Cost containment is a top priority among health system executives

When Rob Lazerow, a managing director at the Advisory Board Co., recently met with the executive team of a large health system, he noticed a construction project had been downsized from the prior year.

The organization decided to replace its aging facilities with smaller structures, which would potentially allow it to fine-tune its staffing model and reduce its inventory of excess supplies.

This development reinforces findings from the Advisory Board's 2018 annual survey of healthcare CEOs, which discovered that cost control has become a top priority for 146 executives surveyed between December 2017 and March 2018.

While interest in revenue growth remains high, cost structure and management were the top concerns among health system executives, according to the survey.

Nearly two-thirds reported that preparing the organization for sustainable cost control was their top aim, followed by adopting innovative approaches to expense reduction and diversifying revenue streams. Half of those surveyed said their top goal was to boost outpatient market share and meet new consumer demands.

The survey indicates that hospital leaders don't think they can grow their way out of margin challenges, Lazerow said. There is more urgency to control costs as margin pressures intensify, he said.

"They have to combine sustainable cost control with steady revenue growth," Lazerow said. "Before, they thought that focusing on growth could mask cost challenges, but there's not infinite room for growth. They won't sustain margins without cost control."

Lazerow emphasized the word "sustainable." Previous efforts to control costs were about weathering storms, he said.

But for the past couple of years, the forces affecting provider margins have not been temporary. Caring for an older and sicker population, for instance, means that providers will have to get by on dwindling Medicare and Medicaid reimbursement levels. That requires a structural change, Lazerow said.

Not-for-profit providers saw their annual expenses eclipse annual revenue growth in 2016, which will narrow margins and could spur merger-and-acquisition activity, according to a 2017 Moody's Investors Service report.

Annual expense growth of 7.2% outpaced annual revenue gains of 6%. The larger expense growth was driven by rising pension contributions and pharmaceutical prices, increasing labor costs amid a nursing shortage and investing in technology, according to Moody's analysis of 323 hospitals and health systems.

Health systems are responding by reducing their hospital footprint; standardizing purchases and clinical operations; outsourcing services like laboratory, obstetrics or real estate management; slowing hiring rates; and restructuring corporate overhead.

"There is a tug of war between purchased services and labor expenses—to outsource or handle in house," Lazerow said. It could make sense to outsource if organizations have a lot of variation in spending across facilities, he said.

That being said, executives are highly protective of maintaining their culture and employee engagement, which could deter them from making significant staffing cuts or outsourcing services, Lazerow said.

"If you sacrifice engagement along the way, you could be poisoning the well," he said.

The survey also had C-suite executives rank high-level strategic priorities. Cost containment was the top priority, according to nearly a quarter of the executives. Revenue growth followed at 23.8%. The third most important priority for executives was population health and an accountable care organization strategy. The fourth was "systemness," or their efforts to standardize operations and coordinate care to save money and improve quality. Physician alignment strategy rounded out the priorities.

Priorities change drastically year to year. None of the top five areas of interest from 2016 matched 2018's list.

In last year's survey, 57% of respondents said their top priority was increasing access to ambulatory services. The same percentage indicated that expense reduction was their primary goal. Boosting outpatient market share, minimizing clinical variation and controlling avoidable utilization followed.

There was much more focus on responding to a new wave of consumerism last year, Lazerow said.