In 2017, nonprofit hospital operating expense growth outpaced operating revenue growth for the second consecutive year, pushing median operating margins to an all-time low.

The enduring nature of today’s revenue pressures—direct pricing threats, site-of-care shifts, new payment models, and more—means that cost containment is more important than ever to maintaining margins. While not all providers can be low-cost in an absolute sense, every hospital and health system should strive to be cost disciplined, keeping cost growth low relative to revenue growth over time.

This research report explores the characteristics of cost-disciplined organizations and examines the role of hospital and health system executives in achieving sustainable expense growth.

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Support and Enforce Enterprise-Wide Efficiency

While frontline clinicians are best positioned to make a variety of decisions, many organizations have skewed too far toward local autonomy at the expense of cost containment. Leaders should strike an appropriate balance between local autonomy and centralized control to rein in excess spending.

1. Elevate decisions about discretionary spending (p. 11)

2. Make centralized controls more responsive to frontline challenges (p. 14)

Invest in Discipline-Enabling Resources

Hospitals and health systems’ biggest investments—in people and technology—have not yielded significant efficiency improvements. But strategic investments in the right types of technology and expertise can help control expense growth in the long term by making high-value choices clear, improving productivity, and facilitating performance improvement.

3. Develop cost-oriented decision-support capabilities (p. 19)

4. Formalize performance improvement implementation (p. 21)

5. Automate administrative and clinical decisions (p. 23)

Build a Scalable Care Delivery Enterprise

There is little evidence that providers have been able to generate economies of scale or lower the cost of care despite an increasing number of mergers and acquisitions. Health systems must leverage their size and resources to generate true economies of scale and maximize the return on their assets.

6. Generate increasing returns to administrative scale (p. 29)

7. Deploy a top-of-site care delivery network (p. 31)

8. Sustain cost discipline amid growth (p. 33)

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