January 27, 2021

Back in the Carter administration, there was an attempt at arresting the growing cost of government by implementing a methodology known as “zero-based budgeting.” The idea was to prohibit the long-standing practice of simply adding a set percentage increase to the previous year’s budget to reflect the budgetary needs for the coming year. Instead, each department would start at zero dollars and would then be required to undertake a study of what was actually needed for that department to perform its function in a given year. The idea was that this approach would force bureaucrats to justify every penny it wanted to spend; and, in so doing, they might discover that some programs were outdated or no longer justifiable. The end result might be lower spending instead of automatic increases.

While there have been these occasional attempts at fiscal responsibility in Washington D.C. over the years, it seems that, these days, spending at record levels is what government does best. Just turn on the printing press and pump out a few more trillion when needed. What could possibly go wrong?

Slippage in Fiscal Stability

Though government isn’t always concerned about the bottom line, businesses cannot afford to operate in such a fashion. Their success is based on the popularity of their product and a reasonable restraint of their costs. That business strategy should be embraced by hospitals, as well; and yet, according to a recent article in the New York Times, numerous studies have demonstrated that about one quarter of healthcare spending amounts to waste. This is an astounding figure. Imagine how a hospital’s financial health could be bettered by simply trimming this fat.

Yes, in order for health facilities to really prosper, they must hold the line on runaway spending. Hospitals that maintain a good balance between excellent care and fiscal responsibility will have the best shot at avoiding that downward spiral into mediocrity or bankruptcy. In the section ahead, we will explore some strategies that hospital CFOs and other executives can use to streamline their operations and maximize their dollars.

Strategies for Reduced Spending

Amy Finkelstein, professor of economics at M.I.T., has written that, based on government data, “overall total care expenditures dropped 10 percent in the first nine months of 2020, compared with the same period a year earlier.” That may sound like hospitals are getting the message, that they’re finally starting to find ways to cut unnecessary costs. The truth, of course, is that spending was reduced because high-acuity cases were reduced. Because of the pandemic, thousands of surgeries and other treatments were put off, thus lessening the need for certain expenditures. What we want to explore are “healthy” ways to reduce costs. That is, assuming surgical cases return to a pre-COVID volume in the next few months, what can hospitals do to reduce unnecessary spending in 2021? Here are some broad areas that should be considered:

Improve Facility Efficiencies

An article in Becker’s Hospital CFO Report contained some interesting ideas for cutting costs by simply making improvements in your plant’s infrastructure. For example, one hospital saved more than $180,000 during a six-month period by simply changing out their landscape sprinkler heads to a reduced-flow model. Another hospital is saving $1.3 million annually by upgrading their water-cooling system. Replacing inefficient urinals and toilets can also save hundreds of thousands of dollars over time.

Other ideas for waste-proofing your plant include energy-saving measures. Chicago-based Resurrection Health Care ended up saving $900,000 every year just by switching from high-energy lamps and ballasts to more efficient models. Hospitals with adequate access to direct sunlight might also consider adding solar panels to help save electricity costs. Yes, all these cost-cutting measures will begin with short-term investments, but the idea is to begin reaping long-term savings.

Improve Care Efficiencies

According to a Wall Street Journal article, a 70 percent reduction in monitoring costs occurred at one hospital due to the facility simply holding doctors to their medical societal guidelines. Similarly, Yale New Haven Hospital was able to achieve a 20 percent reduction in costs, per case, by “reducing variation in clinical practice that may result in adverse outcomes,” according to a report in Forbes Magazine. This included getting everyone on the same page as far as common-use terminology and using robust data metrics to follow patient care at each stage.

Technology, analytics and dashboards should be increasingly utilized to identify patterns of waste and opportunities for smarter care. For example, are imaging services being used appropriately? What about lab services? Does the facility have a means to efficiently and quickly analyze these questions? Does it have an automated system in place that might suggest a more cost-effective utilization of these services?

Reassess Administrative Needs

According to one study, American hospitals spend far more on their bureaucracy than hospitals in other countries. The average hospital in the U.S. spends over 25 percent on its administrative costs. Compare that with 12 percent in both Canada and Scotland. It would seem, therefore, that a review of such costs might be appropriate and could prove useful in identifying potential areas of savings. The idea is not to increase the common burden by eliminating administrative staff, but to identify both processes and programming that might lessen the need for certain administrative costs.

Some hospitals have implemented an ongoing department-by-department program to look for ways to streamline workflows and enhance efficiency. As every hospital is unique, it will be up to each facility to determine where savings can be found in the administrative area of the budget. It may help, however, to see what hospitals of similar size are doing to reduce such costs. The main thing is to make a commitment to do something. Set a goal and begin the process.

Sticking to the Strategy

You can have all the latest and most innovative strategies in the world for cutting waste; but, unless you actually act on those strategies and see them through, they will accomplish little. An independent survey a few years ago revealed that 88 percent of hospitals had cost-cutting plans in place, but only 17 percent reached their targets. So, plan first, then plan to follow through. Come up with an accountability system, including timetables and recurring meetings, that forces those with ownership of the cost-cutting efforts to ensure their implementation.

If we at MiraMed Global Services can be of assistance to you in this area, please reach out to us at info@miramedgs.com. We get excited about helping hospitals succeed.