Five Solutions to Controlling Healthcare's Cost Problem

Five Solutions to Controlling
Healthcare’s Cost Problem

© 2016 Health Catalyst
Proprietary. Feel free to share but we would appreciate a Health Catalyst citation.
The Healthcare Cost Problem
For too long, U.S. hospitals have focused on increasing revenue, volume,
and growth. At the same time, the healthcare system has wasted
hundreds of billions of dollars on supply chain inefficiencies, variation,
service duplication, and suboptimal labor management.
Unfortunately, the healthcare cost
problem has put the industry in
a financial quandary.
Recently, Moody’s Investors Service
reported that hospital median operating
margins fell to just 2.7 percent in fiscal
year 2016, and operating expenses
grew faster (7.5 percent) than operating
revenues (6.6 percent).

While systems can deploy multiple strategies
to impact revenue and volume, traditional
methods are antithetical to value-based care.
Hospitals can raise prices, but Medicare
holds reimbursement increases steady at
only one or two percent a year.
Commercial payers—where hospitals have
traditionally profited—provide increases, but
those are increasingly tied to quality
measures that put hospitals at greater risk.
This risk-based payment structure is
expanding with the growth of alternative
payment models.

The revenue side of the earnings equation
has changed, so hospitals need to change
the cost side as well.
Over the past 20 years, consumer prices for
inpatient services increased 195 percent,
prices for outpatient healthcare services
increased 200 percent, and prices for all
medical services jumped 100 percent.

Consumer prices for prescription drugs doubled,
and prices for nursing homes and adult day
services more than doubled during this time.
In comparison, consumer prices for all items
increased just 50 percent over this same period.
With high-deductible plans, consumers are
bearing more and more of the healthcare
cost burden.
Healthcare systems need to identify the root
causes of high costs and implement smart,
creative solutions to improve their financial
health and prosper under value-based care.

The Role of Operating Expenses in the
Healthcare Cost Problem
Let’s explore what’s behind healthcare’s cost
problem and some ways to get it under control.

Healthcare providers (hospitals and clinics) may have
diminished control over revenues, but they can
control hospital operating expenses, which comprise
all the costs of taking care of patients: labor, supplies,
utilities, equipment, buildings, property, and capital.
A few of these expense categories are driving the
current cost problems:
• High Labor Costs; Low Productivity
• Costs of Employed Physicians
• Unintentional Costs of New Technology
• The Cost Burden of Risk and Reimbursement
• Costs Related to Poor Patient Workflow

High Labor Costs; Low Productivity
According to the Harvard Business
Review, the main cause of operating
expenses outpacing revenue growth
has been the size of the healthcare
workforce, which accounts for almost
half of all healthcare expenses.
The U.S. Bureau of Labor Statistics
projects impressive healthcare
labor growth.

The registered nurse workforce, the largest
healthcare occupation, is projected to grow
to almost 3.2 million by 2024, a 16 percent
increase over 2014 levels.
Other healthcare occupations (occupational
therapy assistants, physical therapists,
home health aides, nurse practitioners,
and physician assistants) are projected
to grow at least 30 percent during
that time.

The healthcare industry accounted for 15.8
million jobs at the end of 2016.
By 2026, that number will reach well over
23 million, a growth rate faster than any
other major specialized industry in the U.S.
By 2026, the number of jobs in healthcare
and social assistance will be the highest of
any major specialized industry in the U.S.

The healthcare industry has lost its focus on
costs partly because it has pushed hard on the
patient experience, access to care, and quality
issues; however, hospitals need to be more
efficient and productive with their resources.
For example, to be more service oriented,
hospitals have adjusted the hours of
operation for outpatient services, offering
flexibility by opening the doors for early
morning, evening, and weekend hours to
accommodate working people.

But then volumes become diluted in the
middle of the day.
Extended hours are challenging from a
financial perspective, even though patient
satisfaction scores may be high.
Healthcare leaders need to redesign their
systems to be more effective in terms of
productivity and service.
It’s a balancing act to synchronize quality,
satisfaction, access, and cost components.
Labor shortages will compound the problem.

