Hospital execs fail to reduce costs where needed, report says

A new report suggests health systems are being too conventional in their approaches to cutting costs, which might be why they aren't making much headway.

Labor costs/productivity and the supply chain were the areas 72% of respondents to Kaufman Hall's latest survey said they plan to target when it comes to cutting costs.

But to succeed in a future that's sure to be marked by disruption, it's going to take a new mindset and a willingness to go well beyond the traditional areas of focus, the report said.

That could mean shuttering rural hospitals, reducing clinical variation and attempting to integrate the physician practices they've accumulated in recent years.

To truly reduce margin, health systems must brave tougher subjects, such as taking a hard look at which services they'll offer at each location, said Lance Robinson, a managing director with Kaufman Hall and an author of the new report.

"We're trying to convince our clients not to try to be all things to all people," he said. "Drill down on the service lines you're good at or that drive good margins for the hospitals."

The report released Tuesday is Kaufman Hall's second annual in-depth look at the priorities and progress healthcare executives are making toward lowering costs. Nearly 190 senior executives from hospitals and health systems took the 2018 survey, up from 173 in 2017. Of those, 21% were from health systems with 10 or more hospitals and 24% represented single hospitals.

Overall, the authors found progress has so far been limited when it comes to cutting costs. Fewer than one in five respondents cited cost reductions of more than 5% in any priority area.

Respondents have made the least progress in service rationalization, an area in which 61% cited no improvement. A prime example of that is health systems' resistance to closing critical access hospitals, even when they're operating at significant losses, said Lyndean Brick, president and CEO of the healthcare consultancy the Advis Group.

"That's the next level of cost cutting: It's difficult and controversial," she said.

Hospitals also need to examine their clinical variation, Robinson said. Before sharing utilization data with clinicians, he cautions systems to be sure it's real, actionable information, because they probably don't get the ears of physicians often. He said health systems also need to identify champions, key leaders within specific service lines, as they work to drive down overall utilization of services and supplies.

Another problem area is when health systems acquire physician practices defensively to gain market share but don't consider how to properly integrate them into their practices, Robinson said.

Seventy percent of executives cited the need to prepare for the transition to value-based care as their top cost transformation driver, down from 77% in 2017. Medicare's transition to paying hospitals under the diagnosis-related group system in the 1980s spurred a drop in hospital revenue that never bounced back, Robinson said. Similarly, hospitals must prepare for a new revenue landscape under value-based care, and repositioning themselves will be an ongoing journey, Robinson said.

"It's not a one and done; it's a continuous process," he said. "You're always evaluating your cost and ways to do things better."

Goal setting for cost reduction was absent in 32% of the organizations whose executives took the survey. Robinson said he found that surprising, as health systems should have established goals early on. Ideally, they can bake those into their budgets while they're being set, he said.

The top cited impediment to cutting costs among survey respondents was a lack of good data. That doesn't mean there isn't enough data, Robinson pointed out. There's a ton of data out there, it's just siloed.

"There is a little bit of paralysis around the information and what to do next," Robinson said. "How do you get to the actionable items from the data that's being presented?"

Brick agreed. Health systems have data stashed in electronic medical record platforms, the cloud and data centers.

"They've got data stored everywhere around the block and in Timbuktu," she said.

The reason many health systems aren't gleaning insight from the data is because they hire analysts that don't have healthcare backgrounds, Brick said.

Other impediments executives cited included political sensitivities that prevent the pursuit of certain savings opportunities and the difficulty of maintaining focus and realizing savings opportunities once they are identified. Another problem is health systems don't know their future financial needs, which hampers their ability to contextualize their cost transformation work.

More than 70% of the survey respondents said they don't have a high degree of confidence in the accuracy of the results from their existing cost accounting solutions, a finding Brick said she found shocking.

"That's so fundamental that it doesn't surprise me we have a problem," she said.

Another 41% of survey respondents did not cite making care more affordable as important to their cost transformation efforts. Kaufman Hall's report said that's noteworthy, especially as Amazon, retail providers and other disruptors with lower fixed costs are able to pass along their operational efficiencies to patients in the form of lower prices.

Making healthcare affordable doesn't just mean lowering prices, Brick said. It could also mean providing care in a different way, such as giving pharmacists more patient care responsibilities, opening urgent care clinics or offering virtual visits. But none of that can happen unless they're using data to learn about the costs of services, pricing and patient demographics, she said.

"It's kind of a dirty little secret that sometimes business strategy in a healthcare system is guesswork," Brick said.

Some of Kaufman Hall's findings mirror those of an August report from Moody's Investors Services that found not-for-profit hospitals' cost cutting initiatives aren't keeping pace with rising expenses. That report found hospitals' median annual revenue growth declined at a faster clip than expense growth between 2016 and 2017. Revenue growth was 4.6% in 2017, compared with expense growth of 5.7%.