Cost Transformation Is Imperative, but Hospital Efforts Lag Behind, Survey Finds

SKOKIE, Ill. – October 16, 2018 – Fewer than one-in-five healthcare executives has seen cost reductions of more than five percent in any priority area in the last year. This is one of many concerning findings in Kaufman Hall’s new 2018 State of Cost Transformation in U.S. Hospitals and Health Systems: Time for Big Steps report.

The report is Kaufman Hall’s second annual in-depth look at the priorities and progress healthcare executives are making in reducing organizational costs. The 2018 report shows that hospitals will need to take big strides and tackle more transformative initiatives. Progress is being made on some fronts, but it is slower than what many experts consider to be required of hospitals and health systems. 

Increasing leadership accountability

Evidence of progress can be found in the following:
 

• 58 percent of responding executives say their organizations have processes and structures in place to hold health system leaders accountable for performance in reaching cost transformation goals, up from 46 percent in 2017

• 56 percent say their organizations make effective use of clinical pathways, protocols, and guidelines to develop a common approach to treatment versus 47 percent in the previous survey

• Additionally, 73 percent of responding executives say cost transformation improvement targets have been distributed across the organization, up from 53 percent in 2017

“U.S. hospitals are facing increasing pressures, so these percentages need to be much, much higher,” said Lance Robinson, managing director at Kaufman Hall. “The combined effect of the shift to a new business model, competitive pressures from expanding health systems, new retail options that are siphoning off high-margin services, and the need to raise capital for strategic growth initiatives is quickly putting hospitals in an untenable position. Our hope is that this new report helps healthcare executives see where they stand in relation to their peers — and that progress needs to be made in most organizations.  We also hope it provides actionable insights to help them accelerate their cost transformation efforts by tackling initiatives such as eliminating, repurposing, or redesigning capital-intensive, inefficient structures, programs, and processes.”

Cost reduction still focused on traditional targets

Among the key findings is that most of the cost transformation that has occurred so far has been in traditional cost reduction areas such as supply chain and other non-labor costs, where 64 percent of executives reported a reduction of three percent or more since 2017. Little progress has been made, however, in areas with the greatest potential for transforming cost structure, such as service rationalization, where 61 percent reported no progress in the past year, or reduction of inappropriate clinical variation (46 percent).

The numbers skewed even higher for organizations with more than 10 hospitals, with 60 percent reporting no progress in reducing inappropriate clinical variation, and 57 percent saying no progress has been made in improving physician enterprise management (versus 44 percent overall).

Keeping cost transformation a priority

A drop in the number of executives who say cost transformation is a “significant” to “very significant” need for their organizations is of concern. In 2017, 96 percent of survey respondents were in this category. In the 2018 report, that number dropped 10 percentage points to 86 percent. The number of organizations who reported they have set “no cost improvement goals” also trended in the wrong direction, from 25 percent in 2017 to 32 percent in 2018.

“Most healthcare leadership teams understand that change is necessary,” Robinson said. “But they are unsure of which initiatives to tackle operationally. This year’s report lays out clear focus areas for driving that transformation. Our goal for the next year is to help hospitals and health system executives make the changes needed to ensure that their enterprises are ‘essential’ providers in the communities they serve.”