Research by Marty Stempniak


PDF version

of Gatefold

H&HN has created this exclusive yearlong series called Fiscal Fitness with the support of the VHA. Finding ways to rein in expenses without sacrificing quality and safety is imperative for hospitals as they struggle to maintain financial viability in a shifting payment system even as their operational costs continue to climb. Over the next several months, we'll look at everything from the supply chain to pharmacy, IT and more. Follow the Fiscal Fitness series in our magazine and in our e-newletter H&HN Daily.

Pressure to cut costs is coming at hospital leaders from every direction. Those who excel at keeping expenses in check are thinking strategically about where to find savings without adversely affecting patient outcomes and hospital or systemwide goals.

Executives would be wise not to wait for the next financial crisis; rather, they should be carefully planning how their cost-management approach gels with their organizational strategy, says Jason Sussman, managing director of consulting firm Kaufman Hall. The questions they should ask themselves are, "How much capital will it take to support our ambitions, and what is the gap I need to make up to get there?"

The next big leap for most hospitals, he says, is figuring out how to sustain any reductions so they don't start creeping back in down the line. Doing so requires commitment from the top, a plan to follow, data to constantly gauge improvement and a culture that's dedicated to staying on task. "As well as hospitals have done attacking those areas of low-hanging fruit, the sustainability, vigilance and what we call the hard-wiring of that activity into their annual processes is that next step," Sussman says.

Faced with sizable reimbursement cuts — about 55 percent of its payer mix comes from Medicare — Archbold Medical Center determined that it needed to trim about $5 million, or 3 percent of expenses, from its budget. So earlier this year, the four-hospital system based in Thomasville, Ga., set out to refine its processes and look for savings, says Charles Hightower, chief financial officer.

Leaders networked with others in the field and looked to professional associations for ways to perform services better with less. They completed plans in October and launched what is expected to be a 12-month intiative in November.

As in other organizations, staffing is the biggest expense at Archbold, and much of the savings came from salary and benefits. The hospital cut seven occupied positions, along with others through attrition, with no impact on quality. Any time a department head wants to add or replace an employee going forward, he or she has to prove that his or her hours per workload unit are on pace to meet targets.

Hightower urges hospital financial leaders to manage costs on an ongoing basis, rather than in big bunches when a crisis comes along. Such watchfulness, they hope, has allowed the health system to sustain those reductions in the years that follow.

"Get started now because the longer you put it off, the more drastic the reductions are going to have to be when you do finally make them," Hightower says. "Our goal is to manage costs on a continuous basis rather than have one big initiative or one big push to reduce a lot of costs."

Archbold also found a significant savings through better oversight of its supply chain, including cutting back on the pricier items doctors preferred, but that had no better impact on patient outcomes.

Strategically minded cost managers take the full picture into account when seeking savings in the supply chain, says Christopher O'Connor, chairman-elect of the Association for Healthcare Resource & Materials Management. A safety syringe might cost a little more, but if it prevents needlesticks at a much higher rate — which can cost thousands of dollars per case or more if the patient has HIV or hepatitis C — it's worth the extra expense.

"Something might cost a little bit more money, but if it improves the patient experience or the patient outcome and increases your reimbursement, then that's exactly what hospitals need to be doing and, heretofore, that's not how they've looked at it," he says.

AHRMM is pushing for an industrywide movement to consider quality and outcomes when cutting costs, so that reductions aren't made in a vacuum. O'Connor believes supply chain leaders are well-positioned to lead the charge in hospitals, since they touch all aspects of the organization.

Whether it's the materials manager or the CEO leading this change, culture is key, says Richard Gundling, a vice president with the Healthcare Financial Management Association. Care redesign is where the real dollars can be found, but hospitals must make sure that all employees are on the same page — from nurses to CFOs, case managers to pharmacists. "It's difficult, and that's why we have avoided it until now," he says.

Case Study


In years past, as long as cash flow was adequate, leaders were mostly content at Jordan Hospital. But with the advent of health reform, everything has changed for the 150-bed community hospital.

Soon, the federal government will require everyone to have insurance, upping concerns about bad debt. And Jordan previously had a big problem with overutilization, which is no longer acceptable with calls to keep patients healthy and out of the hospital, says Chief Financial Officer Joseph Iannoni. The revenue base was eroding and staff levels needed to be matched up with patient volumes.

"Cost-management is very important and strategic to the survival of the institution," he says.

So, the organization calculated its ideal margin, projected future patient volumes in the coming years and determined it needed to take some $7.4 million in costs out of its operations to thrive. Jordan looked to improve quality and customer service, even as it reined in expenses. Leaders did so by looking at both internal and external benchmark data, and studying productivity over past years from department to department. Each division had its own target, and it was a zero-sum game so that everyone could work together to find savings.

Iannoni found that many departments were staffed at the convenience of employees rather than patients. The hospital had 30 radiology techs on staff, for example, but was logging loads of overtime hours because many only worked from Monday through Thursday. Five full-time positions were eliminated without negatively impacting the patient experience. Third-party vendors were being used to perform tests out-of-house when Jordan had the manpower and equipment, costing thousands in unnecessary spending.

"Believe it or not, the customer service and quality ended up being better after we did this process. That happened in multiple departments," Iannoni says. "You know, it's really funny. We found that the department heads actually kind of knew this, but they never wanted to take on that issue until they were forced."

All told, Jordan eliminated about 80 FTEs out of 1,000, some through attrition and reworked hours. Going forward, it tracks the number of employees every pay period to make sure they match up with volume, and adjusts if necessary. Jordan now is working on its next five-year project and may need to tweak further, Iannoni says.

Considering quality when cutting costs

The Association for Healthcare Resource & Materials Management recommends that hospital leaders take a more holistic approach to managing costs throughout the organization, considering the impact reductions might have on patient outcomes and the quality of care. AHRMM board member John Willi, senior director of supply chain management at the Dana-Farber Cancer Institute in Boston, offers five areas for leaders to focus on in the AHRMM Cost, Quality and Outcomes Movement. These tips are meant for supply chain professionals, although they can apply to leaders across the hospital.

1. Decipher and Leverage Complex Analytics: Knowing data on your spending habits is crucial to driving evidence-based savings and operational efficiencies.

2. Understand Various Payment Policies: What impact might accountable care organizations and bundled payment projects have on reimbursement? Leaders must engage with finance and accounting in new ways, scheduling recurring meetings to discuss various items, and predicting health care reform's impact on hospital finances.

3. Hold Discussions, Build Consensus, Motivate Change: Leaders should engage clinicians through the use of evidence-based data and set recurring meetings. They should build a strong presence in clinical areas, and define and deliver on challenging, results-oriented commitments.

4. Anticipate and Swiftly Respond to Disruptions: Engage clinicians and talk with management to review stock demand levels using predictive analytics, and base your supply stock on anticipated future patient volumes.

5. Understand the Impact of All on Outcomes and Reimbursement: Engage with the quality department and provide evidence-based data that will contribute to enhancing value-based outcomes. Participate meaningfully in meetings with clinical staff, physician rounds and nursing huddles to gain visibility.

Source: AHRMM Supply Chain Strategies & Solutions, July/August 2013