Making Cost of Care Less Expensive For Hospitals

March 26, 2014

As hospitals and accountable care organizations try to reduce the cost of care as they take on more risk, conversations about utilization are front and center.  However, as we are working tirelessly to make the cost of care lower by right-sizing utilization, are we actually making care more expensive?

The answer is “yes” – unless your organization is a lean, mean flexing machine that can define lower-cost ways of providing high-quality care.

As hospitals see declines in overall admissions, their focus should shift to reducing their expense base to accommodate lower volumes.

Reducing utilization will reduce the total charges on a patient’s bill. Depending on the reimbursement methodology used, it reduces the amount the insurer pays the provider. But it does not necessarily reduce the cost of care. It actually may increase the cost of care for patients who are seen at the hospital in the future.

Let’s look at a common example. A mid-sized hospital focuses on reducing readmissions for the Centers for Medicare & Medicaid Services-designated conditions for reimbursement penalties. Their readmission rate for these cases is 20 percent – not out of line with most other facilities, but still needing some work.

They pull together teams of physicians, nurses, administrators and case managers and reduce readmissions in those DRGs by 30 percent. They have reduced more than 1,600 patient days. Patients and payers are now receiving at least $4 million less in charges.

However, with 1,600 fewer patient days (approximately 4.3 fewer patients per day), has the hospital taken out a commensurate level of cost? Now compound this with the reduction in utilization from other initiatives that are under way to reduce utilization, such as reducing ICU days and hospital admissions for patients at the end of life, assigning medical homes to prevent admissions for chronic conditions and reducing length of stay for ACO enrollees.

The bottom line is that revenue will decline along with patient admissions and inpatient days.

The clear call to action is that expense reductions need to keep pace. Unless the largest cost driver, which is staffing, is going down in lock step with the reduction in volume, your organization’s cost of care is not going down. Rather, the same cost is being spread over fewer patient days, fewer lab tests, fewer drugs administered … and therefore the cost of each individual service for each patient seen in the future increases.

And here’s where the problem really begins. The unfortunate truth is that most hospitals are not highly effective in flexing staff down when volume declines. Nor are they particularly adept at implementing lower-cost models of care.

It’s hard to adjust staff schedules, to cut hours, to ask staff not to come to work, to ask staff to leave early, to take PTO when they don’t want to, and of course, to lay people off. It is even harder for department leaders who know that if volume spikes and staffing is low, patients’ lives could be jeopardized.

Moreover, department administrators don’t typically have the detailed information needed to provide them insight into their actual staffing needs based on volume trends and service mix, not to mention the data needed, and time to analyze the data, to identify opportunities to reduce labor costs beyond simply flexing down. Without data to project the likely impact of reducing staffing, department leaders often don’t have the confidence to move forward with lower-cost staffing models.

The path forward is to leverage analytics to combine large data sets, pull out meaningful trends, and produce highly visual charts that point department leaders to specific opportunities to reduce cost. Sustainable cost reduction involves more than staffing to volume, but more importantly, re-thinking how care is delivered.

Once improvements are defined, having readily accessible and actionable data to drive accountability for achieving results is absolutely critical. Only then will healthcare providers be able to build a culture of continuous cost improvement … and truly to be able to reduce the cost of care, not just amount paid for care.