Cost Reduction in Health Systems: Lessons from an Analysis of $200 Million Saved by Top-Performing Organizations

By Caldwell, Chip; Butler, Greg et al. | Frontiers of Health Services Management, Winter 2010 | Go to article overview

Cost Reduction in Health Systems: Lessons from an Analysis of $200 Million Saved by Top-Performing Organizations


Caldwell, Chip, Butler, Greg, Poston, Nancy, Frontiers of Health Services Management


SUMMARY *

The number of healthcare organizations that require targeted cost reduction due to state and federal budget shortfalls demands intense senior leader accountability. Leaders are discovering that traditional methods for curbing expenses have been largely exhausted, and they seek fresh approaches to meet their strategic imperatives. This study of more than 200 US healthcare organizations, which included detailed site visits and interviews at 42 organizations with $188 million validated cost recovery, found specific nondelegable senior leader roles among top performers. These roles relate to techniques for goal setting, use of data, characteristics of organization-wide accountable change models, and culture characteristics.

The major difference between rats and people is that rats learn from experience.

-B. F. Skinner

INTRODUCTION

In Toy Story 3, Andy, as he is packing for college, is asked by his mother, "What are you going to do with all these old toys?" Realizing he can only take one toy with him, Andy selects Woody, choosing to donate the remainder to a day care center. Why Woody? In Andy's words, the faithful cowboy toy is the one toy who is always there for you, always consistent, never wavering, always dependable to stand by his convictions, regardless of circumstance, hardship, or peril.

As this article will reveal, this same vital characteristic emerged from the 2010 findings of detailed analysis of 42 organizations through senior leadership interviews and site visits and our 2008 study of over 200 US hospitals' cost performance analyses (Butler and Caldwell 2009). Senior leaders of topperforming organizations exhibit an unwavering, consistent, and disciplined approach to strategy achievement, goal-setting, implementation, and ownership of the organizational change model used to extract costs.

During the course of this article we will examine the following:

* The database description of the 37 healthcare organizations that produced almost $200 million in validated costs

* Affmitized groupings of the 16,952 manager-implemented changes that achieved these savings by type of savings, magnitude of savings, and so on

* How the 17 top-performing organizations achieved results and, of the 25 "non-starter" organizations, what factors led to their lack of results

* The "take-home" value - what assessments and interventions readers might apply in their own organizations

The urgency of cost reduction is compelling. Senior leaders who fail to act, hoping better times will come, do so ill-advisedly. In a survey of 525 CEOs, the American College of Healthcare Executives (ACHE 2010) reported that CEOs' top three concerns are financial challenges, healthcare reform implications, and care for the uninsured, all of which point to the urgency of improving organizations' cost positions. While senior leaders have faced the need to reduce costs for many years, the compelling factors have never been more urgent. El Camino Hospital CEO Ken Graham (2010) observes, "As insurers bundle, we expect a 10 percent to 15 percent decrease in reimbursement rates." Thirty-one states project budget shortfalls greater than 10 percent at the same time that Medicaid enrollment is expected to climb 5.4 percent (Von Drehle 2010). A Pew Center (2009) analysis found that state budget shortages average 12 percent, and California tops the list with a 49 percent imbalance. The reasons for concern and immediate attention are compelling, to say the least.

APPROACH TO THE ANALYSIS

The authors used a three-phase approach to create the content for the analysis.

1. We first downloaded 16,952 specific changes (e.g., a pharmacist substituting an IV route for an oral route of a particular drug, a PACU manager having two staff members come in two hours later because the workload was lighter in the morning) that managers had entered into our online improvement database, representing $188,486,604 of validated savings implemented by 37 organizations within (Caldwell 2010a). …

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