More than half a million experienced nurses are
expected to retire by 2022, and 1.1 million new RNs
will have to replace the retirees and fulfill the
healthcare needs of a swelling patient population.
Physicians and many other clinical disciplines are
in this same predicament, though less severely.
If hospitals can’t expand available resources, they
must get them from somewhere else (e.g., contract
labor), which will double, triple, or quadruple the
cost of labor and ultimately impact prices.
Suddenly, the labor expense line will be
unmanageable, even with fewer people on staff.

Costs of Employed Physicians
Hospitals employed 38 percent of all U.S. physicians
in 2015, a 50 percent increase from 2012.
From a strategic perspective, there are many good
reasons for employing physicians; doing so captures
the revenue stream of their patients and facilitates
population health activities.
Employing physicians increases the payroll, but it
also has benefits, so healthcare systems need to
diligently monitor both.

Unintentional Costs of New Technology
Ten to 15 years ago, not-for-profit health systems
focused on productivity, but along came new
enterprise systems and EMRs, which distorted
this focus.
Healthcare systems were promised many things
that didn’t happen with EMR conversions.
Often, the technology was installed without
sufficient integration because the process was
usually rushed.

Clinician workflows and methods weren’t studied
and optimized, which resulted in workarounds to
accommodate the technology.
Healthcare did not realize the efficiency gains
typically seen in other industries by installing
technology and, in some respects, the
technology has cost more money than
it has saved.

The Cost Burden of Risk and Reimbursement
The risk and reimbursement structure in
healthcare adds to the cost burden.
The American Hospital Association reports that
health plans and systems are slow to pursue
capitated payment plans.
As shown in Figure 1 on the next slide, only
29 percent of medical payments were linked to
alternative payment models (APMs) in 2016
(e.g., shared savings, shared risk, bundled
payments, or population-based payments).

Figure 1: Fee-for-service still accounted for 43 percent of all payments in 2016.
Source: Health Care Payment Learning and Action Network Report

Payers often reimburse on a fee-for-service (FFS)
basis (43 percent of healthcare dollars in 2016),
but put providers at risk for various measures,
setting up a greater risk component than has
ever existed.
For example, payers compare competing
hospitals on utilization and reward the
better performers; It is in their interest to
reduce utilization, thereby reducing claims.

Medicare reimbursements generally fall short of
actual costs, so health systems and providers
struggle to better match their costs with
reimbursement.
Medicare has never increased its reimbursement
rates to match inflation. Medicare also applies
restrictions to many clinical processes.
For example, when a patient transfers between
services, it must be under the same DRG. Or
before patients can transfer to a skilled nursing
facility, they must have been in the hospital for at
least three days.

Medicare, in general, reimburses less than
commercial payers do. One long-time mantra
states that hospitals should operate at a cost
structure that at least breaks even at a Medicare
reimbursement rate.
And even though commercial rates are rising, they
aren’t doing so as quickly. In some respects, the
goal for commercial payers is to lower their
reimbursement rates to match Medicare’s.
They may never quite get there, but every time
Medicare makes a significant change in how they’ll
reimburse, the commercial world is close behind.

Costs Related to Poor Patient Workflow
Finally, there are many reasons why healthcare systems need to be
concerned about inefficient patient flow through their hospitals.
Poorly managed flow leads to higher volume
and overutilization of emergency rooms and
intensive care units.
It creates surgery delays and longer length of
stay, the latter which increases infection rates.
Healthcare systems need to do a better job of
optimizing operating room schedules, filling
exam rooms, and generally streamlining physical
asset use and managing capacity.

Five Ways to Control Operating Expenses
While the cost problems appear to be out of
control and worsening, healthcare systems can
minimize them through creative new
approaches to how they conduct their
operational, clinical, and financial business.
1. Refocus on Labor Management
2. Manage Employed Physicians
3. Change the Patient Encounter Environment
4. Augment Standard Approaches with
Technology to Control Costs
5. Manage Patient Access and Flow Through
the Healthcare System

1. Refocus on Labor Management
Hospitals can get more productive by
refocusing on labor, a focus that was lost in
the past few years for many reasons.
Hospitals need to better match resource
demand, making sure they have the right
staff with the right skill for the workload.

