As the healthcare community tries to transform itself from a volume-based to a value-based system, costs may become even more constrained. To succeed, hospital leaders must manage costs by identifying effective resources and integrating service distribution plans, according to a report put forth by the American Hospital Association (AHA).

“Exacerbated by the U.S. deficit and other economic challenges, the rising cost of healthcare is a front-and-center issue nationwide for patients, employers, providers, and govern­mental and commercial payors alike,” according to the report created by Kaufman, Hall & Associates in Skokie, Ill. “To continue meeting community healthcare needs in this new delivery and payment environment, hospital and health system leaders will need to think and act strategically about managing cost. Strategic cost transformation will be required.”

Authors of the report entitled, “A Guide to Strategic Cost Transformation in Hospitals and Health Systems,” said that it will be necessary for hospital administrators to follow three pathways to achieve value-based care:

• Pathway 1: Reduce current operation costs;
• Pathway 2: Reduce costs through restructuring businesses and service lines; and
• Pathway 3: Reduce costs through clinical transformation.

The report suggested that hospitals ensure that CEOs drive the cost transformation process. Additionally, they must develop and implement a strategic cost master plan; bolster the hospital's business platform; and create and support cultural change within the organization.

As for Pathway 1, the report noted that hospital administrators must be ready to “attack overhead and non-value-added functions, overhead costs, and costs ‘flying below the radar.’” This can be achieved by using benchmarks to identify cost-saving areas, streamlining overhead and/or understanding staffing and productivity issues.  

In Pathway 2, hospitals must ask themselves: “Where can we most effectively invest our limited capital and human resources to meet the continuing healthcare needs in our communities?”

Pathway 3 focuses on improving care processes, physician integration and producing effective care transitions.

According to the report, most hospitals currently focus on Pathway 1—attempting to reduce operational costs by cutting overheads—but they will soon need to embark on Pathway 2.

“Due to rising healthcare costs, the industry’s value proposition—best-possible quality of care at lowest-possible price—will not be reversed,” the report stated. Therefore, CEOs must drive the process to cut costs and can do so by first increasing cost efficiency throughout the organization.

“In some organizations, the low-hanging fruit has not already been picked,” the report stated; there still is time for hospitals to focus in on areas where cost-cutting will lead to care efficiencies. They can start by integrating health IT in the mix, which will enhance value-based care and find areas to cut costs.

“In an era of flat-to-declining revenue, cost-reduction goals should be established to close as much of the organization’s capital shortfall as possible,” according to the report. Hospitals must focus on staff and labor costs, which often account for more than half of the organization's operating expenses.

While setting targets will help achieve goals, “targets alone are not sufficient.” According to the report, “Targets without specific improvement initiatives will produce unsatisfactory cost savings.”

In an effort to transform thinking, CEOs and leaders must evaluate the organization’s options. This should include strategic financial planning, evaluation of the geographic market, assessing service lines and identifying ways to better distribute care.

Hospitals and providers must also ask themselves whether their efforts will result in long-term sustainability, particularly as the markets continue to change.

“Hospitals and health systems should use a structured process and fact-based framework to analyze their core businesses and service lines. Discussions must openly address total value of each entity to determine if each is the best use of scarce resources,” the report summed.

Additionally, hospitals will need to redefine their offerings and tough decisions will need to be made by leadership, including how to offer care.

“The end product of service distribution planning is a plan that drives improved operating performance through efficient care delivery across a geographic area without compromising quality and outcomes, and often improving both,” according to the report.