Survey: Performance improvement required to transform cost structures, invest in future business models

Oct. 25, 2019

Nearly all U.S. hospitals (96%) now recognize the importance of, and have set, cost reduction targets, yet fewer than one in four respondents have achieved “most” or “all” of their cost transformation goals, especially in non-traditional, high-opportunity cost reduction areas — such as lowering unwarranted clinical variation — according to Kaufman Hall’s new report, done in collaboration with the Healthcare Financial Management Association (HFMA), 2019 State of Healthcare Performance Improvement: Strategy, Technology, and Tactics.

The report is Kaufman Hall’s third annual in-depth look at priorities healthcare executives are setting and progress they are making toward improving organizational performance. This year’s data was collected in partnership with Kaufman Hall / Axiom and HFMA, resulting in a larger data set than in previous years. The results indicate that hospitals should embrace opportunities for more meaningful gains, such as obtaining more valuable data insights, demanding greater accountability for performance improvement goals among leadership, and delivering better information to support physician engagement.

Hospitals face multiple revenue and expense challenges that underscore the need for cost transformation. Chief among the revenue challenges, according to the survey, are flat or declining inpatient volumes, which 30% of respondents listed as their top concern. Closely following are downward pressure on commercial insurance rates (27%), and an increasing percentage of Medicare and Medicaid patients (19%).

At the same time, almost one-half of respondents (47%) said rising salary and wage inflation, the result of a tight labor market, makes it more difficult to hold the line on expenses. Since labor costs account for up to 60% of a hospital’s expenses, this trend is a direct threat to cost transformation efforts. Additionally, 23% of respondents say that demands for capital to fund strategic initiatives are putting pressure on their bottom line.

As the recognized need for cost transformation continues to grow, so does the focus on technology that will enable it. In fact, nearly three out of four (73%) respondents said they will invest in cost transformation technology within the next two years. Yet when asked if their organizations have access to reliable, trusted costing data, as many answered “no” as “yes” (47% each, with the final 6% saying they didn’t know).

Having reliable, trusted data is core to any analytics effort, and especially to one as complex as cost transformation. The report recommends that organizations pursuing a more detailed understanding of costs adopt a tiered approach — matching intensity of effort with items that have the highest impact on decision making.

“A detailed and in-depth understanding of costs is essential for all healthcare provider organizations today,” said HFMA President and CEO Joseph J. Fifer, FHFMA, CPA. “But specific organizational needs vary depending on market conditions and other circumstances. Prioritizing analytics needs helps organizations avoid extraneous data and move forward more effectively.”   

When asked in which areas their organizations had made the greatest strides in reducing costs, 36% of executives surveyed said “labor cost/productivity” and 32% said “supply chain and other non-labor costs” – both traditional areas of focus. At the same time, 31% said they had the most difficulty in achieving their labor cost/productivity cost transformation goals.

One other major area of opportunity is reducing unwarranted clinical variation. While it was recognized as a high potential opportunity, it was also identified as one of the areas where respondents faced the most difficulty in achieving their cost transformation goals. It was tied for last in areas where respondents had achieved their greatest cost transformation success.

“We believe the mechanisms enabling cost transformation are better understood now than ever before,” said Kermit S. Randa, chief executive officer, Kaufman Hall Software. “Hospitals continue to proceed cautiously, but the fact that they are taking cost transformation seriously is a step in the right direction. Our hope is that the 2020 report will show even more progress and a greater commitment to making the transformational changes required to thrive in a healthcare future that will look very different from today.”

To download a copy, visit 2019 Kaufman Hall Performance Improvement.

Kaufman Hall has the release.