HEALTHCARE COST CONTAINMENT

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1 Practical strategies for financial strength HEALTHCARE COST CONTAINMENT October 2016 hfma.org/hcc Health System s Performance Improvement Efforts Net $15M Savings in 1 Year By Geoffrey P. Cole, DeeDee Risher, and Lisa M. Bragg Leaders at Athens Regional Health System achieved targeted improvements in supply chain, physician enterprise services, care management, clinical and operational effectiveness, labor optimization, and human resource functions. Dental Clinics Meet Community Need While Reducing ED Visits 6 Community Hospital Leverages Business Intelligence to Address Declining Revenues 7 Viewing Anesthesia Services As a Cost Center 10 Cost Accounting Provides Keys To Continuous Cost Management 12 Joint Effort Exemplifies Volume-To-Value Shift 13 Transforming Your Lab from a Cost Center to a Strategic Asset 14 Electronic Claim Management Could Save Healthcare Providers $8B 16 Sponsored by

2 performance improvement Health System s Performance Improvement Efforts Net $15M Savings in 1 Year By Geoffrey P. Cole, DeeDee Risher, and Lisa M. Bragg Athens Regional Health System leaders worked across departments to achieve performance improvements and continue to monitor results through project management teams. Daniel R. Verdon Vice President, Publications and Digital Assets Betty Hintch Senior Editor Laura Ramos Hegwer Editor Linda Chandler Production Specialist Ellen Joyce B. Tarantino Advertising Production Specialist Healthcare Cost Containment is published bimonthly by the Healthcare Financial Management Association, Three Westbrook Corporate Center, Suite 600, Westchester, IL Presorted nonprofit postage paid in Chicago, IL Healthcare Financial Management Association. Volume 9, Number 5 Subscriptions are $120 for HFMA members and $145 for other individuals and organizations. Subscribe online at or call HFMA, ext 2. To order reprints, call HFMA, ext To submit an article, contact Betty Hintch at bhintch@hfma.org. Material published in Healthcare Cost Containment is provided solely for the information and education of its readers. HFMA does not endorse the published material or warrant or guarantee its accuracy. The statements and opinions in Healthcare Cost Containment articles and columns are those of the authors and not those of HFMA. References to commercial manufacturers, vendors, products, or services that may appear in such articles or columns do not constitute endorsements by HFMA. MORE ONLINE Subscribers can access back issues of Healthcare Cost Containment at hfma.org/hcc. ISSN In 2014, Athens Regional Health System, one of northeast Georgia s largest healthcare systems, was in the midst of evaluating its performance improvement efforts while launching a new electronic health record (EHR). A less than optimal EHR implementation widened the gaps in performance and negatively impacted the financial status of the hospital. The health system needed to identify performance improvement opportunities to help close a projected $29 million to $51 million gap and achieve its desired 5 percent margin. To achieve these goals, Athens Regional engaged a consultant to assess and implement performance improvement initiatives focused on the following financial goals. > > An immediate income statement improvement of $15 million during the first year of the initiative (August 2014 to July 2015) > > A stretch goal of $30 million per year in income statement improvements after the first year Leaders also aimed to achieve targeted improvements in the following areas. > > Supply chain (particularly pharmacy and laboratory services) > > Physician enterprise services > > Care management and clinical and operational effectiveness > > Labor optimization > > Human resources and organizational structure Supply Chain Within pharmacy, initiatives focused on improving medication inventory management to reduce the costs associated with waste of expired medications and 340B optimization to manage pharmaceutical spend by accessing outpatient drugs at a lesser cost when meeting regulatory requirements. In addition, the teams focused on enhancing Athens Regional s antibiotic stewardship program to reduce overuse of antibiotic therapy while improving and not compromising patient outcomes. Supply chain management set its sights on negotiating or renegotiating contracts with various vendors, especially medical device suppliers. One pharmacy initiative focused on improving medication inventory management to reduce the costs associated with waste of expired medications and to optimize use of the 340B drug pricing program. The initiation of a National Provider Number allowed Athens Regional s laboratory services to develop its Regional Lab Outreach (RLO) locations to provide a more comprehensive and timely scope of lab services and improve the patient experience. Through its RLO, Athens Regional focuses on the availability of information to enhance the accuracy and timeliness of its services to maximize efficiency and cost-effectiveness throughout the testing process. 2 October 2016 Healthcare Cost Containment

