More than 50 percent of hospitals and health systems do not have an adequate cost reduction goal in place, and a lack of good data and insight into costs may be the primary reason for the low-cost reduction goals and limited progress at organizations, according to a recent report from Skokie, Ill.-based managing consulting firm Kaufman Hall.
The report from Kaufman Hall presents results of an online survey completed by more than 150 senior executives in U.S. hospitals and health systems. The report shows a significant gap between understanding in U.S. hospitals and health systems of the cost transformation imperative and commitment to making the needed cost reductions. As detailed in the report, 2017 State of Cost Transformation in U.S. Hospitals: An Urgent Call to Accelerate Action, an overwhelming majority of hospital executives surveyed (96 percent percent) agree that transforming costs is a “significant” to “very significant” need, yet more than 50 percent of organizations do not have adequate cost reduction goals in place.
Healthcare costs are skyrocketing and are unsustainable, which points to why widespread cost reduction is needed. Last month, Moody’s announced that after years of cost containment, non-profit providers’ annual expense growth of 7.2 percent outpaced annual revenue growth of 6.2 percent.
The study findings indicate that healthcare organization leader recognize that financial realities make cost transformation an imperative for their organizations. Sixty-eight percent of respondents said cost transformation was needed to close a gap between our financial plan and current operating performance, and 77 percent said it was needed to refine the organization’s cost structure as we transition to the value-based are model.
According to the report, 25 percent of executives said they have no cost reduction goals for the next five years, while an additional 26 percent have a goal to reduce costs by 1 percent to 5 percent—a range that is far below what is required to transform cost structures, and is unlikely even to keep pace with inflation, according to the report authors.
What’s more, 29 percent of healthcare organizations have a cost reduction goal of 6 to 10 percent for the next five years, about 20 percent of organizations have a cost reduction goal of more than 10 percent, and only five percent of organizations have a goal of reducing costs by more than 20 percent.
Current cost reduction efforts focus on conventional priorities, like labor costs and supply chain, based on the responses from the majority of organizations (60 to 70 percent of respondents).
"Executives have been working on these items for decades. In many organizations, most of the major reduction opportunities likely have been achieved. Further substantial reductions will require pursuit of much more difficult initiatives,” the study authors wrote, citing areas that will yield transformative reductions, such as clinical redesign, service rationalization and workforce configuration.
“Financial realities demand a new way of providing care,” Walter Morrissey, M.D., Kaufman Hall managing director, said in a statement. “This is not business as usual, involving incremental change. To meet community needs under healthcare’s new business imperatives, and to participate as a provider of choice in narrow networks developing nationwide, organizations must have a strong value proposition and a cost position that is significantly lower than competitors.”
The report suggests that a lack of good data, as well as insight into costs and savings opportunities, may be the primary reason for the low cost reduction goals and limited progress at organizations. According to the Kaufman Hall 2017 CFO Outlook report, more than 90 percent of survey respondents believe their organization should be doing more to leverage financial and operational data to inform strategic decisions, yet the new Cost Transformation report indicates that only 25 percent have confidence in the accuracy of the data generated from their cost accounting solution.
Seventy-five percent of organizations reported that their cost transformation success is average to below average to date.
The report highlights that for most hospitals and health systems, achieving such a position will be a transformational undertaking, requiring an extensive effort to dramatically lower costs by 25 percent to 30 percent over a five-year period.
“Effort toward the cost reduction target recommended by Kaufman Hall must start now, not at a yet-to-be-determined future date,” Morrissey said. “It will involve initiatives such as reshaping the portfolio of services and businesses, redesigning the care model for improved effectiveness and efficiency, and reconfiguring the workforce—all of which have the potential to yield much, much lower costs.”
The report also outlines that in order to transform U.S. healthcare costs, leadership action is needed in four key areas:
- Adopting a new mindset and ensuring accountability
- Putting in place a cost improvement roadmap, based on data- and analytics-based planning, processes, and tools
- Rethinking the portfolio of businesses and services
- Redesigning the care model and workforce to meet quadruple-aim goals—better care, better health, lower costs, and improved patient and caregiver experience