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July 2, 2020
How to Reduce Your Operating Costs When There’s No One Left to Furlough
David Burda
COVID-19 Economics Innovation System Dynamics

How to Reduce Your Operating Costs When There’s No One Left to Furlough

I’m not independently wealthy, and as a journalist for nearly 40 years now, there have been times in my adult life when our family has lived check to check. Yet, when it looked like our monthly living expenses were starting to exceed our monthly income, our first thought wasn’t to get rid of one of the kids to cut our operating costs. Although the kids represented most of our expenses, we found other ways to cope.

Not so for many hospitals, health systems, medical practices and other healthcare organizations whose revenues all but evaporated because of COVID-19. Their first thought was freezing or cutting pay, laying off staff and furloughing workers. Labor makes up a large share of a healthcare organization’s expenses, and it’s usually the first place healthcare executives and managers look to cut when things get rough. It’s fast and easy or certainly faster and easier than finding other ways to live within their shrinking means.

Downsizing healthcare’s workforce during a pandemic that shows little sign of slowing down in the U.S. doesn’t seem particularly logical when we may need those workers to care for more patients sickened by the virus. But, healthcare is an industry like any other industry, and business always comes first.

At some point, though, a healthcare organization could run out of doctors, nurses, other caregivers and support staff to show the door and stay in business. Where else could a hospital, health system, medical practice, health plan or other type of organization find new opportunities to reduce its operating costs?

Unless the answer is turning off the lights, carpooling or switching to basic cable, I don’t know. But, a lot of smart people do. Below are a handful of reports, research and surveys that may give healthcare execs some ideas beyond reducing head counts and FTEs. For each entry, I highlighted an idea or recommendation that I thought was particularly creative or insightful.  

Six cost-cutting targets

In October 2019, researchers from Humana and the University of Pittsburgh School of Medicine published a study in the Journal of the American Medical Association that estimated that the U.S.
wastes $760 billion to $935 billion a year in healthcare spending. The biggest chunk—$265.6 billion—comes from “administrative complexity.” That’s followed by:

  • Pricing failure ($230.7 billion to $240.5 billion)
  • Failure of care delivery ($102.4 billion to $165.7 billion)
  • Overtreatment or low-value care ($75.7 billion to $101.2 billion)
  • Fraud and abuse ($58.5 billion to $83.9 billion)
  • Failure of care coordination ($27.2 billion to $78.2 billion)

“Implementation of effective measures to eliminate waste represented an opportunity (to) reduce the continued increases in US health care expenditures,” the researchers said.

For your organization, that’s six rich targets to go after instead of people.

It’s the paperwork

In January 2020, researchers from City University of New York at Hunter College, the Harvard Medical School, the Cambridge Health Alliance and the University of Ottawa in Ottawa, Canada, published a study in the Annals of Internal Medicine that compared healthcare administrative costs in the U.S. versus Canada. They said administrative costs represented 34.2 percent of national health expenditures in the U.S. in 2017 compared with 17 percent in Canada.

On a per capita basis, administrative costs totaled:

  • $933 for hospital care in the U.S. compared with $196 in Canada
  • $844 for public and private health insurance in the U.S. compared with $146 in Canada
  • $465 for physician care in the U.S. compared with $87 in Canada
  • $255 for nursing home, home and hospice care in the U.S. compared with $123 in Canada

Short of moving to Canada or to a government-run, single-payer system in the U.S., this study points to time-consuming and budget-eating paperwork as ripe for time-saving and cost-reducing automation as the way forward. Rather than cutting staff.

Eight electric opportunities

Also in January 2020, and related to what the Annals study found, the Council for Affordable Quality Healthcare released its 2019 CAQH Index, which is based on two billion medical claims submitted by 154 million health plan members. The Index basically compares the cost of doing eight things manually versus doing them electronically. The tasks (and their per-transaction manual versus electronic costs) are:

  • Eligibility and benefit verification ($8.77 versus $1.22)
  • Prior authorization ($14.24 versus $1.93)
  • Claim submission ($4.22 versus $1.06)
  • Attachments ($5.06 versus $2.55)
  • Coordination of benefits ($1.05 versus $0.18)
  • Claim status inquiry ($10.13 versus $2.41)
  • Claim payment ($3.18 versus $1.59)
  • Remittance advice ($4.22 versus $1.26)

Going fully electronic on all eight could save the industry $13.3 billion a year, CAHQ said. That would cover a lot of physician, nurse and staff salaries, wouldn’t it?

Standardization equals savings

In February 2020, two editors and one consultant affiliated with Health Affairs published a blog post that reported on the latest machinations from the Council on Health Care Spending and Value, a working group put together in 2018 by Health Affairs to come up with ways to reduce costs and improve outcomes. Like others, the group pointed its collective finger at administrative expenses as a leading culprit.

The group acknowledged that some administrative expenses are necessary, but it cited three examples of what it called “low-value administrative spending” in need of immediate attention:

  • The costs associated with non-standardized protocols for exchanging money and patient data
  • The costs associated with redundant quality reporting and pay-for-performance systems
  • The costs associated with fee-for-service medicine and all its payer-specific, disparate documentation, coding, billing and re-billing requirements

Variation kills your operating budget. What this working group is saying is look for ways to standardize and streamline business processes and compliance with regulatory requirements.