3 Best Practices for Rapid Change Management and Performance Improvement An at-the-elbow approach. Depth and breadth in the scope of knowledge coupled with an in-the-trenches mentality both internally and with outside partners is essential for effectively managing change. Leadership availability and transparency. During times of significant change, anxiety is high and trust can be eroded, leading to resistance to change. Ensuring leadership is physically available and transparent is critical for maintaining trust and engagement. Acknowledgement of unintended consequences. Although never desired, unfavorable outcomes are often unavoidable during transformational change. Leaders need to be nimble in acknowledging such unintended consequences and provide a clear path forward to overcome them. This resulted in increased commercial and governmental volume, additional decreases in vendor pricing agreements, and negotiation with payers to add Athens Regional s RLO to the payer-provider network. Physician Enterprise Services Updates to Athens Regional s chargemaster improved revenue capture. Increasing the use of scripting allowed frontline team members to engage patients and family members in capturing copayments and deductibles at the time of service, helping to ensure enhancements in cash collections. Physician services also accessed an analytics tool allowing for concurrent evaluation of physician coding practices, collections, productivity, and volume statistics. The tool offers detailed data that can be collated and analyzed concurrently, providing business intelligence that can translate into actionable steps toward performance improvement before bottom line results are unfavorably impacted. It can track evaluation and management coding performance against Medicare benchmarks. Through training and understanding of regulatory guidelines, physicians helped achieve appropriate reimbursement rates for services rendered. Care Management and Clinical and Operational Effectiveness This initiative leveraged proven best practices to enhance communication among physicians, nurses, care managers, social workers, and charge nurses especially during multidisciplinary rounds resulting in improved patient outcomes that reduced length of stay and associated costs. For example, utilizing a multidisciplinary rounding template to target anticipated day of discharge, accelerate care, and plan early for discharge moved overall length of stay from 4.71 days to 4.28 days in just eight months while increasing discharges by an average of 120 patients a month during the initial measurement period. To reduce orthopedic cost per case and position the organization to break even on Medicare, leaders at Athens Regional implemented a clinical and operational effectiveness program. The effort focused on patient education, standardization of hip and knee order sets, post-operative pain and nursing management, and proactive discharge planning. To accomplish these performance improvement goals, training and education focused on the following areas. > > Utilization review tools to decrease reliance on external physician advisers and associated costs > > Patient class assignment and compliance with the Two-Midnight rule to avoid increased observation discharges > > Nursing documentation to effectively capture charges for observation services Labor Optimization To support labor optimization, Athens Regional s strategies keyed in on training, evaluation of automation, and staffing-to-demand to improve workflow in Key Performance Indicators for Case Volume Athens Regional Health System uses a project scorecard to identify root causes of variation, initiate process improvements methodologies, and implement corrective strategies. Case Volume Budgeted Volume Variance Budgeted Case Volume Inpatient Month Outpatient Month Total Month Inpatient Month Outpatient Month Total Month Inpatient Month Outpatient Month Total Month % 96% 112% % 0% 41% % 26% Source: Navigant Healthcare. Used with permission. hfma.org/hcc October

4 such areas as adult critical care; facilities management; IT; public safety; and environmental, nutrition, and surgical services. Athens Regional achieved the stretch target of $30 million in annual improvements by July Leaders at Athens Regional implemented a clinical labor optimization model for nurse staffing that pairs operations analytics with provider data. This allows for predictability modeling that assists nursing to understand the ongoing day-today challenges of patient demand and the supply of clinical labor needed to deliver staffing solutions that provide sustainable cost savings. The solution has been utilized by a variety of health systems, resulting in sustainable savings, increased staffing efficiencies, and increased employee satisfaction. Finally, a position control process was implemented that requires detailed information about requests to fill open positions, including the FTE value proposition and the current departmental budget and productivity status. This provided the right detail to allow leaders to