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Cost Containment for Hospitals: Steps to a Successful Hospital Cost Reduction Strategy 

April 19, 2022

Reducing the cost of care continues to be the top strategic priority for hospitals. The rising costs of care results in negative net revenue for hospitals, making it a great concern. Hospital leaders find themselves spending more time and money planning how to reduce costs only to have no positive yielded results. A cost reduction program revolves around cost containment strategies. To have an effective cost reduction program everyone on board should understand what cost containment is and the various benefits of cost reduction strategies your healthcare organization can follow.

Understanding The Benefits of a Cost Reduction Program

Having a successful cost reduction strategy will help you grow net revenue, but even more importantly, it will also boost quality and patient experience. Leading healthcare organizations have used cost reduction programs to improve the quality of care at their organization, resulting in millions of dollars of cost and value savings.

Repeatedly, operational benchmarking becomes the first tactic for cost reduction by healthcare organizations. Operational benchmarking is comparing your organization’s cost metrics and performance to other peer organizations. Benchmarking on its own is not an effective cost reduction strategy but paired with the right tools it can be highly effective at yielding actionable results. Luckily, there are steps that can be taken to create a successful cost reduction program.

Operational benchmarking is comparing your organization’s cost metrics and performance to other peer organizations.
  • Establish Leadership and Owners: Executive level sponsorship drives accountability, sets the tone for improvement and creates urgency. Having an executive working alongside a cost reduction program is essential. This could mean having the CFO, COO or leadership from the CMO and CNO to drive movement. It is also crucial to have a dedicated program owner who is the central point of coordination for the program. The dedicated program owner should have the following skills:
    • Effective communication skills
    • Be present with the team
    • Influential leadership skills
    • Strong analytical skills
    • Project management experience
  • Set the Target: Cost reduction programs do not work when the goal is simply a number, but having a target does help track progress and celebrate wins. The target should be incorporated into a strong visual that can be shared across the organization so that people can see their progress over time. It is also important to be able to explain the target and have it resonate with the staff. Targets that do not resonate with staff will result in weak engagement and minimal commitment to the program.
  • Brand the Program: Having a strong, appealing brand for the cost reduction program helps with communication and with securing that organization-wide buy-in. Be creative and have fun with this part! Name and brand the program so that it is easily remembered.
  • Establish Guiding Principles: These should be specific guidelines that drive the behavior and mindset of all team members towards their target. It can be helpful to turn this into a visual that can be kept across the organization available for anyone.
  • “Design the Two Machines” (A Structure to Promote Action & Accountability): One of the key areas of concern for organizations undertaking a cost-reduction program is governance. Think of it like this: there are two machines, which you can think of as spinning wheels. The first machine is “opportunity identification and vetting,” which is fed saving opportunities in one end and spits them out the other end. In this process, some of the opportunities for savings identified by the organization are going to be lemons and some are going to be prioritized for tracking. Prioritized opportunities are then fed into the second machine, “project performance management.” Once they’re being tracked, some of the opportunities are going to realize savings while others are going to be off-target and sent back to Machine No. 1. These two spinning-wheel machines are always turning. And they don’t ever stop. They are not built for three months or a year; they are the new normal and the culture for the organization.
  • Identify Resources: A cost reduction program should have a team of full-time project leadership resources. These people will be focused on working with providers, service lines, they will pick up initiatives and drive behavior changes to reduce healthcare expenses. This is an important role that should be played by someone dedicated to project resources.
  • Communicate, Communicate, Communicate: To achieve cost reduction, frontline workers need to change their behaviors. To get there, highly effective communication is necessary for them to know what they are doing and understand why and how they need to connect to the movement.

The first step in achieving cost reduction in healthcare is for leaders to be able to understand the true meaning of cost containment. Cost containment requires strategies that hospitals follow to continuously reduce the cost of care while providing high quality care to customers. This can be done by hospitals through implementation of some of the strategies shared today.

Strata brings a unique set of software and service solutions to help healthcare providers better analyze, plan and perform in support of reducing the cost of care and caring for their community.

For organizations looking to use data to understand their costs, check out these resources below: