The health system market has experienced widespread layoffs as staffing cuts have been a high impact lever for hospitals to achieve cost reductions amidst an environment where margins are being compressed. Employee layoffs, however, are only a short-term solution. In order to drive long-term cost reduction, hospitals will need to fully understand and manage their cost of care.
Hospitals have a do-or-die imperative relative to cost reductions since major changes in reimbursement and care delivery models are shifting the financial risk from payers to providers and putting downward pressure on provider revenue. A glaring example is the need for hospitals to accept underpayments for Medicare and Medicaid-covered patients as a cost of doing business. According to the American Hospital Association, underpayments were a combined $51 billion in 2013 alone, with hospitals receiving only 88 cents on the dollar for Medicare patients and 90 cents on the dollar for Medicaid patients. That same year, 27% of hospitals had negative operating margins as reported by the Centers for Medicare and Medicaid Services (CMS), and this percentage is estimated to increase to 28-30% by 2019.
The chart below illustrates a representative example of how hospital expenses break down. With labor contributing to ~60% of hospital costs, it is no surprise that staffing cuts have been a focus for hospitals in their cost reduction efforts.
Last year, 38 hospital and health systems announced or implemented workforce reductions of more than 100 employees, according to an article from Becker’s Hospital Review. We have seen this trend continue in 2015, with some examples including:
Eventually, however, hospitals won’t be able to cut more staff. Instead, hospitals need to optimize operational and clinical performance by aligning clinical care with cost information. Research shows that physicians are interested and ready to engage to reduce costs, but don’t have access to cost data. A study from Health Affairs shows that physicians care about cost considerations, but only about 20% of orthopedic surgeons in the study were able to correctly estimate the cost for common orthopedic devices. A huge opportunity exists for hospitals to put cost information into the hands of physicians, providing them with such knowledge when making care decisions.
To optimize operational and clinical performance, hospitals will have to focus on investing in innovative technology. Supporting the use of new technology is a Deloitte publication regarding radical cost reduction strategies based on organizational realignment. It calls out IT investment as a key lever for achieving hospital cost reductions. Recently, the Yale New Haven Health System announced it has realized $125 million in savings without layoffs by engaging physicians in cost control with “quality metrics coupled with a sophisticated cost-accounting system.” The health system has recently partnered with Strata Decision Technology, a provider of SaaS solutions for financial analytics, business intelligence, and decision support, and will leverage Strata Decision’s pre-built algorithms and workflows to “identify opportunities to eliminate waste, inefficiency, and clinical variation as well as manage initiatives to take cost out on an ongoing basis.”
We’ll continue to watch the landscape of healthcare technology companies focused on cost management as the use of their solutions continues to rise within hospitals and other providers.
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