This is a general article about cutting expenses not just in our specialist but I thought our followers would want to read it.
Aside from growing the top line, reducing operating expenses is the only way to improve the bottom line
In an era of mounting fiscal uncertainty marked by flat, or even downward trending, net revenue at hospitals, the need for cost reduction has never been greater. Yet, many cost reduction efforts fail. At the center of these failed efforts is a lack of understanding about “the how” of achieving real, measurable cost savings.
The core principle of cost improvement, and where many healthcare organizations go wrong, is that to reduce costs, operating expense actually has to come out. Providers spend a lot of time and energy working to “improve efficiency” or “reduce the cost of care”—neither of which actually results in any real, measurable cost savings that can be seen in financial statements.
Aside from growing the top line, reducing operating expenses is the only way to improve the bottom line. Reducing expenses means fewer FTEs, fewer supplies ordered, lower acquisition costs for implants, less money spent on contracted services, or reduced outlays for staff benefits.
This principle has three accompanying elements that are necessary to establish and manage a successful cost improvement program.
Key element #1: Well-defined metrics, goals and targets
Before starting a cost improvement initiative, healthcare providers not only need to clearly understand their goals, but also must communicate them in a way that compels action, not fear or hopelessness. Typically, each year, the finance department models the forecasted changes in volume, reimbursement rates, inflation, and the expense base needed to generate an acceptable margin. In today’s environment, this usually results in a need for reduced expenses – like “a budget gap of 4 percent” or “$40M reduction in cost.” The same cycle repeats annually.
While this language works for finance, it is confusing to people outside of that department because it doesn’t equate to anything tangible or realistic. Also, as volume, reimbursement, and patient mix change from year to year, the overall cost reduction target may change from one year to the next, which can spawn distrust between operations and finance. Moreover, the mere idea of identifying ways to saving $40M is overwhelming and seems impossible, while identifying ways to reduce cost per case by $50 sounds achievable.
Consider creating a cost reduction path that spans up to five years and is based on a metric that is tangible, such as cost per case mix index (CMI) adjusted equivalent admission or cost per inpatient case. Taking this approach will enable meaningful communication of cost savings goals to front-line staff and allow for clarity on what cost drivers can be impacted to achieve cost targets.
Key element #2: Selecting the right projects
Healthcare organizations can typically identify hundreds of savings opportunities. The challenge lies in choosing the right projects that will yield results.
In any cost improvement program, projects should be selected that will reduce operating expenses on the income statement. If a line cannot be drawn from the improved metric to a line item on the income statement, the project will not result in real savings. One example of the “wrong” project to select is reducing utilization of services. Reducing utilization will reduce the charges on a patient’s bill, and reimbursement in some cases, but organizations will only experience hard dollar, income statement savings if they also reduce corresponding staff and supply expenses related to that volume.
Take reducing length of stay (LOS). Unless the improvement reduces the number of hours worked or allows another inpatient case to fill the bed, there is no impact to financial performance. In an era of decreasing volume, we cannot count on another patient filling the bed.
These projects may be beneficial to do for a variety of reasons, but it is important to recognize that they will not reduce expenses unless further action is taken.
Key element #3: Diligent program management
Arguably the most important yet most often overlooked element, is establishing a central oversight structure that keeps the organization moving quickly and methodically. All too often, once teams are chartered, they are off and running – but at different paces, with different ideas, and with a different understanding of their end goal.
Clearly articulating what is expected from teams, at what time intervals, is important to getting results at the end of the process (see accompanying chart)—the more precise the instructions, the better. Clearly outlining deliverables, savings targets, and dates is the key. For example, each team needs to find $XXX in savings opportunities, then validate that the opportunities can be operationalized, then identify which cost center and GL code will have reduced expenses, then implement the changes by a certain date.
Such a deliverable-driven undertaking is very different from charging teams with a vague mission like “find and implement cost savings opportunities.” Getting to this level of detail is the only way to ensure that savings will be delivered, and can be measured on an on-going basis.
While, this approach may seem daunting at first, it is important to remember that to get different results, we need to do things differently. Providing clear expectations and structure will get us much farther down the path of reducing the cost of care than business as usual.