Four Common Missteps That Leaders Make When Under Pressure To Reduce Costs!
Current economic conditions caused by the pandemic are forcing health systems to hurriedly concentrate on cost reduction strategies. We have uncovered four (4) common missteps that leaders make when under pressure to reduce costs:
- Misstep # 1: Stop treating a sizeable share of your organization resources as “fixed”
Health organizations categorize to many of their resources as fixed costs, such as those incurred by plant operations, finance, registration, human resources, medical affairs, administration, etc. This assumption is a miscalculation because the resources of any department with more than one employee are variable and not fixed.
The workloads demanded from most departments cannot be delivered by only a single person. Understanding what aggregates demand for services, explains both how to assign resources and how to allocate resources.
Believing that most costs are fixed causes executives to focus improvements or reduction efforts only on the portion perceived as variable. The fixed cost fallacy also helps to explain why demand growth does not lead to significantly lower unit costs; the so-called “fixed resources” generally increase at rates close to those of demand volumes, and sometimes faster if the new workload mix is more complex to serve. - Misstep # 2: Line item reductions
When the need to reduce costs arises, financial executives often mandate arbitrary and across-the-board cuts of line-item expenses. This often translates into a mandate to reduce labor expenses or supplies (including pharmaceuticals) by a specific percentage or requiring capital expenditures to be less than EBITDA.
Financial executives should focus more on how to successfully and cost-effectively treat patients with a condition over complete cycles of care, rather than attempt to mandate a mix of labor, drugs, equipment, and devices used in individual treatments and procedures. - Misstep # 3: Not using “top-to-bottom of license” to complete assignments
Almost any department administrator can report how many Units of Service (RVUs, HPPDs, etc.) are generated within their department, but very few know the labor cost per unit of time. Since health care (a labor-intensive industry) has large variations in the different personnel cost involved in treating a patient’s clinical condition.
The ratios between highest and lowest compensated front-line staff vary widely from 3-5:1 to as high as 8-12:1. This means that who performs a task has a large impact on the overall cost of treating patients. When highly compensated staff delivers complete assignments from “top-to-bottom of license”, then more high-quality care and better customer service can be delivered at a much lower cost. - Misstep #4: Redefine clinical care to achieve great service and cost-effective operations
Few clinicians and administrators are aware of how much staff coordination is required to complete simple care activities or the enormous number of staff that interacts with a patient during hospitalization. They are even less aware of how much specialization has been created around care delivery. Sustainable improvements require a revaluation of splinter care roles and a firm commitment to a strong key few.
