Cost management is of particular importance these days to providers and payers, as expense increases have outpaced revenue increases the past several years as noted in part two of our four-part series.

This article asserts that now is the time for the chief operating officer (COO), chief clinical officer (CCO), chief financial officer (CFO), and chief strategy officer (CSO) to own the cost-containment imperative. This includes calibrating cost-containment goals and committing to a methodology to change the work, workflow, workforce, and workspace to balance their margin, mission, and market priorities.

Problems with Traditional Cost-Containment Approaches 

Several problems plague traditional cost-containment initiatives.

Problem No. 1: Traditional cost cutting is akin to the game of “whack-a-mole.” Cut costs in one place and watch them rise in another place over time (Exhibit 1).

Problem No. 2: Costs are often insufficiently defined, and insufficiently managed, so opportunities are missed. It is important at the outset to define the costs to manage, both over the first year and over the next five years. Costs to define include:

• Clinical costs vs. nonclinical costs — What counts as clinical cost? Is clinical labor included, and what about nonclinical labor involved with delivering clinical services?
• Corporate costs vs. hospital costs — Are physician costs included in this classification?
• Unit cost vs. utilization-driven cost — Defined by department? DRG? Physician?
• Cost to payer vs. cost to provider vs. both, or all simultaneously?
• Use of year-over-year cost trend or an absolute reduction in costs?

Problem No. 3: Traditional cost containment has become too tactical, and it does not reflect the strategic changes in direction necessary to achieve sustainably lower costs. The excessive costs that remain lie in “white spaces” (i.e., processes, functions, departments, locations of services) that have avoided standardization, centralization, and automation. Further cost cutting could negatively impact quality and service, if the emphasis is exclusively on cutting cost.

That’s why strategic conversations and decisions including the COO, CCO, CFO, and CSO are essential to decide what to standardize, centralize, and automate to balance efficiency, effectiveness, and speed to value. For example, consolidating a service (e.g., heart surgery) at a site, outsourcing revenue cycle, or investing in “clicks vs. bricks” go beyond a single department’s span of decision-making, and often represent political lightning rods at many organizations. Thus, executive teams need to lead a more strategic, integrated approach to cost containment to balance margin, mission, and overall market position.