Pick up the pace in the OR

In March 2020, researchers from Michigan State University and Rutgers University published a study in the Journal of Operations Management that reported their findings from watching 92 surgeries performed over 250 hours at a large teaching hospital in the Midwest.

They found that procuring unplanned surgical supplies added five to 10 minutes to each surgery because the supplies that were in the OR at the start of a procedure weren’t always the supplies that the surgeon wanted during the procedure. To avoid delay-causing workarounds, the researchers recommended that hospitals do a better job maintaining up-to-date physician preference cards, or PPCs, for each surgeon.

“By recognizing and identifying instances of workarounds, healthcare organizations can take steps to address the key reasons for unplanned costs in episodes of care,” the researchers said.

Not to mention the extra five to 10 minutes that patients spend under anesthesia, as the researchers noted. No one needs that additional patient safety risk.

Better planning, lower costs, better outcomes. You have to like that.

Less friction, more savings

Also in March 2020, The Hamilton Project published a policy proposal written by David Cutler, the well-known Harvard economist and healthcare advisor to former President Obama, on how to reduce healthcare administrative costs. In his 28-page proposal, aimed at the U.S. health system as a whole, Cutler said we need streamlined data flows to achieve administrative simplification in three areas:

  • Claims processing
  • Prior authorization
  • Quality reporting

“All of these tasks involve standards-based data flows across institutions: from provider to provider, provider to payer, and payer to provider,” Cutler wrote. “Causing the right information to flow as and when it is needed is thus central to any system of administrative cost reduction.”

You can apply Cutler’s ideas at a micro level at your organization. If you want to learn how to do that, I would highly recommend you read “Healthcare’s Age of Liquid Data: Extreme Interoperability Sparks Personalized, Real-Time, High-Value Services on 4sighthealth.com. 

What about corporate?

Now, if you’re looking for specific departments or functions to cut or cut back on or automate, you can look at the results of a survey of 114 senior-level provider executives done by the Healthcare Financial Management Association and Navigant. They also released the results in March 2020, and you can download them here.

Seventy-five percent of the execs said their organizations are overspending on corporate services by 10 percent or more. At what corporate service do they want to target their cost-cutting efforts at over the next 12 months? In rank order:

  1. Revenue cycle management (cited by 23 percent of the execs)
  2. Supply chain (20 percent)
  3. Information technology (19 percent)
  4. Facilities (10 percent)
  5. Administration (9 percent)
  6. Human resources (8 percent)
  7. Marketing (6 percent)
  8. Finance (5 percent)

And how will they do it? In rank order:

  1. Consolidation or centralization (cited by 45 percent of the execs)
  2. Standardization, simplification or streamlining (27 percent)
  3. Automation (15 percent)
  4. Selectively outsourcing (13 percent)

Having worked at many media and publishing companies over the years, reporters, editors, designers, photographers and other creatives are always the first to go when revenue stops and profits drop. Just like frontline caregivers and staff are always the first to go in healthcare when that happens.

How to Reduce Your Operating Costs When There’s No One Left to Furlough

It’s tough to stay in business when you don’t have anyone writing stories or caring for patients. It’s better to look higher up on your organizational chart for cost savings. You’ll find a lot of people shopping online or running a side hustle on company time.

As I hope these seven reports, research articles and surveys show, there are many ways to reduce your operating costs other than furloughing and laying off frontline caregivers and staff particularly during a deadline pandemic. It’s a short-term strategy with a lot of downside risks not the least of which will be serious morale problems when your patient volume returns and you ask your employees to come back.

Thanks for reading.

Stay home, stay safe, stay alive.

About the Author

David Burda

David Burda began covering healthcare in 1983 and hasn’t stopped since. Dave writes this monthly column “Burda on Healthcare,” contributes weekly blog posts, manages our weekly newsletter 4sight Friday, and hosts our weekly Roundup podcast. Dave believes that healthcare is a business like any other business, and customers — patients — are king. If you do what’s right for patients, good business results will follow.

Dave’s personnel experiences with the healthcare system both as a patient and family caregiver have shaped his point of view. It’s also been shaped by covering the industry for 40 years as a reporter and editor. He worked at Modern Healthcare for 25 years, the last 11 as editor.

Prior to Modern Healthcare, he did stints at the American Medical Record Association (now AHIMA) and the American Hospital Association. After Modern Healthcare, he wrote a monthly column for Twin Cities Business explaining healthcare trends to a business audience, and he developed and executed content marketing plans for leading healthcare corporations as the editorial director for healthcare strategies at MSP Communications.

When he’s not reading and writing about healthcare, Dave spends his time riding the trails of DuPage County, IL, on his bike, tending his vegetable garden and daydreaming about being a lobster fisherman in Maine. He lives in Wheaton, IL, with his lovely wife of 40 years and his three children, none of whom want to be journalists or lobster fishermen.

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