Many hospital systems acquire physician
practices and then remain hands off in their day-
to-day operations, but it’s important to align
physician incentives with the rest of the system.
Physicians are accustomed to benchmarking
through the Medical Group Management
Association, so equivalent internal review is
appropriate, which means digging into their
operations and inquiring about things like how
much support staff is needed.

Now that the practice is part of the system,
what services are duplicated, what needs to
be systematized, and what needs to stay at
the practice?
For example, physician practices may not
be accustomed to collecting revenue based
on the policies of a larger healthcare
system, so these types of processes need
to be standardized.
Managing employed physicians applies a
new level of discipline where it hasn’t been
applied before.

To adapt to changing risk and reimbursement
models, healthcare systems need to evolve
how they oversee certain patient types.
For example, telemedicine is one way to
use technology to modify resources, allow
centralization, and apply specialized skills.
And regulations are changing to
accommodate greater reimbursement
for telemedicine.

In 2015, Kaiser Permanente processed 59
million patients through its online portals, virtual
visits, or the health system’s apps. That was the
first year virtual encounters outpaced in-person
encounters.
Telemedicine, along with email and other
connectivity with clinicians, can take
healthcare to a whole new level,
reducing the need for office visits.
Clinicians can still treat and deal with
patients using technology which changes
the patient workflow.

The healthcare Internet of Things is also changing
the patient encounter environment.
This market is projected to reach $117 billion by
2020 with more than 25 billion connected devices.
Wearable monitors, smartphone diagnostic
applications, and remote scanning and
imaging devices, to name a few,
represent new technology that
holds potential for reducing
operational and clinical costs.

4. Augment Standard Approaches with Technology to Control Costs
Many healthcare systems don’t truly understand the
costs of the care they provide. Minimizing variation
and standardizing clinical care delivery positively
impacts costs.
Tools like the CORUS™ cost management suite,
can be used to understand the true cost of
providing care across the continuum and can
relate those costs to patient outcomes.
CORUS gives providers the ability to see
clinical activity data at a very granular level.

While standardization is critical to managing
costs, clinicians may not react favorably to the
notion of a cookbook approach, even though
most of them already practice consistency and
standardization when they treat patients.
Clinicians follow specific steps during every
exam, process patient variables, develop
diagnoses, and recommend treatments.
Clinicians conduct many standard processes
for each patient, with appropriate deviation
when necessary.

Clinicians tend to be driven by data and competition.
Show them data that compares their performance
to their peers with quality outcomes, and they will
do everything in their power to end up at the top
of the list.
This is a classic tactic for getting this very important
stakeholder group motivated toward understanding
and controlling costs for improving outcomes.

Healthcare systems can also do more to improve the
bottom line by better managing their revenue cycle.
Systems must improve what is commonly referred to
as revenue integrity: their ability to appropriately
document a medical bill, justify it, and collect it.
This boils down to how well the system adheres to
clinical documentation improvement (CDI), following
the premise that if services are not well documented,
then they weren’t rendered and cannot be
appropriately reimbursed.

As the American Health Information Management
Association (AHIMA) says,
Successful clinical documentation improvement (CDI)
programs facilitate the accurate representation of a
patient’s clinical status that translates into coded data.
Coded data is then translated into quality reporting,
clinician report cards, reimbursement, public health
data, and disease tracking and trending.”

5. Manage Patient Access and Flow Through the Healthcare System
Historically, wherever patients have accessed
healthcare—in the ER, the ambulatory setting, or
the inpatient setting—is where they have
received treatment.
Over the past few years, however, this has been
better controlled by case management workers
who focus on patient navigation and reducing
length of stay. Improved control puts healthcare
systems on the right path to managing demand.

Healthcare systems must take a business approach to
examining capacity, controlling where patients should
be and what services they should be receiving.
This control also depends on the disease state of the
patient. If someone presents with cardiac issues, the
protocols are well understood almost all the time.
If patients aren’t where they should be, then case
managers can place them in the right environment
(e.g., specialist’s office or urgent care) where they
aren’t using resources needed for emergency
situations.

