It could take years for hospitals and health systems to mitigate the financial and operational impacts of COVID-19. The longer the pandemic lingers, the more important it becomes to quantify the extent of that damage as soon as possible and determine how it will affect future operations.

Organizations need to determine whether existing performance improvement plans are feasible and what changes they need to make to close financial gaps. Creating viable and robust financial recovery plans requires an understanding of costs related to supplies, labor, and clinical performance, and integration across your organization to set realistic targets for each of those areas.

These four strategies can help your organization create an enterprise performance management (EPM) infrastructure to achieve your cost-reduction goals:


Strategy 1: Compare supply chain costs to detect variations

Hospitals and health systems count on their supply chain to manage what can account for as much as 40% of an organization’s costs. The supply chain must establish processes that enable tracking of purchased products and services through to individual patient encounters.

Cost and utilization data enable supply chain leaders to detect variations across departments and facilities, identify areas where product standardization could generate savings, support bundled-payment and pricing initiatives, and provide greater leverage for volume-based discounts from vendors. Utilization data can support predictive modeling for demand trends to ensure sufficient inventory.

Supply chain leaders need to benchmark their performance, both internally and against peer organizations, to identify opportunities for improvement and gauge performance against other organizations. Where the supply chain excels, comparative analysis can validate and quantify the supply chain’s contributions to the organization.


Supply chain cost containment

Providing supply chain data at the needed level of granularity and timeliness may require investment in more sophisticated cost accounting, comparative analytics, and clinical systems. The benefits of any investment will extend far beyond the supply chain to finance and clinical operations.


Strategy 2: Link labor costs and productivity

Although labor expense is the No. 1 driver of total costs for most departments, it is controllable. Focusing on productivity helps assign labor resources to where they are needed most to improve workflows while minimizing downtime.

Back testing of forecasting assumptions can improve the predictive accuracy of projections over time. Productivity analytics help planners take assumptions and replace them with actual values for drivers to test the quality and predictive accuracy of their models. They can analyze where values differed from estimates, and how inputs may have resulted in different outputs than modeled.

This analysis helps assess the volatility of plan elements given changes in volume or mix of services.


Labor cost containment considerations

Managers need a powerful tool to better assess the overall operation and staffing levels of their departments, allowing them to identify and respond to trends quickly.


Strategy 3: Communicate the budget impact of costs associated with quality performance

Typically, costs associated with poor quality that impact patient revenues or operating expenses have not been clearly defined or accounted for in external or internal financial statements. By including these costs as line items, however, leaders can track the cost-effectiveness of quality initiatives and make adjustments as necessary to improve overall results.

An internal cost accounting system or data and analytics platform gives healthcare leaders the tools needed to efficiently collect, analyze, and track costs tied to specific quality indicators.

By benchmarking organizational performance on quality measures, organizations can identify improvement opportunities and achieve performance goals. This requires combining patient care cost and quality data with internal and external benchmarks.

Clinical Cost Containment Strategies

Healthcare leaders need transparency into quality-related costs to drive performance improvement progress. Cost accounting and clinical comparison tools improve visibility for key stakeholders across the health system.


Strategy 4: Use an integrated data-driven approach to set and sustain realistic targets

To succeed in reducing an organization’s cost structure, executives need a rich set of accurate data that provides insight into current costs and informs decisions on how to reduce costs going forward.

Succeeding in a more challenging financial environment requires a disciplined, data-oriented approach that reflects previous performance, blends financial and clinical analytics, and begins with a clear understanding of how far the organization will need to go to create a sustainable path forward.

Increased data on its own, however, will not necessarily lead to improvements in performance. What’s required is actionable data. Advanced analytics systems can display role-based dashboards that eliminate the need to sort through rows and rows of data. Problem areas are prioritized and displayed in context with your budget, trends, and peers in a single source of truth across multiple levels of your organization.


Overhead cost containment strategies

An integrated platform offers robust cost accounting data and analytics, integrates with the organization’s strategic financial planning software, and delivers contextual information in an actionable format. Survey data indicates executives that have confidence in the accuracy of their cost accounting data are more likely to report progress in areas such as labor costs and clinical variation reduction.


Historically, many hospital boards have started their financial planning with the assumption that volume will increase year over year, and in turn, avoid tough decisions about where to cut costs. As 2020 has shown, those assumptions are no longer reliable. As hospital leaders confront the prospect of a long-term recovery period, they must develop, establish, and communicate financial targets for cost reduction initiatives to create a pathway to financial sustainability.

The imperative for hospitals to embark on continuous, organization-wide cost reduction initiatives has never been greater. With the right infrastructure and systems in place, organizations can integrate their clinical and financial management and genuinely transform their organizational approach to managing costs. Ultimately, cost reduction should be part of an organization’s DNA — a continuous journey, not a destination.

*Adapted from COVID-19 Monitoring and Planning Guide: Cost Containment, copyright 2020 Kaufman, Hall & Associates, LLC