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The 3-pronged strategy you need for cost reduction

November 22, 2017

    Health systems' costs are quickly outgrowing revenue, and payers are looking for every opportunity to spend less for care and target high-cost acute services.

    That means a Band-Aid strategy of slashing one-time costs will not suffice. The most successful organizations will pursue a three-pronged strategy of an all-hands-on-deck tactical agenda, fixed cost restructuring, and clinical variation reduction.

    Read on to learn more about the components of this three-pronged approach.

    Prong 1: Engage an all-hands-on-deck approach for system-wide savings

    Advisory Board's Cost Control Atlas details 20 cost-saving tactics that we culled from our hundreds of published best practices for their potential for near- to medium-term savings and universal applicability. They fall into four categories: "Slam dunk"—which yield high cost savings in a short implementation period—low-hanging fruit, worth the effort, and long game.

    One of the "slam-dunk" opportunities for organizations is to prevent unnecessary surgical supply waste. Many organizations waste millions of dollars annually on surgical supplies. We estimate that following a few simple strategies—such as monitoring and analyzing discarded supplies and color-coding procedure preference cards and surgical trays to avoid opening certain supplies until requested by the surgeon—can yield annual savings of $1.5 million for a 300-bed hospital and $9 million for a regional system.

    Download the Cost Control Atlas

    Prong 2: Tackle fixed costs

    Today's marketplace demands more than incremental efficiency gains. No factor is a greater obstacle to health systems' future competitiveness than their heavy fixed cost burdens. Addressing this obstacle is difficult—yet essential.

    Organizations need to critically evaluate their physician footprint and service portfolio, their bed count, and whether they should hand over real estate management to a third party, such as real estate investment trusts (REITs).

    One system that has taken a forward-thinking approach to reducing its cost structure is Indiana University Health (IU Health). For instance, the system rationalized its service lines—including by consolidating the open heart program at one of its hospitals that performed about 50 procedures a year with another that performed about 900 annually—converted a hospitals to an outpatient facility, and centralized oversight over ancillary services. IU Health's operating margin increased from 6.2% in 2013 to 12.8% in 2016.

    Prong 3: Reduce unwarranted clinical variation

    Health system CFOs say that reducing unwarranted care variation accounts for about 40% of their current cost saving opportunity. However, success in this endeavor doesn't come easy—it requires determination, initiative stamina, and leadership.

    In Advisory Board's examinations of successful efforts to reduce care variation, five kinds of contributions from finance leaders stand out. These finance leaders:

    • Make a leadership commitment as they would for a major capital project;
    • Prioritize highly variable, high-cost opportunities first;
    • Target variation within the system, not just relative to external benchmarks;
    • Align incentives to engage medical staff; and
    • Invest in implementation and sustainability.

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