Using a “Total Cost” Strategy to Reduce Healthcare Costs

While cost reduction efforts at hospitals and health systems typically emphasize internal cost structures, it’s important to look at other factors to address new payment models and evolving types of insurance plans. That’s the advice of Jim Blake, Managing Director at consulting firm Kaufman Hall, who has published a helpful overview on how organizations can use a more encompassing approach to cost-reduction efforts.

His view is that hospitals and health systems will need to use a “total cost” strategy in order to remain competitive in the new environment. Organizations that take a proactive approach to implementing a total-cost strategy will be able to navigate future developments from a position of strength. Waiting for external pressures to reach a boiling point is fraught with risk and will leave little room for error.

Blake suggests developing a roadmap that links needed investments to the benefits they are expected to deliver in terms of improving internal cost structures as well as reducing the total cost of care. A key area for potential new investments involves data analytics, which will help an organization more accurately quantify goals and benchmark their performance against specific metrics.

Key factors vary across different parts of the country. The article notes, for example, that “per capita health expenditures in Connecticut and Maine are far higher than those in Georgia and Arizona. Even more telling, research has shown striking variations in healthcare costs within small areas, variations that are not readily explained by demographic differences and are more likely associated with differences in how healthcare is deployed, used, and practiced.”

Approaches to reducing costs under fee-for-service models (e.g., better management of capital, labor, overhead and supply costs) can have little impact in value-based models that rely on total population health and care coordination with partners. Fee-for-service models also provided minimal incentives to improve clinical effectiveness, which is now critical. Other factors to consider include service-line distribution. It’s important to review operations to determine if a health system is providing similar services at multiple facilities that are geographically close in proximity.

To learn more about this holistic approach to cost-reduction efforts, you can access the article at: http://www.kaufmanhall.com/thought-leadership/resources/full-details/why-hospitals-should-tackle-the-total-cost-challenge