Its time to get serious about costs

When announcing a new health care company formed by Amazon, Berkshire Hathaway and JPMorgan Chase, Warren Buffett didn’t mince words about the rationale: “The ballooning costs of health care act as a hungry tapeworm on the American economy.”

Health care spending hovers at about 18 percent of gross domestic product, 52 percent more than that of the next highest spending nation. Since December 2007, real health care spending has increased 30 percent. By 2027, the federal deficit is forecast to reach the highest level since World War II, driven almost entirely by the aging population and rising per capita health care costs, according to the Congressional Budget Office.

More than half of health spending goes to hospitals and physicians, with hospitals making up almost one-third of total spending. Yet, hospitals have had only small successes in making permanent changes in their cost structures.

Given rising economic pressures, and the impatience of government, payers, employers and consumers, hospitals need to take new steps to achieve and maintain permanent reductions to their cost structures.

New thinking

Successful companies in the internet economy have a strong point of view about costs. They deliver excellence at the lowest possible cost, no matter the level of revenue. They use systems thinking, innovative technology and supply chain excellence in continual pursuit of this low level of costs. Amazon and Apple exemplify such achievement:

  • In 2016 alone, Amazon increased the number of robots in its warehouses by 50 percent.
  • Gartner Inc. analysts established a separate “masters” category to recognize Apple’s supply chain excellence.

In hospitals, on the other hand, costs tend to increase when revenues increase, and costs tend to decrease when revenues decrease, according to Moody’s Investors Service data. This fluctuation suggests that hospitals have not yet developed a point of view about what the cost level should be for the care delivered, nor established an organizational imperative to achieve that level. Developing this point of view is key to tackling costs with a new intensity and using new approaches.

Cost management

Traditional cost management in health care has focused on labor and supplies. Too often, however, costs creep back in after an initial reduction, because there has been no fundamental change in the structure and processes of the organization. The kind of cost reduction needed requires a more fundamental and holistic approach:

Reconfigure the portfolio. Health systems need to do a top-to-bottom review of demand and performance for every one of their facilities and services. They must be willing to make tough decisions about selling, converting or closing facilities that do not have sufficient volume or are otherwise unable to perform up to necessary financial or clinical standards. They must be willing to divest service lines that are not delivering value to the organization and community. They must be willing to consolidate services that are performed at multiple locations in close proximity.

New approaches to facility design should be considered to ensure a match between patient needs and appropriate levels of care. Hospitals need to ask themselves what a completely redesigned system of care would look like — one that meets demonstrable community needs in the most streamlined manner possible. Then they must be willing to take action based on these insights.

Redesign the care model. Excessive utilization resulting from problems with care delivery design, coordination and standardization cost the U.S. between $285 billion and $425 billion annually, according to a study by Donald Berwick, M.D., and colleagues in the Journal of the American Medical Association. For health care organizations, redesign of care delivery holds great promise to reduce costs and improve quality. This redesign should include the sites of care, who delivers the care, and standardization of clinical protocols and operations.

For example, at Oakland, Calif.-based Kaiser Permanente, more than half of primary care visits are performed virtually. Kaiser sees many hospital services in the future being performed in the home. The result of clinical care redesign will be greater efficiency and a better experience for both caregivers and patients, and a reduction in unwarranted variation that can undermine quality and increase costs. These are perhaps the most difficult changes for a provider organization to make, but are at the core of making leaps toward improving quality, the patient experience and efficiency.

Reconfigure use of labor. Hospitals need to leverage the highest-cost (per unit and in total) resources to their highest and best use. The clinician workforce is highly trained and expensive. Unfortunately, the application of its skills often is inefficient at all levels (for example, physicians doing excessive data entry or nurses transporting patients). Optimally matching expertise to the tasks at hand is inherently difficult in such a complex system, but the potential payoff is enormous.

A loss of patience

Health care delivery in America has a multitude of problems, and it is clearer each and every day that legacy health care no longer meets the needs of a number of its critical constituencies. This lack of success is complicated, but mostly can be traced to a system of care that simply is too expensive for the economy at large.

The Amazon-Berkshire-JPMorgan initiative demonstrates that corporate America sees legacy health care as an essential component of its overall supply chain, but a component whose total cost and growth of cost are no longer acceptable or tolerable. Jeff Bezos, Warren Buffett and Jamie Dimon have lost patience. Hospital CEOs across America should have lost patience as well.

Kenneth Kaufman is chair of Kaufman, Hall & Associates LLC in Skokie, Ill.