be informed before approval. Human Resources, Benefits, and Organization Structure A dependent audit was conducted to update employee information and ensure dependent coverage was accurate and appropriate. This involved removing ineligible dependents (e.g., divorced spouses, children who have met the maximum age limit for coverage). Additional strategies included aligning paid-time-off practices with the market in an effort to reduce balance sheet liabilities. Finally, the organization initiated Athens Regional Achieves Stretch Target of $30M in Annual Improvements Athens Regional Health System achieved the stretch target of $30 million in annual improvements by July $35 In Process Complete Projected $30 $Millions $25 $20 $15 employees and reduced employee burnout. Sustaining Success In an effort to maintain projected gains, an interdisciplinary team comprised of Athens Regional clinicians and leaders from finance, supply chain, operations, and human resources was formed to provide oversight of existing and future high-visibility initiatives. As initiatives are completed and transitioned to their leaders, project information and scorecards are housed in a central repository and overseen by project management teams who alert senior leaders when variation is present. When needed, the project management teams re-engage with the Athens Regional initiative leaders to begin process improvement methodologies to identify the root cause of the issue and implement corrective strategies. In addition, to augment leadership communication, the project management teams are responsible for reporting to executive leadership every Monday morning. Results As a result of the partnership, Athens Regional achieved the stretch target of $30 million in annual improvements by July Furthermore, the health system achieved a cumulative balance sheet benefit of $6.6 million within a year of the project s inception. Athens Regional is expected to maintain and even improve on this pace in FY16 and FY17, with $33 million in annualized improvements projected for FY17. Geoffrey P. Cole, MD, is vice president of ancillary services, Athens Regional Health System, Athens, Ga. (Geoffrey.Cole@ athenshealth.org). $10 $5 Source: Navigant Healthcare. Used with permission.: October 2016 Healthcare Cost Containment July 2015 June 2015 May 2015 April 2015 March 2015 Feb Jan Dec Nov Oct Sept Aug $0 4 span-of-control guidelines to ensure each leader managed the appropriate number of personnel, providing better management of DeeDee Risher is manager of the project management group, Athens Regional Health System (Dorothy.Risher@ athenshealth.org). Lisa M. Bragg, RN, BSN, CCSGB, is director, delivery innovation, Navigant, Tampa, Fla. (lisa.bragg@navigant.com).

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6 business strategy Dental Clinics Meet Community Need While Reducing ED Visits By Laura Ramos Hegwer CFO Gordon T. Edwards shares how his organization reduced certain types of ED visits by 36 percent over a three-year period by offering comprehensive dental services. Marshfield Clinic Health System, Marshfield, Wis., added 10 dental clinics to address the link between chronic illnesses and dental health as well as stem nontraumatic dental-related emergency department (ED) visits. Marshfield Clinic is one of the largest private medical practices in the country, with more than 1,200 providers in 86 specialties. It operates 49 clinical locations, including the 10 federally qualified dental clinics. It also owns the sixth largest health plan in Wisconsin. In this interview, CFO Gordon T. Edwards discusses his organization s strategy to offer dental care. On improving access to dental services. Marshfield operates its dental centers through the Family Health Center of Marshfield Inc., a federally qualified health center. The centers treat everyone, but they primarily provide critical dental services to Medicaid and uninsured populations, Edwards says. The clinics have 38 dentists and three oral surgeons spread across the 10 sites. To date, the clinics have provided services to more than 127,000 adult and pediatric patients since the first one opened in On the impetus to add dental services. A lot of this stemmed from 2000, when the U.S. Surgeon General released the first report on oral health in America, Edwards says. It addressed the epidemic around prevention and treatment of dental ailments and how oral disease impacts the elderly, disabled, and poor. Since then, research has shown that periodontal disease is linked to diabetes, cardiovascular diseases, kidney disease, pregnancy complications, and other ailments. Research shows that periodontal disease is linked to diabetes, cardiovascular diseases, kidney disease, and other ailments. ED Visits for Nontraumatic Dental Care, Emergency department (ED) visits for nontraumatic dental care dropped 36 percent between 2009 and 2012 in Marshfield Clinic Health System communities where dental care services became available Black River Falls October 2013 Chippewa Falls June 2007 Ladysmith July 2013 Marshfield August 2010 Medford December 2009 Neillsville August 2009 Park Falls March 2008 Rhinelander January 2010 Rice Lake June 2010 Source: Marshfield Clinic Health System and the Wisconsin Medical Society. Used with permission. 6 October 2016 Healthcare Cost Containment

