Taking On the Cost Drivers

HealthLeaders Magazine , Karen Minich-Pourshadi, for HealthLeaders Magazine, June 9, 2010

While most expense categories are unavoidable, there are ways to reduce costs.

Healthcare costs continue to escalate, with no signs that healthcare reform will bring much relief. In the 2010 HealthLeaders Media Industry Survey, finance leaders overwhelmingly pointed to the government as the No. 1 cost driver.

The laws and mandates put in place to protect patients and ensure fair and accurate accounting are also causing budgets to swell year over year. Most healthcare leaders, however, recognize there is little they can do other than comply and accept the expense associated with the litany of legislation, explains Richard Clarke, president and CEO of the Healthcare Financial Management Association.

While healthcare leaders scrutinize every penny in their budgets, some key cost drivers—labor, technology, and supply chain—continue to confound many hospital and group practice leaders. Being keenly aware of which drivers are bleeding the bottom line isn't enough, however; understanding the solutions other innovators are using to tackle these challenges and utilizing them to move a facility forward in difficult economic times is the key.

Cost Driver: Labor
Generally comprising 50% to 60% of the overall budget, labor is one of the first areas that healthcare leaders looked to trim when the recession arrived. It's perhaps not surprising that in 2009, as purse strings really tightened due to the economy, more than 32% of chief financial officers implemented a hiring freeze to keep their budgets in order. Though there were layoffs, for the most part, organizations retained staff, opting instead to cut overtime, vacation, benefits, and hours.

While this cost driver holds rank as the area that finance leaders say dominates their budgets, it's also an area that healthcare providers are not inclined to cut. In fact healthcare continues to be one of the few industries nationwide showing job growth during the recession, creating 228,700 new jobs in 2009 and 588,000 new jobs since the recession began in December 2007, according to the Bureau of Labor Statistics.

"We haven't had a layoff, and our goal is not to have a layoff," says Chrissy Yamada, CFO of Evergreen Hospital Medical Center in Kirkland, WA. "We gotta cut costs, though. We are seeing our volume come down 6%, and we have a fixed overhead structure."

The 290-licensed-bed Evergreen Hospital Medical Center is the cornerstone of services provided by King County Public Hospital District No. 2, and labor and benefits make up approximately 60% of its total operating budget. Adding complexity to the situation, Evergreen Hospital is bound by union contracts and premium pay rates, all of which have the facility looking for creative non-labor solutions to decrease costs.

Steering toward solutions
When it comes to reducing labor cost, there are short- and long-term approaches. Often the short-term approach is what many healthcare leaders have already done, as mentioned previously. Creating larger, long-term decreases in costs, however, requires new thinking.

Efficiency models
Tackling inefficiency in the existing labor force is one approach to reducing costs, Clarke says. "In the long-term, I'm hearing that adopting Toyota's Lean or Six Sigma is reducing costs for labor and having an impact on other areas like supply chain and patient throughput," he says. "The key is you have to right-size staff-to-patient numbers."

Lean is a strategy for cutting costs and boosting productivity, with an emphasis on eliminating waste and improving processes while providing more value to customers. Similarly, Six Sigma looks at reducing variations in processes, products, and services to reduce waste. The American Society for Quality conducted a study of 77 hospitals and found that 53% have some type of Lean initiative and 42% are using portions of Six Sigma.

Lee Memorial Health System in Fort Myers, FL, adopted a combination of Lean and Six Sigma back in 2001. Spanning four acute care hospitals, a rehab center, and children's hospital, and employing over 9,500 people, the 1,423-licensed-bed system uses this method to keep its $521 million labor budget in check. John Wiest, COO of business and strategic services at the health system, says the approach has helped the facility weather the recession.

"We literally have been building up our productivity for the last nine years so this management model is now ingrained in our culture," says Wiest, whose facility actually had a total net revenue increase to $1.03 billion in 2009 from $937 million in 2008.

When the economy softened, so too did the Florida real estate market, and for the first time in years, Lee Memorial Health System saw its patient volumes decrease. "Volume decreases were unprecedented for us; we've always had a predictable 3% to 5% population increase. So we looked at the situation and said, for us, it's about matching our labor up to align with the decrease in volumes," explains Wiest.

Armed with an efficiency-model mind-set, Lee Memorial overhauled its staffing resource center and now uses some staff as "internal travelers"—individuals who can float to different departments, as needed. Next, the system looked to its premium pay—overtime, call back, and traveler pay—bringing it down by 14.8%. Leadership reviewed its dependence on contracted labor, reducing it where possible, and thereby saving the system $4.2 million. The overtime budget was capped at 3% of total salaries, leading to another $1.2 million in savings, and the system stopped allowing employees to accrue paid time off while they were using their paid time off, resulting in another $2 million in savings.

Though Lean and Six Sigma are best viewed as long-term fixes to labor, because Lee Memorial Health System had been using this methodology for so long, it was able to quickly ramp up and realize immediate savings. However, as other facilities look to capture savings in the short-term, this efficiency model can offer some help. For example, by reducing waste from the surgery department just by adding a block scheduling system, another hospital, St. Joseph, MO-based Heartland Health, saved over $300,000 in one year. The facility was better able to decrease nursing overtime and saved the equivalent of six full-time employees.

Often thought of more in terms of compensation, benchmarking is a solution Clarke recommends to find out where your organization may need to review. By adding a measure of comparison, hospitals can see where they may be falling short or wasting or misusing manpower, as well as offer employees productivity goals.

Clarke explains that the process of benchmarking can reveal to healthcare leaders, for instance, if a nurse is doing something that an aide should be doing. "You want to be sure that the people being paid a higher wage aren't doing the work that a qualified, lower-paid employee can do," he adds.

Benchmarks entail gathering productivity statistics and then using them to determine the level of staff and the overall need for specific services. The data allows the facility to distill where it is overstaffing and understaffing and compare it to anticipated volumes. From this point, healthcare providers can enact flexible hours in which team members would be called in based on actual patient volume.

Benchmarking can also be a short- and long-term fix to a bloated labor budget. Just by taking this approach, the 185-bed MedWest Health System in Clyde, NC, saved $3.62 million in labor costs within six months by reducing 85 FTEs—42 as a result of staff reductions and 43 as a result of volume-based flex staffing.

Cost Driver: Technology
Though labor is the most obvious place to look for lard in your budget, technology is also a big money-suck for healthcare providers. The cost of EMRs and clinical technology is consistently a pricey priority for hospitals and group practices. In a January 2010 survey conducted by GE Capital, healthcare providers were asked what level of IT investment will be required for them to adopt an EMR system, and 51% of respondents said it would cost $1 million to $5 million or more.


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