Most hospital execs have limited cost reduction goals for next 5 years

More than half (51 percent) of hospital and health system executives responding to a Kaufman Hall survey said they have either no cost reduction goals or a goal of only a 1 percent to 5 percent reduction in the next five years.

One in four hospitals reported having no cost reduction goal. Single hospitals were more likely to be in this category, with 40 percent having no reduction plans. These results were not, however, due to hospitals thinking reducing costs shouldn’t be a priority—quite the opposite, in fact, as 96 percent said cost transformation is a “significant” to “very significant" need for their organizations.

“Financial realities demand a new way of providing care,” Walter Morrissey, MD, managing director at Kaufman Hall, said in a statement. “This is not business as usual, involving incremental change. To meet community needs under healthcare’s new business imperatives, and to participate as a provider of choice in narrow networks developing nationwide, organizations must have a strong value proposition and a cost position that is significantly lower than competitors.”

Some 29 percent of hospitals and health systems reported having a 6 to 10 percent cost reduction goal, 11 percent will aim to cut costs by 11 to 15 percent, 4 percent will try for a 16 to 20 percent reduction and 5 percent have a cost reduction goal of more than 20 percent.

The recognition of the need to cut costs is nothing new. Most hospitals, however, reported being less than thrilled with their efforts so far. Three-fourths described their cost transformation success has been “average to below average,” with 25 percent reporting it as “better than average or very successful.” Eighty-two percent of single hospitals and 92 percent of systems between five to nine hospitals were in the former group, while 43 percent of 10+ hospital systems were in the latter group. To Kaufman Hall, that shows that “scale matters” in trying to drive down costs, which has been one of the justifications for increased merger activity among hospitals.

“Larger systems were successful across the range of targets even in the (less than 20 percent) range with an average success score of 3.5. Success at this level for larger systems represents substantial cost reductions. While single hospitals also were successful at achieving their targets, with an average of 3.13, no single hospital responded with targets greater than 15 percent,” the report said.

When asked about the factors driving their decisions to reduce cost, 77 percent of respondents cited the need to refine their structures in the transition to value-based care, beating out the 68 percent who cited the need to meet financial performance targets.

The most commonly cited impediment to cutting costs was data—25 percent identified a lack of good data into costs and where the opportunities for savings exist as the top hurdle to achieving cost cutting goals. Another 21 percent said their organizations have trouble realizing those opportunities even when they’re identified.

“To succeed in reducing organizational cost structure, executives need a rich set of accurate data that gives them insight into their current costs and allows them to make informed decisions,” the report said. “The data and analytics must extend beyond financials to include clinical and other operational data sets.”

The report made several recommendations to remove these barriers. Chief among them was development of a cost transformation plan, which can solve several issues identified by the survey, including limits on workers’ time and attention, the absence of accountability for leaders who don’t meet cost reduction targets and managers who may not know what’s expected of them.

The data piece could also be addressed through this plan, with the report recommending a collaboration between clinical and financial leaders to obtain the right kind of data and analytics platform for a value-based care world, rather than reporting systems oriented only to fee-for-service.