Most Hospitals Lack Effective Cost Reduction Programs, Survey Finds

Only 6 percent of hospitals reported that their cost reduction programs were effective, indicating room for improvement in program development, according to a survey conducted by the Healthcare Financial Management Association (HFMA).

The survey, sponsored by the software company Strata Decision Technology, reflects responses from 185 healthcare finance, accounting, and revenue cycle executives.

While 89 percent of the organizations had a cost reduction program in place, only 6 percent said their program was extremely effective.

As hospitals and health systems deal with the financial repercussions of the COVID-19 pandemic, cost reduction programs are a critical part of keeping facilities afloat. However, hospitals will not see any savings if their cost reduction programs are not properly implemented.

According to the researchers, the first step to a successful cost reduction program is to identify the main area for savings and choose a mathematically defendable savings target.

The survey found that only 8 percent of respondents set a margin improvement target of over $100 million. Meanwhile, 86 percent set a target of less than $50 million, with 50 percent setting a target of less than $10 million.

Having both an executive sponsor and a program owner can also help healthcare organizations focus their program on areas that will see the biggest impact, experts said. The majority of respondents (85 percent) reported that their cost reduction program was executive sponsored.

Hospitals should also establish a governance structure and secure the right resources to distribute tasks accordingly. Cost reduction programs are more likely to be effective if an organization allocates tasks such as identifying opportunities for cost reduction, prioritizing projects, and tracking results, the report said.

Smaller hospitals and health systems were less likely to have successful cost reduction programs, the survey found. Experts emphasized the importance of governance structure for these organizations and how holding conversations about cost reduction can help lead to effective programs.

Successful cost reduction programs should also foster a culture of accountability in which all participants offer new ideas and help identify areas for savings. This can help relieve some of the burden that finance staff members face.

The survey found that 80 percent of healthcare organizations said that service line, clinical, and operational leaders have shared accountability for cost targets. In addition, 72 percent of respondents said their overall culture of accountability around cost reduction programs was acceptable, good, or excellent.

Accountability is especially important now as labor reduction may have been the default cost reduction method in the past but is no longer possible due to significant workforce shortages. Collaboration between executives and clinicians can help hospitals develop an alternative area for cost savings.

The most successful programs among the respondents consisted of formal, ongoing cost reduction processes, researchers noted.