7 Leaders also recognized that ED use was related to poor dental health. In 2009, patients made 32,000 ED visits in Wisconsin for dental problems. Our Family Health Center board prioritized access to dental care and asked our executive director to lead an effort to improve oral health in the communities we serve, Edwards says. We believe we are here to serve our communities, and this was a pressing need. On outcomes from the dental program. The health system has realized a significant reduction in ED visits due to dental ailments. From 2009 [to] 2012, we saw a 36 percent reduction in total ED visits for nontraumatic dental care, Edwards says. We also saw a 30 percent decline in the number of unique patients [who] had an ED visit for nontraumatic dental care as well as a 10 percent decline in the average number of ED visits per patient. On potential cost savings. When asked to quantify the cost savings from these efforts, Edwards points to research by Cigna that found that periodontal care reduces overall medical costs in the first year ( Improved Health and Lower Medical Costs: Why Good Dental Care Is Important, Cigna, 2010). For example, first-year medical costs drop an average of $1,400 for patients with diabetes who receive dental care. To help quantify their own improvements, leaders at Marshfield have founded the Institute for Oral and Systemic Health as part of the Marshfield Clinic Research Foundation. This institute will help us better integrate medicine and dentistry and publish more research in the future, Edwards says. On making the business case. Finances are always the most challenging aspect of anything that is mission-driven work, Edwards says. We were fortunate to create partnerships with the U.S. Health Resources and Services Administration and the State of Wisconsin. We also had subsidies coming from our operations. Without any of that support, it would have been difficult to get this off the ground. Today, even though the operations don t break even on their own, the financial support associated with running the 10 dental centers is less than $5 million a year. On finding the talent. Finding the right talent to deliver dental services is another obstacle. It s always a challenge to recruit and retain dentists, particularly in rural settings in the Midwest, he says. We have created strong partnerships with dental schools, such as A.T. Still University in Missouri, and we are starting to see some of the benefits of those partnerships today. First-year medical costs drop an average of $1,400 for patients with diabetes who receive dental care. On taking on new challenges. As not-forprofit organizations, we need to be focused on what our communities biggest challenges are, Edwards says. In this case, we identified a problem, and we spent a lot of time trying to make it work. We started this initiative a decade ago when dental care was one of our biggest challenges. Now, we are looking at what we can do to combat substance abuse, particularly opioid abuse, which is becoming a larger issue in our community. We don t have it figured out, but the confidence we have gained with dental care gives us the confidence to see what we can do to address other challenges in our community. Laura Ramos Hegwer is a freelance writer and editor based in Lake Bluff, Ill., and a member of HFMA s First Illinois Chapter (laura@ vitalcomgroup.com). Interviewed for this article: Gordon T. Edwards is CFO, Marshfield Clinic Health System, Marshfield, Wis. business intelligence Community Hospital Leverages Business Intelligence to Address Declining Revenues By Kelley Smith and Tim Welling Hospital leaders were able to view real-time costs across the organization. Knox Community Hospital (KCH), a 99- bed advanced community hospital located approximately 40 miles northeast of Columbus, Ohio, needed to make a dramatic organizationwide change to streamline its outdated financial reporting system at a time when inpatient revenue was declining by percent. Specifically, leaders at KCH had to address the following challenges. > > Each service line or department manually entered statistical and revenue data into 30 to 40 separate Excel worksheets across the organization. > > Readmissions reduction reporting was manually intensive and did not enable timely, proactive interventions. > > Analysts lacked a method to manage increasingly complex fee-for-value compensation models. > > The finance team at KCH lacked insight into profitability by payer, which diminished the hospital s ability to negotiate. > > Leaders also lacked an understanding of profitability by service line and were unable to justify the elimination or addition of new service lines. To address these challenges, KCH leaders implemented new processes within their finance division to help further the hospital s goals to improve patient care, maximize quality, and improve operating efficiencies within each of their service hfma.org/hcc October

