This week we feature excerpts of a discussion with Marian Jennings of M. Jennings Consulting and an iProtean expert. Marian covers the importance of “doing more with less” and the most effective approaches to reducing costs.
iProtean: Why should we be focusing so much attention on reducing cost? Don’t we also need to focus on growth?
MARIAN JENNINGS: How do you ensure financial viability? It’s a pretty simple equation: Revenues are greater than expenses. So traditionally the way we have been successful financially is we have grown revenue. We need to attract more patients to be successful under the payment models, but I would argue that especially in the short term for most organizations, it is going to be essential that you reduce cost.
Now, cost reduction is not an end in itself. I once had a professor who said if your goal is to reduce cost, go out of business. Your cost will be zero and you will have maximized your goal. So we’re not doing cost reduction just because we can or because we can’t think of anything else to do. We’re doing it because we believe that reducing cost improves our value positioning.
Value is the relationship between quality, outcomes, affordability, access and cost. So if we reduce cost, that in and of itself, without any changes in our quality or our satisfaction, improves our value positioning.
Most organizations need to be looking at reducing their cost over the next five years by at least 10 percent, maybe more. Few organizations actually have identified reductions in that order of magnitude. So the very first step for your board is to actually have the have the finance committee review, and then the board review a five-year financial forecast. The forecast should envision neither the best nor worst case scenarios, but the most likely scenario.
Then review what will likely happen to your margins if you continue to offer the same range of services you currently offer and if payment changes the way you envision it will change. From this you can identify the magnitude of the financial gap. And again, it’s typically at least a 10 percent reduction in cost, maybe even 15 percent and, in some cases, 20 percent.
iProtean: What approaches to reducing cost will have the greatest payoff for our organization?
MARIAN JENNINGS: When I think about reducing cost, I envision this as a continuum and you have to do all of it. I don’t view that you do one thing or you do the other thing, I don’t think there are bad strategies or m-innovative strategies or traditional strategies, I view that you should be trying a number of things simultaneously.
You should be trying a number of things simultaneously. Each strategy you pursue will be necessary; none will be sufficient on its own. So I envision those as buckets of strategies.
The first bucket is what I would call more traditional, low-hanging fruit. Everyone is pursuing these, you may need to accelerate your pursuit or find new vehicles to achieve it but those are around primarily productivity. So they’re labor productivity, supply chain costs, revenue cycle enhancements. They are very traditional ways that we would try to get at our core infrastructure of cost.
You should put this first bucket into the context of the financial gap between what you expect to happen and what you need for financial viability. How much of this gap can be closed through these traditional vehicles?
In addition to those traditional approaches to improving your cost position, there are a couple of areas that organizations really need to take a close look at. One is to tackle the overhead, or the fixed costs of the organization. Most hospitals and health systems would view their cost as half-fixed and half-variable. But having 50 percent of your costs as fixed is a very dangerous positioning for the organization. So, boards need to challenge management to look at the overhead costs and the organizational structure.
Overhead costs are not only the people in the billing department or in medical records. Every department has fixed costs. Every clinical department has fixed costs: nursing, your physician enterprise, lab, etc. You need to look at the overall fixed cost structure of the organization and reduce it. That may mean reorganizing departments, combining departments, more teamwork across departments. But we really can’t survive in a world where half of our costs are considered untouchable.
Another bucket includes reexamining the portfolio of your services including where the services are located. This is particularly true in terms of location for multi-hospital systems, especially ones that are aggregated by individual hospitals and providers coming together where you may have a lot of redundancy of services at multiple locations.
Portfolio assessment is not for the faint of heart. It’s incredibly challenging. Are we willing to make the hard decisions once we see the results of the analysis? You’re trying to determine where you should be investing resources to grow, where you might need to close down or shrink a program or divest it in order to free up resources that you can re-deploy. Easier said than done.
The third bucket has two components. First is core clinical redesign across the continuum of care .The second major component of these more innovative or transformational approaches to cost reduction is your electronic health record (EHR). Clinical redesign relies on EHR for data to help redesign clinical care.
(Marian offers more on the best approaches to reducing costs in the upcoming iProtean course, Doing More with Less: The Cost Imperative.)
The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.
Coming soon: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman.
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