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Hospital Cost Transformation

By October 19, 2018Commentary

Hospital inpatient admissions have been declining as medical care has moved to more outpatient and home settings.  But hospitals still account for a lot of spending because they have gobbled up physician practices and other provider types.  And hospitals are generally not regarded as well-run institutions.  So it isn’t surprising that there are a plethora of consultants happy to help them improve their revenues, cost structures, efficiency, etc.  Kaufman Hall issues a report based on a survey of hospital executives regarding their facilities “cost transformation”.   (KH Report)   190 individuals participated, from hospitals and systems of all sizes.  While all respondents say their organizations are focused on cost reduction, 32% say their institution has no specific goal for such reductions and 57% say such targets are only at the total organization level, not down at a division or department level where there might actually be some specific accountability.  While 86% of respondents say cost transformation is very important, 42% say they don’t have processes in place to track and ensure that objectives are met.

Factors driving cost reduction pressures include the shift to value-based reimbursements, cited by 70%, and the need to remain competitive, cited by 67%.  The latter is kind of funny, given that most hospitals and systems have done their best to consolidate and eliminate competition.  A much smaller percent list trying to make care affordable as a reason for controlling costs.  Based on what I see, hospitals don’t care at all about the affordability of care and seem to be more concerned about maintaining high executive pay.  In terms of areas of focus, labor cost and supply chain are listed by 72% as important.  But areas where more opportunity may be present, like reduction in clinical variation, cited by 38%, clinical process redesign, cited by 45%, service line rationalization, cited by 29%, seem to be receiving less attention.  And little real progress is reported, with only 26% of facilities reporting savings of even 3% in labor cost/productivity, although 64% say they reached that level in supply chain and non-labor costs.  Barriers to improvement listed include lack of data and analytics, political sensitivities and difficulty maintaining focus.  Sounds pretty typical to me.  Hospitals need to do more, but they really have no incentive to do so when their current horizontal and vertical market power allows them to charge excessive prices to commercial and other payers.

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