services. The teams, each of which involved physicians, met regularly and were led by appointed team leaders and steering committees.

Ideas ranged from more simplistic supply chain tweaks to the complex task of reducing clinical variation. They replaced specimen bags with less expensive bags supplied by a non-medical vendor, saving tens of thousands of dollars a year.

Trinity's clinic, which included some 630 doctors, renegotiated its contract with Johnson & Johnson for its arthritis and Crohn's disease drug Remicade to net $800,000 in savings. The lab department identified expensive tests that were routinely ordered but not always necessary. They went through all the lab order templates in the electronic health record and in one instance found about 6,000 unnecessary tests as part of the order set.

Without a true partnership with the physicians, big changes are near impossible, Birjandi said. "It's not just the cost of the material but the labor costs and the quality of it," he said. "Here we are sticking patients with needles unnecessarily. It went beyond expense reduction—we reshaped service and quality."

They used a database to benchmark costs, productivity and resource utilization against comparable providers, which was particularly enlightening for the doctors, DeRoo said. The data motivated teams to reduce utilization, improve efficiency and better manage costs.

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Over a 12-month span, the system saved more than $25 million—$7 million in labor management, $6 million in non-labor control, $6 million in contract renegotiation and $6 million through shorter lengths of stay. The system produced a double-digit margin last year, which it used to reinvest in technology and four new catheterization labs. Management rewarded teams that generated the most dollar savings, the most ideas and had the greatest physician participation with team dinners and other incentives.

They have evolved from one-time projects to embedded practices. The Christus system now employs similar team-based tactics throughout its hospitals in northeast Texas as well as in the San Antonio and Santa Rosa markets.

Beyond cost savings, it has spurred a new collaborative culture that partners administrative and physician leaders in systemwide decisions, Birjandi said. "It seeps into the culture," he said. "Directors and managers are constantly looking for ideas. An entire organization is helping management reduce costs 24/7 as if it is their own business."

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Lindsey Bradley, center, faced a financial crisis when he was CEO of Trinity Mother Frances Hospitals and Clinics in 2015.

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."

Physician involvement

Montefiore Health System, an integrated provider in New York City, formed an independent provider association in 1995 that has helped the organization better manage risk-based contracts—including through the Medicare Access and CHIP Reauthorization Act and a Pioneer ACO—and ultimately deliver better care, said Vanessa Guzman, associate vice president of quality improvement at Montefiore.

Montefiore leverages technology to engage with patients after discharge, identify patients who need a preventive-care visit and monitor vital signs virtually to keep patients healthier, she said.

"Together, as an IPA and ACO, we are able to carry out some of these high-cost functions but also work closely with the technology so we don't lose touch points with patients," Guzman said. Part of that is learning from physicians what information they need to improve outcomes, she said.

"One way to get that information is to provide feedback reports to our providers and relay how they're performing in preventive care and managed care, and benchmark that and display how their peers are performing," Guzman said.

But for the majority of providers, some of the most difficult conversations regarding organizational and clinical transformation await, Keckley said.

"Fundamentally, one of the most significant challenges and maybe also one of the greatest opportunities for a lot of these systems is that they continue to acquire assets and have continual integration going on," he said. "It's almost never-ending unless they stop acquiring, but because of the opportunistic nature of the market, it's hard to do that."

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