Strategies for Reconfiguring Cost Structure ABOUT THIS REPORT This Report Is the Third of Five Reports Planned for HFMA’S Current Phase of Value Project Research

An HFMA Value Project Report Strategies for Reconfiguring Cost Structure ABOUT THIS REPORT This report is the third of five reports planned for HFMA’s current phase of Value Project research. Other topics addressed in this phase include: • Acquisition and affiliation strategies (released June 2014; available at hfma.org/valueaffiliations) • Physician engagement and alignment strategies (released December 2014; available at hfma.org/valuephysicians) • Measuring and communicating value (forthcoming) • Societal benefit and cost structure (forthcoming) All HFMA Value Project resources, including reports and online toolkits, are available at hfma.org/valueproject. The findings in this report are based on: • A March 2014 survey of 146 of HFMA’s senior financial executive members, including CFOs and vice presidents of finance • Interviews with industry analysts • Input of the 14 health systems that serve as members of HFMA’s Value Advisory Group • Site visits to four systems that actively are pursuing significant reconfiguration of their cost structure to address current market conditions and prepare for the future: Banner Health, based in Phoenix; Benefis Health System, based in Great Falls, Mont.; Providence Health & Services, based in Renton, Wash.; and Vanderbilt University Medical Center, based in Nashville, Tenn. Site visits took place during the fall of 2014 and winter of 2015. HFMA appreciates the willingness of these systems to share their experiences and expertise. REPORT HIGHLIGHTS alue creation for care purchasers depends on Work to sustain the gains your organization achieves. both optimizing the efficiency with which care is Gains in labor productivity can be eroded if a system does V delivered today and investing in new technologies, not have a strategy for maintaining or building on them. infrastructure, and innovations that can improve the • Read about Benefis Health System’s use of a position quality and cost-efficiency of care delivery in the future. control committee to review new staffing requests Key lessons from HFMA’s research on strategies for on page 14. reconfiguring cost structure include: Realize that standardization can be overdone. Understand that reconfiguring cost structure is different Standardization is important to ensure consistent quality from reducing cost structure. Hospitals and health systems and patient experiences across a system, and can save today must emphasize cost reductions in established money on supplies. But a “one size fits all” approach can operations and services but also increased investments be inappropriate or limiting in some settings. Also remem- in new care management models and infrastructure. ber that words matter. For example, “reducing unnecessary • Understand the lessons health care can learn from the variations in care” will resonate with clinicians more than airline industry’s reconfiguration in the special feature “standardization,” which may suggest an effort to overly on page 7. restrict a clinician’s ability to make decisions based on individual patient needs. Give your organization the benefit of time. Organizations • See how examples from Banner Health demonstrate the that start their efforts early will have an easier time main- need to standardize at the appropriate level on page 15. taining staff morale. • See the three promises Benefis Health System made Develop strong physician leadership models to achieve to staff when it launched its “break even at Medicare” savings from clinical transformation. HFMA members initiative on page 12. identify clinical transformation as the area with the greatest potential to achieve savings, but clinicians must trust that Look within the organization for the knowledge required transformation efforts will be best for their patients. As to accomplish the organization’s goals. Individuals within earlier Value Project reports have noted, it is important an organization know where opportunities to improve to emphasize quality in clinical transformation; typically, efficiency lie, and also understand the obstacles to realizing cost savings will follow. Physician leadership is critical to those opportunities. building trust that the focus of clinical transformation will • Learn how Banner Health and Vanderbilt University be improved quality of patient care. Medical Center (VUMC) leveraged organizational knowl- • Learn how Providence Health & Services and Banner edge through the use of internal project management Health use physician consensus models for clinical teams on pages 13. transformation on page 18. • Read about VUMC’s diagnostic management teams on page 19. HFMA Value Project Report 1 Account for local market and political considerations Embrace the likelihood