Strategic Cost Management-Is Your Revenue Under Pressure?

Strategic Cost Management-Is Your Revenue Under Pressure?

Strategic Cost Management-Is Your Revenue Under Pressure?
  Strategic Cost Management: Is Your Revenue Under Pressure? 

The Value of Strategic Cost Management  

The changing healthcare landscape has put cost management on the to-do list of all savvy healthcare executives. Even if their organization has a healthy margin, these executives know that their revenue is under pressure. They see the downward trends in payment and volume. They know that new competitors are targeting hospital patients. They know that high-deductible health plans and price transparency are giving consumers the incentives and tools to choose providers based on price. And they know that value-based payment will require that provider organizations manage costs while improving quality.  

Keys to Strategic Cost Management  

These payer, purchaser, and competitive pressures mean organizations will need to reduce costs to a degree that goes beyond any efforts to date. Given the scope of change needed, cost management needs to be not a project, but part of organizational DNA.  The following are five keys to achieving that critical goal. 

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1. Establish a Target Cost Position  

With increasing pressure from payers and other purchasers for lower prices, organizational leaders are challenged to identify the cost position they need to occupy in order to be competitive for managed care contracts, narrow networks, and direct contracts with large employers. Setting this position requires an understanding of the organization's current cost position by cost center, service line, and administrative function in relationship to competitors in their market and national benchmarks. With that information in hand, the organization can set its target cost position in relationship to these benchmarks-for example, to be the lowest cost organization in its market. 

2. Use Data and Analytics to Guide the Effort  

The foundation of systematic cost management is data to understand cost drivers and to track progress toward goals. For cost management efforts to be embraced and pursued system-wide, data need to be accurate, trusted, and integrated from multiple sources. Data need to be organized to facilitate trending of key metrics related to volume, cost, and profitability for each service line.  Data should be detailed enough to support business decisions, but not so granular as to make collection and analysis unwieldy. The system should allow users to drill down to more detailed views and to customize reports based on unique queries. Cost data should be integrated into all cost-management activities, from setting and communicating goals, to tracking improvement initiatives, to celebrating successes.

3.  Invest in Cost Management

Institutionalizing cost management requires an organizational investment in human and technical resources to support that process.  Many organizations have a dedicated group of process-improvement experts staffed in a project management office. They ensure a formal and disciplined approach to performance improvement, track progress on initiatives, and ensure commitments are kept. The team has become a natural part of ongoing performance improvement. 

4. Build Commitment  

Organization-wide commitment is another imperative for ongoing cost management. That commitment starts at the top. The CEO and Executive Team have to believe it, have to be committed to it, and have to participate in cost management. Gaining commitment requires a common vision for why change is necessary and a clear articulation of that case throughout the organization. The specific cost goals then need to be aligned with goals throughout the organization. In the best performing organizations, financial performance is one of four quadrants in a balanced scorecard that is used to determine bonuses for the entire organization. Within the finance quadrant, there are two metrics, operating margin and cost per adjusted admission, with the cost metric weighted the higher of the two. 
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5. Make Cost Management a Continuous Process  

For hospitals to achieve and sustain their desired cost position, cost management must be systematic, continuous, and measurable.  The process starts with identifying cost goals that align with the organization's strategy and financial and capital requirements, determining the required timing of the savings, and gaining leadership buy-in for the goals.  Responsible parties develop detailed plans at the department and system levels, including metrics and tools to measure progress. The plans are then put into action, aligning metrics, targets, and budgets, and tracking results.
The Author: Wayne Ziemann

                                          Wayne Ziemann
Healthcare Performance Improvement Strategies 
Healthcare Strategic Performance Improvement Executive
•Expert in improving the profitability of healthcare organizations through proven cost reduction and revenue enhancement strategies. •Over twenty years of experience consulting with some of the most prestigious academic medical centers and health care organizations in the country. 

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