8 lines. They also added a new financial business intelligence solution that had the potential to significantly reduce costs through its ability to integrate with KCH s legacy systems, extract information from the electronic health record, and accelerate the process of gaining insights and driving strategic business decisions. Adopting New Tools and Processes By implementing the new business intelligence solution and processes across all service lines for the first time, KCH was able to provide real-time cost transparency throughout the organization and to substantially improve how service line managers managed the financial performance of their departments. This enabled the CFO, vice president of finance, and department heads to gain additional visibility into their progress toward meeting projected financial goals so they could better anticipate and address any outliers. As an example, KCH is taking a preemptive approach to tackling bundled payments in its orthopedic service line in preparation for the next wave of the Centers for Medicare & Medicaid Services Comprehensive Care for Joint Replacement mandates. True cost accounting across all facets of an orthopedic episode, including supplies and labor, is imperative to forecast and maximize revenue. KCH previously lacked the ability to dissect each component of the episode and identify process inefficiencies, quality indicators, and cost outliers by diagnosis, surgeon, anesthesiologist, and other care team members. Promoting Culture Change As Danielle O Brien, vice president of finance at KCH, worked to prepare the team for this significant organizationwide change, she was fully aware that cultural change would be necessary. Not only would individual hospital employees have increased control over costs, but there also would be much greater transparency, both of which would increase their own personal accountability. This would intensify not only pressure from above but also peer pressure as every manager wanted to help the entire team achieve success. O Brien also realized that she and the rest of the management team could not force new behaviors. They needed to help the team understand that by eliminating waste, they could also improve patient care. The patient is at the center of everything we do, O Brien says. To effectively manage our resources, we need to closely monitor patient days, cash on hand, and ultimately operating EBITDA [earnings before interest, taxes, depreciation, and amortization]. We believe our new business intelligence system and processes have inspired a positive cultural shift within our hospital by increasing transparency into our processes, resource allocations, costs, and workflows. By managing not just the technology implementation but also interrelated processes and cultural issues, KCH leaders already have benefited. The finance team is now able to provide daily budget numbers and maintain margins by service line, improve pricing capabilities, better understand referral patterns, reduce length of time to enter charges to ensure timely billing to payers, manage risk within the new ACO shared savings model, and reduce readmissions through near real-time reporting of costs and patient outcomes. Lessons Learned Executives at KCH offer the following advice for other hospital leaders rolling out new business intelligence processes and technology. Choose wisely. When planning to implement a new business intelligence solution, it is important to pick not only a solution that the finance team feels is a correct fit but also a solution that addresses the financial and analytical needs of other leaders in the organization (e.g., department heads such as the directors of case management, emergency services, physical therapy/ occupational therapy, laboratory, and radiology). Be open to suggestions. When integrating with a new business intelligence platform, it is important to keep an open mind when evaluating current report generation and statistical calculations. Often times opportunities arise to enhance current practices that make the organization more efficient. Select the right leaders. As the organization obtains more information from the business intelligence tool, it is critical to have the correct leadership in place to strategically implement change and make adjustments based on reliable data. The leadership team at KCH is committed to effectuating proactive change based on the data they receive on a regular basis. Their management teams are far more receptive to process improvement changes now that they are able to see data-driven findings. Driving Organizational Change To support their mission of providing compassionate health care that exceeds expectations and adapt to the new world of shared savings, leaders at KCH not only needed advanced data gathering and analytics tools but also had to revamp processes, change job responsibilities, and grapple with organizationwide cultural change to achieve success. The new system and associated organizational changes have allowed KCH to establish a foundation to ensure that future decisions are grounded in enterprisewide analytics that support expansion and the hospital s mission in a volatile and competitive healthcare market. Kelley Smith, RN, MPH, is COO, Envision Health, Ann Arbor, Mich., and a member of HFMA s Eastern Michigan Chapter (kelleysmith@envhs.com). Tim Welling is vice president of business intelligence, Agilum Healthcare Intelligence, Brentwood, Tenn. (twelling@ sentryds.com). Interviewed for this article: Danielle O Brien is vice president of finance, Knox Community Hospital, Mount Vernon, Ohio (Danielle.OBrien@kch.org). 8 October 2016 Healthcare Cost Containment

