Historically, hospitals and health systems have responded to periods of economic distress with cost-cutting campaigns.

However, given long-term, structural changes to the health care market and acute care business model, such campaigns are likely to yield limited returns unless they can fundamentally bend the slope of the cost growth curve.

To remain profitable amid this changing landscape, hospitals will need to radically restructure their acute care operations.

Download the Research Report

S&P forecasting a tough road ahead

In early 2012, S&P released a report showing that not-for-profit margins remained stable across 2011, largely due to a focus on cost reduction. Using tactics ranging from wage freezes to staff cutbacks, providers across the country made significant progress in their cost reduction efforts.

However, the report painted a bleaker long-term view: weaker volumes and long-term revenue constraints will make it harder for providers to remain profitable.

Four ways to transform the acute care model

Providers' traditional strategies during economic downturns—cost reduction campaigns—are only a quick fix and are unable to address long-term structural challenges to the acute care business model.

Providers should focus on four areas to build a truly sustainable organization.

1. Nurturing employee innovation

Instead of viewing employees as an intractable cost category, the most progressive systems turn to the workforce as a source of performance improvement ideas. By engaging staff in an "innovation challenge," for instance, organizations are able to tap an existing resource for fresh cost-saving ideas.

Taking a cue from the principles driving value-based purchasing, some providers are tying employee compensation to enterprise-wide performance. In doing so, one system saved $6.3 million in one year, distributing more than $100,000 back to employees.

Learn more starting on p. 17.

2. Capturing shared value with suppliers

Currently, hospitals focus on standardizing supply orders to increase purchasing volume and drive down price. This narrow focus strains physician relationships and precludes opportunities to achieve larger, more sustainable savings. Hospitals must work closely with suppliers to identify highest-value supplies across brands, eliminate unnecessary costs on both sides, and introduce shared incentives to achieve more value from supply chain purchasing.

Learn more starting on p. 41.

3. Standardizing care delivery

The Institute of Medicine has estimated that one in every three dollars spent on health care in the United States is unnecessary. To eliminate unwarranted care variation, providers must recognize opportunities for standardization and savings, and make a concerted effort to engage clinicians in changing problematic practice patterns. This requires advanced analytics and a re-engineered workflow, as well as evidence-driven practice patterns and a scalable structure.

Learn more starting on p. 59.

4. Realizing full system value

Future growth in inpatient demand will require a reenvisioned acute care system. Even hospitals that prioritize independence will need to place “systemness” at the core of their margin improvement strategy. Providers should rethink their offerings, rationalizing and rebalancing services across the system.

Learn more starting on p. 79.

Download the Full Research Report