of disruption in health care when seeking to rationalize assets or service lines. by investing in innovation. An organization is better off A decision to consolidate service lines in a single facility disrupting its own business model than having it disrupted or reduce the capacity of a facility can have both competi- by others. tive and economic effects. • Learn how Providence Health & Services is funding • See the factors that can influence service line and and operationalizing an innovation agenda for the system asset rationalization decisions on page 19. on page 25. Invest in population health management infrastructure Consider affiliation as a cost-effective alternative for the long term, but be alert to opportunities for to ownership when developing a population health returns in the short term. Investments in networks and management network. Affiliating can help healthcare infrastructure capable of managing—and assuming risk organizations avoid the substantial costs of acquiring new for—the health of a population can be equated with “laying facilities, minimize antitrust concerns, and help network the cable” for the next generation of healthcare delivery. participants achieve economies of scale while maintaining Even so, systems can realize savings from these investments their independence and local governance structures. in the short term that can help mitigate the expense. • See how the Vanderbilt Health Affiliated Network benefits • See how Banner Health Network identifies cost-saving its members on page 26. opportunities within its accountable care organization on page 24. • Learn how clinicians at Swedish Health Services developed a business plan to realize a positive return on a requested investment in population health infrastructure on page 24. 2 hfma.org INTRODUCTION he need for health systems to reconfigure their cost respondents to a recent HFMA survey indicated that they structure is being driven by two imperatives in today’s are unable to offset declining revenue from government T market. The first is the reality of declining payments. payers with increased commercial rates. Indeed, commer- A combination of legislative actions in recent years—including cial payers are feeling pressure from both employers and the Affordable Care Act (ACA), the American Taxpayer Relief insurance exchanges (both public exchanges created Act, and the Budget Control Act of 2011 (which introduced pursuant to the ACA and private exchanges emerging in automatic budget sequestration)—amounts to cumulative response to market demand) to keep rates low. reductions in Medicare and Medicaid payments to hospitals The pressure of declining or flattening revenue streams of an estimated $460 billion from 2014 through 2023 is compounded in many markets by declines in utilization, (see the exhibit below); reductions in the ACA alone identified by HFMA survey respondents as the second most account for 85 percent—or $390 billion—of this total. significant driver of the need to control costs. Industry Not surprisingly, almost two-thirds of respondents to analysts are still debating the reasons for these declines— an HFMA survey cite decreased Medicare and Medicaid arguably a combination of continuing economic headwinds payments as the main external driver of the need to from the Great Recession, the impact of increasing con- control costs (see the exhibit on page 4). sumer exposure to healthcare costs through the growing use Whereas cuts in public programs traditionally have of high-deductible health plans, and changes in healthcare been balanced by a “cost shift” to other payers, this option delivery that already are starting to affect utilization of is growing increasingly limited. More than 70 percent of higher-acuity services. Regardless of the cause, declining ESTIMATED REDUCTIONS IN MEDICARE AND MEDICAID PAYMENTS 85% of Projected $460 Billion in Hospital Federal Cuts Are ACA-Related 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 (10) (20) ACA Cuts = (30) $390B Over (40) 10 Years (50) Billions of $s (60) (70) (80) Medicare Productivity Medicare DSH Medicaid DSH Hospital Sequester ATRA Coding Adj. Sources: 1. HFMA analysis 2. Elmendorf, D.W., Congressional Budget Office, letter to Speaker John Boehner, July 24, 2012. 3. Bank of America, "2-Year Budget and 3-Month Doc Fix Legislation," Dec. 12, 2013. 4. Mitchell, A., Medicaid Disproportionate Share Hospital Payments, Congressional Research Service, Dec. 2, 2013. 5. Hatch-Vallier, L., "Medicaid and Medicare Disproportionate Share Hospital Programs," CHRT, Jan. 22, 2014. 6. American Hospital Association, "Hospitals Have Absorbed Nearly $122 Billion of New Cuts Since 2010." HFMA Value Project Report 3 utilization is a reality for many health systems, especially investments include IT and analytics, expansion of primary those

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