Cost Reduction, a Tough Job for CFOs

October 10, 2014

Survey reports that 83 percent of providers fall short of topline-focused cost reduction targets with 70 percent reporting minimal savings

Most hospitals fall well short of their cost reduction targets, in part because the ability of chief financial officers to meaningfully impact how operational and clinical leaders approach the issue is limited.

“It seems like we’ve been trying to restrict cost increases forever,” said Greg Klugherz—chief financial officer at Centracare Health in St. Cloud, Minn.  Klugherz spoke recently with Healthcare Finance News about the cost reduction goals of a pilot program at his system’s critical access hospitals and integrated clinics.

“We wanted financial improvement and intervention and targeted one percent of operating expenses,” he explained. “We’re operating at a margin above the median for our rating category, but our topline (revenue) growth was likely to be lower.”

Klugherz is not alone. A 2014 survey of 100 finance professionals at 75 organizations by Strata Decision Technology, a Chicago-based financial analytics firm that focuses on healthcare, reports that 83 percent of providers fall short of topline-focused cost reduction targets with 70 percent reporting minimal savings. “The Current State of Cost Reduction in Healthcare” cites overutilization, redundancy, inefficiency, medical errors and unnecessary variation in clinical practice with wasting close to $765 billion annually.

Liz Kirk, vice president of cost improvement solutions at Strata Decision, says CFOs can no longer maintain or grow margins by focusing on the topline alone. “Reducing operating expenses is the only way to preserve margin,” she said.

According to the survey results, obstacles to real savings underscore “the need for a new mindset, skillset and toolset in this new healthcare environment to effectively drive out costs.”

“Most (cost leaders) struggle with quantifying and tracking actual savings of operating expenses,” Kirk said. “All struggle with holding leaders accountable for hitting their cost improvement targets.”

Indeed, 55 percent of survey respondents find tracking and quantifying savings difficult with 44 percent calling multiple cost reduction projects time consuming and data intensive and blaming lack of accountability for “holding their organization back.” Poor clinical and operational engagement, staff shortages and lack of focus by senior leaders presented obstacles for 27 percent of survey respondents who report improvement projects yielding “soft-dollar savings or no savings at all.”

“Soft-dollar savings are improvements that successfully move a metric linked to cost, but don’t directly drive cost,” explained Kirk. “For organizations to realize hard-dollar savings, actual cost has to be removed.”

Klugherz agrees. “No money gets saved until someone reduces staff. You might reduce supplies, but the big cost is staffing. Soft cost never gets realized.”

A dearth of available technology to enable labor-intensive analyses means most hospitals must track projects via email and Excel spreadsheet. CentraCare uses hospital-wide software and metrics to track cost reduction, and currently relies on database tools and an electronic suggestion box.

Kirk advises hospital leaders to build reporting infrastructures and senior leadership teams to optimize cost reduction. Klugherz calls his hospital’s dedicated cost improvement team “a subset of the executive crew responsible for clinical operations.”

He advises hospital leaders to “Be ready to make your case and explain what you need from people to achieve your goals. Illustrate where there are opportunities to learn what drives cost and changes,” he said.