With U.S. health care costs rising for patients, employers and the government, the move to a value-based business model will help ensure high-quality care at the lowest price. This model will push hospital and health system leaders to think and act strategically about managing costs, calling for strategic cost transformation, according to authors of a new guide from the Health Research & Educational Trust and Kaufman, Hall & Associates Inc.

This transformation process can occur along three pathways. Pathway 1 involves cost management, which includes improving current operations and controlling overhead costs and costs "flying below the radar." Pathway 2 involves reducing costs by restructuring businesses and service lines, and Pathway 3 focuses on reducing costs through clinical transformation. "A Guide to Strategic Cost Transformation in Hospitals and Health Systems" outlines strategies for Pathways 1 and 2, describing eight action steps for each of the two pathways and how hospitals have successfully implemented them.

To lay the groundwork for strategic cost management, four strategies are critical:

  • Ensure that the CEO drives the strategic cost transformation process.
  • Develop and implement a strategic cost transformation master plan.
  • Bolster the organization's business platform and ensure its fully functional at all levels.
  • Create and support cultural change.

One step to help hospitals and health systems reshape and reduce costs is to understand the key drivers of staffing and productivity inefficiencies. Like many hospitals, Central Washington Hospital, a 198-bed regional medical center in Wenatchee, Wash., has labor costs that total more than half of its operating expenses. An executive steering committee at CWH identified potential cost savings, with input from physicians; directors from human resources, quality management and finance; and other department teams. The focus was on reductions that would not affect patient care and would reduce the number of required layoffs.

The hospital offered early retirement incentives and revised its vacancy review process. Departmental plans for cost savings — including improving clinical documentation, supply chain management and vendor contracting — were reviewed by the clinical performance committee and the executive steering committee. CWH identified savings of $7 million for its 2012 budget.

For Pathway 2, a hospital or health system assesses its businesses and services, determining long-term sustainability and the most efficient and effective distribution of services. IU Health Bloomington Hospital and its parent system, Indiana University Health, initiated service distribution planning in connection with their 2010 affiliation.

The health care organizations designed a regional service delivery plan so the combined entity would improve quality and care coordination and serve patients close to their homes. A management steering committee provided oversight during the process, which outlined roles for the system's four major hospitals and medical centers. Clinical task forces defined which services would be offered at which sites and to what scale.

Through service distribution planning, IU Health Indianapolis and Bloomington Hospital were able to complement each other's services. The process also reshaped plans for major facility renovations, enabling the best use of limited capital and clinical resources.

To download "A Guide to Strategic Cost Transformation in Hospitals and Health Systems," go to www.hpoe.org/strategic-cost-transformation.

Cynthia Hedges Greising is a communications specialist with the Health Research & Educational Trust. Contact her at cgreising@aha.org.


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For information, visit http://www.hpoe.org/resources/hpoehretaha-guides/802

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