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10 service line management Viewing Anesthesia Services As a Cost Center By Daniel Prevost Adopting this mind-set can help finance leaders control costs as they address competitive realities and prepare for the transition to value-based care. As hospitals and health systems work to control costs in the face of increasing competition and the growth of value-based payments, it is time to reconsider traditional models around the business of anesthesia. Because anesthesia services are usually outsourced, they are often overlooked as a cost factor, even though they represent a significant portion of surgical procedure costs. If finance leaders view anesthesia services as a cost center rather than an outsourced revenue center, with an eye toward high-volume surgical procedures, most will find substantial opportunities to contain costs without compromising quality or safety in their organizations. This includes direct costs associated with staffing models and indirect costs related to operating room (OR) utilization and process efficiencies. Containing Direct Costs Through Staffing Structures As payments for anesthesia services have increased during the past decade because of shifts in payer mix, hospitals are looking more closely at inefficiencies in staffing models that lead to increased costs. Most anesthesia professionals would agree that a care team model, which includes an anesthesiologist and a certified registered nurse anesthetist (CRNA), is the most efficient method of delivering care. However, many finance leaders are not aware that splitting the physician and CRNA into separate tax ID numbers can drive up staffing requirements because of added billing rules associated with that model. For example, many hospitals contract with anesthesia groups while directly employing CRNAs. This arrangement removes the cost of the CRNA expenses from the anesthesia group and allows the anesthesiology group to coexist without additional financial support. Organizations that establish contracts that place all anesthesia providers under the same tax ID number will reduce staffing costs, with minimal associated revenue leakage. Because this arrangement places the CRNAs and the anesthesiologists under two separate tax ID numbers, payer policies require the anesthesiologist to document for medical direction to qualify for payment, meaning both the CRNAs and the anesthesiologists need to devote more time and effort to documentation, thus reducing the time they can devote to care. Outsourcing anesthesiologists while directly employing CRNAs can require more anesthesiologists to cover a given case load than if all were operating as part of a single entity. In this model, billing rules have the unintentional effect of dictating anesthesia staffing levels. Pursuing a staffing model that places all anesthesia providers under a single tax ID number can eliminate this billingdriven inefficiency. The key is to structure the anesthesia model in such a way as to increase provider flexibility and make sure that each provider is working top of license to optimize revenue. For example, a 10-room surgery center operating within a two tax ID number model requires three anesthesiologists to oversee 10 CRNAs. Moving to a single tax ID number model could potentially require only two anesthesiologists to safely oversee 10 CRNAs. This would produce a savings of approximately $600,000 in burdened costs by eliminating one anesthesiologist while reducing associated revenue by $90,000 to $100,000 annually. The positive financial impact of placing all anesthesia services under a single tax ID number can be even more effective for a large healthcare enterprise. In one recent example, a health system required Determining Patient Risk Factors Leads to Reduced Pre-Op Testing Anesthesiologists can help hospitals and health systems reduce the costs of unnecessary pre-op testing by evaluating patient risk factors. A decision tree methodology is one tool that anesthesiologists can use to determine necessary pre-op testing Source: abeo. Used with permission. Standard Number of Tests Ordered Number of Tests Ordered Through Decision Tree Methodology 10 October 2016 Healthcare Cost Containment

