Cost imperative: "what would you do if you couldn't cost-shift? What would you do if Medicare prices were the best you could get?"

Healthcare Financial Management, April, 2008 by Richard L. Clarke

I often ask these questions of healthcare leaders as they debate the issues of pricing, physician integration, capital demand and access, and volume. The usual reaction to my question is one of horror. Without the cost shift, price flexibility is eliminated, and the only survival alternatives are to increase volume (assuming the payment received is greater than marginal cost) and reduce cost.

While this scary future may seem implausible, several storm clouds on the horizon suggest we are moving in this direction. With the aging population and growing numbers of uninsured in America, many hospitals will experience an increase in the percentage of Medicare and Medicaid patients. No price flexibility there.

The cost shift and other factors have driven the price of group and individual health insurance premiums to an unaffordable level. As a result, more uncovered healthcare costs are shifted to patients. Given the limited ability of patients to pay this uncovered burden at full charges, there is less price flexibility with patients. And the consolidation of payers has increasingly concentrated purchasing power. Again, limiting pricing flexibility.

So the idea that Medicare prices may be all you can get isn't that far-fetched.

When I discuss this scary future with CFOs, their strategic focus usually is on enhancing revenue rather than managing costs. While strategies to increase volume and broaden the payer mix are important, I believe an equally important strategy is cost management. In this issue of hfm, Jeni Williams reports several case studies of finance leaders working with clinicians to better manage labor and supply chain expenses. Several strategies emerge from these studies, including working with nurse managers to develop truly meaningful and decision-oriented productivity reports, engaging clinicians more actively in supply chain decision processes, and helping physicians understand the cost profiles of the products they prefer to use.

Retooling care delivery is another cost management strategy. Using the best utilization data available from internal and external sources, providers can redesign care delivery processes to reduce redundancies, reduce nonproductive time, and improve quality. These strategies and many more are important in controlling the two key cost areas of labor and supplies.

Although strategies related to physician integration, revenue cycle, and capital demand and access are critical to success, I believe that an effective, high-level strategy to reduce cost is also imperative, especially if price flexibility continues to erode.

Richard L. Clarke, DHA, FHFMA President and CEO, HFMA