There is variation in the pathways patients follow
through a hospital, but there is an expected or typical
approach and use of services that each patient needs.
Some deviation from the expected is legitimate; for
example, the patient presented with comorbidities
that needed to be addressed.
But sometimes, deviation exists just because
something has always been done a certain way.
Providers need to use their tools and technology
for treating patients of certain disease types in
more standardized ways, and then deviate
when a patient requires it.

Recognizing the Healthcare Cost Problem Is
the First Step Toward Solving It
Healthcare systems previously relied on payment
increases to meet bottom-line needs, particularly
from commercial payers, but now the expense
trend is growing faster than the payment trend.
The United States already spends more on
healthcare per person than any other country,
and increasing costs are only putting U.S.
healthcare consumers at greater risk.

Healthcare has a cost problem, but the
solutions exist.
Healthcare systems need to recognize the
problem, identify the problem’s sources, and
then begin the improvement journey.
Systems must pay close attention to the
increasing costs of labor, labor shortages,
acquiring physician practices, technology
implementations, and increasing risks
accompanied by decreasing reimbursements.

Recognition is only half the battle.
Adopting the appropriate technology,
embedding the required expertise,
recruiting targeted human resources,
and spreading best practices all
combine to win the cost war.

For more information:
“This book is a fantastic piece of work”
– Robert Lindeman MD, FAAP, Chief Physician Quality Officer

More about this topic
Link to original article for a more in-depth discussion.
Five Solutions to Controlling Healthcare’s Cost Problem
Rising Healthcare Costs: Why We Have to Change
Jared Crapo, Sales, Senior VP
Hospital Revenue Cycle Management: 5 Ways to Improve
Bobbi Brown, Senior VP
Healthcare Total Cost of Care Analysis: A Vital Tool
Gregg Teeter, Business Intelligence Manager
Improving the Transparency of Physician Compensation in Value-Based Care
Health Catalyst Knowledge Center
Introducing the Health Catalyst® CORUS™ Suite: Activity-Based Costing and Cost Insights
Leslie Hough Falk, Senior VP

Bobbi Brown is the Vice President of Financial Engagement for Health Catalyst. Ms.
Brown started her healthcare career at Intermountain Healthcare supporting clinical
integration efforts before moving to Sutter Health and, later, Kaiser Permanente, where
she served as Vice President of Financial Planning and Performance. Ms. Brown holds
an MBA from the Thunderbird School of Global Management as well as a BA in Spanish
and Education from Misericordia University. She regularly writes and teaches on finance-related
healthcare topics.
Other Clinical Quality Improvement Resources
Click to read additional information at www.healthcatalyst.com
Bobbi Brown

John Hansmann, MSIE, FHIMSS, DSHS joined Health Catalyst in October, 2015 as a Sr.
Director. He has over 30 years of healthcare experience in operations, productivity
management, strategic and IT analyses. Prior to coming to Health Catalyst, John was the
Senior Director of Labor Management & Productivity for Tenet Healthcare Corporation.
Prior to Tenet, John worked for Intermountain Healthcare as the Urban South Region
Manager of Management Engineering. He has expertise in the development of standardized
nursing care models and staffing practices, optimizing patient throughput, work redesign and
leading workflow analysis. John is a Fellow of the Healthcare Information and Management
Systems Society (HIMSS), a senior member of the Institute of Industrial Engineers (IIE) and
Diplomate within the Society for Health Systems (SHS.) He is a past Board member for HIMSS and
past President for SHS. He currently serves on the Advisory Board for the school of Industrial and
Manufacturing Engineering (IME) at North Dakota State University (NDSU.) He received his BSIE
and MSIE from NDSU.
Other Clinical Quality Improvement Resources
Click to read additional information at www.healthcatalyst.com
John Hansmann

Five Solutions to Controlling Healthcare's Cost Problem

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Five Solutions to Controlling Healthcare's Cost Problem

Similar to Five Solutions to Controlling Healthcare's Cost Problem (20)

More from Health Catalyst

More from Health Catalyst (20)

Recently uploaded

Recently uploaded (20)

Five Solutions to Controlling Healthcare's Cost Problem