We convened cross-sector healthcare business professionals to discuss cost management challenges and approaches for 2023 and beyond. Here are the top 10 takeaways from the session.

1. Everyone is pessimistic about the economy (for good reason), but there are conflicting tea leaves.

We asked attendees to imagine it was January 2024 and predict the state of inflation and level of economic growth. Very few indicated inflation would be low and a recession would be avoided (3% and 5% respectively; see graphic below).

Our attendees' attitudes seem to be in line with global consumer confidence indicators. But spending indicators don't tell the whole story. Healthcare job growth remains strong and there will never be a time when we need fewer frontline staff.

Despite the conflicting calculus, remember that healthcare isn't entirely recession proof. Corporations are dependent on non-operating income from market investments. Additionally, patients' ability and propensity to pay for preventive care and medicines cannot be overlooked.

2. Each sector faces unique—but intertwined—cost management challenges.

As my colleague Ken puts it, "you don't mess with the energy market and expect nothing to happen." Inflation in the supply chain and wage growth have impacted all sectors of the healthcare industry. Outstanding questions remain regarding who will absorb (or pass on) these heightened costs.

So far, it appears providers have borne the brunt of the expense increases. The median hospital operating margin was -0.2% through November. Meanwhile, the overall healthcare price index increased 2.7% year-over-year in November.

3. Don't be 'low-cost'; rather, manage cost growth and practice unrelenting cost discipline.

An ambition to be low-cost (while noble) is both short-sighted and unrealistic for providers. As a starting point for identifying cost management opportunities, not-for-profit hospital executives should assign accountability for every penny spent across their business units and address variation from budget ruthlessly over time. Micro-management of budgets is one reason for-profits have recorded better than average financial performance across all health systems.

4. You need a more granular view of your costs.

Many hospital executives believe they're scraping the bottom of the barrel when it comes to finding new cost reduction or cost avoidance opportunities. The sizeable untapped opportunities are usually in clinical, rather than administrative, areas. But to find a continuous pipeline of opportunities, organizations may need to invest in data analytic capabilities that provide insight into the true cost of delivering care at the procedure, patient, and physician-level.

Accurate cost and quality data can also go a long way in engaging physicians in conversations about clinical choices and in designing high-value care pathways.

5. Administrators: show you're committed to cost management in your own teams.

Your revenue-generating business units need to see a leadership team exercising prudence and accountability before they're likely to get on board with a change in standard operating procedure. Research has found that administrative expenses account for approximately 15% to 25% of total healthcare expenditures in the U.S.—an amount that some (including your physicians) may deem excessive and inefficient.

Show (don't just tell) how your administrative units are exercising cost-discipline and providing unquestionable value to the organization before rolling out major productivity-oriented initiatives.

6. Not all costs are the same. Look for transformative changes, not budget haircuts.

Across the board budget reductions are a common, but flawed strategy. One-time cuts don't give your organization long-term financial security and are likely to set you up for future cost creep. Ideally you want to implement policies and processes that deliver recurring savings.

Some examples include tying new-hire requests to productivity benchmarks, establishing guardrails around high-cost medication use in the inpatient setting, and implementing technology to automate tasks and reduce "scut work."

7. Give frontline staff time and space for innovation.

You need more leaders. Your staff, particularly frontline staff, have ideas. You need to capture them and scale the good ones. There are many ways to foster a culture of innovation and continuous improvement, from changes to performance review grids to ideas incubators and project management structures. The best approach is the one that engages your staff to take the lead.

8. Aim for top-of-license, and top-of-site.

We've been writing about top-of-license nursing practice for a while at Advisory Board. Today, it continues to be one of the highest-opportunity areas for cost sustainability—hospitals and health systems everywhere continue to report workforce shortages and elevated spend on contract labor.

Top-of-site care (an Advisory Board term) offers a similar cost sustainability promise. What is it? It's the delivery of clinical services in the setting that maximizes financial return without compromising care quality or unduly burdening clinicians and patients. It's a mindset of using the capacity of the entire health system more effectively within a region. And in practice, it may involve the shift of lower-acuity procedures to community-based sites with lower overhead. The end goal is to deliver services in the setting with the greatest impact (clinically and financially) and ease of use.

9. There are serious tensions between expanding healthcare access and curbing costs.

Expanding healthcare access requires investments in people, facilities, and equipment. And healthcare stakeholders (patients and physicians) often covet the "latest and greatest." There is no easy solution to this tension, but some providers and suppliers are thinking outside of the box.

For instance, MetroHealth in Cleveland, Ohio has created a partnership where their imaging equipment supplier is paid based on volume of scans. The supplier also finances the cost of the equipment in MetroHealth's newly established freestanding imaging centers upfront. This keeps capital investments (and debt burden) lower for MetroHealth as they grow.

10. Don't kill your growth projects.

To achieve sustainable margins, hospital and health system leaders must combine both revenue growth and cost control efforts to create a comprehensive margin management playbook. Both sets of strategies are necessary to achieve stable margins, and neither is sufficient alone.

Think critically about which projects are most closely aligned with your strategic direction and what investments are needed to sustain your business in the long-term. Because after all, if you're not growing, aren't you dying?

About 60% of our attendees said they have a 0% to 5% operating cost reduction target for next year. What's yours and how are you planning to achieve it? AskAdvisory for more insights on cost management or reach out to me directly to share your experiences at gelbaugc@advisory.com.

Contributors to this article include: Ken Weitzel, Jim Bonnette, Julie Jaquiss-Collins, Vidal Seegobin, and Sam Norton