Hospitals need cost reduction strategies, fall short on setting goals

Despite an overall understanding that hospitals need to cut costs to improve their bottom line, the actual commitment to making the necessary reductions is lacking, according to a new report from Kaufman Hall.

According to their 2017 State of Cost Transformation in U.S. Hospitals: An Urgent Call to Accelerate Action report, 96 percent of hospital executives surveyed agreed transforming costs was a "significant" to "very significant" need, but more than half of organizations haven't implemented adequate cost reduction goals.

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Moreover, 25 percent said they have no cost reduction goals for the next five years. Though an additional 26 percent have a goal to reduce costs by 1 percent to 5 percent, that range is well below the required range that will transform cost structures. In fact, Kaufman Hall said it is unlikely to keep pace with inflation.

Overall, the knowledge that more work is needed seems prevalent as nearly 70 percent said they know they need to "close the gap between their financial plan and current operating performance" and almost 80 percent said changes are needed to align their cost structure with value-based care.

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For most hospitals and health systems, revamping cost structures will be a "transformational undertaking" that requires a significant effort to lower costs 25 percent to 30 percent over a five-year period, Kaufman Hall said.

"Effort toward the cost reduction target recommended by Kaufman Hall must start now, not at a yet-to-be-determined future date," added Walter Morrissey, Kaufman Hall managing director. "It will involve initiatives such as reshaping the portfolio of services and businesses, redesigning the care model for improved effectiveness and efficiency, and reconfiguring the workforce--all of which have the potential to yield much, much lower costs."

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Beyond the need for cost transformation in general, the report indicates that a lack of data and insight into cost and savings opportunities may be to blame for inadequate cost reduction goals. The report showed more than 90 percent of respondents think their organizations should be doing more to "leverage financial and operational data to inform strategic decisions." But accuracy poses a barrier, as the report also shows only 25 percent are confident in the accuracy of the data from their cost accounting system.

Twitter: @BethJSanborn
Email the writer: beth.sandborn@himssmedia.com