Eight Steps for Hospital Cost Management

Hospital growth is slowing, so administrators are investing in hospital cost management to preserve margins.
Hospital growth is slowing, so administrators are investing in hospital cost management to preserve margins.

Hospitals are seeing shrinking margins, with slowing growth causing them to explore other ways of preserving decreasing revenue. The American Hospital Association’s 2018 Chartbook showed that the percentage of hospitals with negative margins increased by the end of 2016. These margins were similar to the levels seen during the 2008 recession. The result is that hospitals are increasingly pursuing other means of protecting their margins, primarily through hospital cost management.

Operating costs tend to be high for hospitals, with labor eating up much of the budget. A 2017 survey by Deloitte that included 20 chief executive officers of hospitals concluded that labor made up approximately 50% of hospital operating costs.

As a result, a 2017 survey by Kaufman Hall of 150 hospital and health system executives determined that while 96% identified cost transformation as a significant requirement, only one in four were actually pursuing hospital cost management strategies.

Deloitte reports that the most common objectives of these strategies involve creating new models for staffing, shifting patients to outpatient care, and reducing both administrative costs and the cost of supplies.

For hospitals that identify cost management as a way to preserve margins, embarking on the process can be daunting. An eight-step process can help direct the initiative:

Determine the Healthcare Organization’s Readiness for Hospital Cost Management. This assessment should include alignment, operational planning, as well as overhead management to determine if the organization is ready to pursue a major cost transformation.

Set Goals Based on Shortfalls for the Organization. All objectives of the strategy should be aimed toward reducing capital shortfalls. The goals will give shape to the steps necessary to fund the organization and maintain high levels of performance.

Use Both Internal and External Benchmarks to Identify Areas of Potential Savings. From historical trends to global benchmarks and department comparisons, the hospital may identify areas of savings.

Supplement With Additional Data. The hospital will likely need to collect additional data to build out a strong case for a hospital cost management strategy. Input from medical staff, department managers, and other stakeholders can also round out the data informing the strategy. 

Focus on Staffing and Productivity. Whether it’s a problem related to the execution of staffing plans or poorly defined roles, or the incorrect use of overtime as well as other productivity issues, this area may help to quickly identify zones of potential improvement for cost management.

Examine Staffing Methods. A staffing method change may present a way to keep costs more reasonable, but they may also create a gap between the needs of the patients and the staff members. Look for new models that don’t impact the patient unnecessarily.

Look for Redundancies in Overhead. You may find ways to streamline other departments, including accounting, human resources, IT, legal, and marketing, just to name a few. An organizational change may improve cost savings but also improve operations.

Align Cost Management Plans With Broader Organizational Goals. It’s important to align the hospital cost management strategies within the hospital’s financial plan and budget. Doing so will allow you to invite management to monitor the progress of the cost management initiative.If your healthcare organization is contemplating a hospital cost management initiative, contact us at PAG. We can help you reduce your IT costs and help you leverage the best solutions for better savings while improving the patient experience.

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