Chasing Cost Reductions Isn’t the Answer for Hospitals to Balance the Budget

Cutting administrative costs has traditionally been the first strategy hospitals use to make up a budget deficit. But in today’s health care environment, it will take more than reducing personnel and operational expenses to make up the shortfall that is on its way, if not already here. There are a variety of reasons why cutting administrative spending won’t balance the budget – but in a nutshell, it’s not enough and it does not drive better patient care. 

Many hospitals already lose money on Medicare and Medicaid and those reimbursement amounts continue to drop. It is also anticipated that private payers will reduce their rates in proportion to the federally funded programs.  Medicare Fee-for-Service (FFS) reimbursement models are on their way out. Physicians and health care systems will be forced to adapt to changing models in order to stay in business. 

For example, hospitals are labor intensive, so staff reductions are an easy target for cost containment. But, this isn’t the answer. The Accountable Care Act (ACA) will result in a significant increase in the patient population through expansion of Medicaid, employer mandates, and insurance exchange programs. Millions of previously uninsured individuals will be seeking healthcare. 

In addition, America is aging. The baby boomer population bulge is marching to its senior years 78 million strong and that means a higher proportion of elderly patients that will need higher cost care. The first boomers reached retirement age in 2011 and some studies show that the group as a whole is less healthy than previous generations.  With more patients to serve, more personnel will be needed. 

The new mantra in health care is “reduce costs and improve quality.” However, the cost reduction measures to consider go well beyond evaluating supplies, food services, and other operational expenses. Hospitals must find ways to eliminate wasteful care practices that permeate our health care industry. FFS models currently reward providers for high volume. This sometimes results in inappropriate or unnecessary care that does not improve patient outcomes. Hospital-acquired complications and costly readmissions are examples of preventable waste. The lack of evidence-based medical decisions in patient care results in higher cost care plans without an increase in quality or a better outcome.

The new model must reverse old thinking to embrace the idea that quality controls cost. In some ways, that’s revolutionary thinking since for so long the thinking has been that the more access to tests, the more money that is thrown at episodes of care, the better the outcome for patients. Numerous data-driven initiatives to reduce variations in care lay that model bare. So the mantra needs to be switched from “reduce costs and improve quality” to “improve quality to reduce costs.” 

How does that transformation take place? Budget strategies in 2014 need to include the creation of a more collaborative culture where clinicians work together to reduce variation in care, eliminate unnecessary tests and procedures, follow infection-fighting protocols, and provide better education to patients on how to manage their conditions.  Status quo cannot be a strategy.

Health care in America is at a tipping point. Hospitals and physician practices employing creative strategies that show great promise to improve patient outcomes while cutting costs, such as adding more midlevel providers and reducing variations in care, are more likely to land in a healthy and competitive position to better serve their patient populations and stay financially viable.

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