11 Reduced Pre-Op Testing Leads to Cost Savings Anesthesiologists at a perioperative surgical home wrote pre-op testing decision trees that took patient factors and surgical factors into account. This methodology reduced the need for new pre-op testing by nearly 65 percent and resulted in approximately $600 in savings per commercially insured patient and $200 per Medicare or Medicaid patient. Medicare/Medicaid Insured Commercially Insured $0 $200 $400 $600 $800 Source: abeo. Used with permission. 66 anesthesiologists when it was using a separate tax ID number for the CRNAs. By switching the model to place both groups under one tax ID number, the health system reduced its requirements for anesthesiologists from 66 to 58, for a net positive cost savings of approximately $4 million annually. Organizations that establish a contract that places all anesthesia providers under the same tax ID number will optimize revenue by reducing staffing costs, with minimal associated revenue leakage. Controlling Indirect Costs by Optimizing OR Location In addition to addressing direct costs through staffing models and structures, hospitals and health systems can reduce indirect costs by locating ORs in a way that makes utilization more efficient. As a general rule, the greater the consolidation of anesthesia locations within a provider organization, the greater the efficiency. Physically dispersing anesthesia providers across a campus inevitably requires more staffing to ensure adequate coverage. For example, if a health system managing 40,000 cases per year in 30 locations reduces the number of locations to 27 due to improved OR utilization, that system can actually increase the number of procedures performed annually at each location without requiring additional staff or losing locational efficiency for patients. Assuming a 1:3 anesthesiologist/crna ratio, such a move would also avoid approximately $1.2 million in salary costs that would otherwise be required for additional anesthesia providers. Implementing More Efficient Pre-Op Testing Regardless of staffing model, OR location, or even payment model, improving process efficiency also can reduce indirect costs. This is especially true of pre-op testing and patient clearance. In many hospitals and health systems, surgeons have grown accustomed to ordering a full roster of available pre-op tests to reduce the possibility of day-of-surgery cancellations, instead of testing based on risk factor concerns identified by the anesthesiologist. Having anesthesiologists actively drive pre-op testing can help avoid the cost of cancellations while also decreasing costs associated with excess testing. One way to assist anesthesiologists with pre-op testing evaluations is to use a decision tree methodology. As a general rule, the greater the consolidation of anesthesia locations within a provider organization, the greater the efficiency. For example, leaders at a perioperative surgical home recently tasked their anesthesiologists to design an effective means of reducing day-of-surgery cancellations. The strategy involved anesthesiologists writing pre-op testing decision trees that took patient factors and surgical factors into account. Nursing staff were instructed to determine which pre-op tests to order by following the decision tree specific to each procedure and to call an anesthesiologist if they had any questions. In a pilot program with two surgeons, this methodology reduced the need for new pre-op testing by nearly 65 percent. It resulted in savings of approximately $600 per commercially insured patient and $200 per Medicare or Medicaid patient. Leaders at the perioperative surgical home then expanded the use of the decision trees across the entire patient population to ensure adequate and efficient pre-op testing across the enterprise. Consequently, day-of-surgery cancellations fell from approximately 20 per month to less than one per month, and the savings seen in the pilot program multiplied across all patients. Realizing Additional Improvements Leaders at the perioperative surgical home continue to explore new ways to reduce day-of-surgery cancellations and to reduce costs for better performance under value-based payment models. Projects currently or soon to be piloted include pre-operative frailty and nutrition assessments, pre-operative anemia screening, and a new concept of prehabilitation, designed to improve a patient s functional status, including strength, balance and nutrition, prior to an operation. For example, a frail patient scheduled for an elective surgery would need good nutrition for wound healing and strength for physical therapy during recovery, especially for orthopedic and general surgery. These are just some of the ways in which viewing anesthesia services as a cost center can help finance leaders control costs as they address competitive realities and prepare for the transition to value-based care. This mind-set is an important first step in eliminating avoidable direct and indirect costs and addressing correctable inefficiencies by looking at how all specialty practices fit into the bigger picture. Daniel Prevost is regional vice president, abeo, Asheville, N.C. (Daniel. Prevost@abeo.com). hfma.org/hcc October

12 cost accounting sponsored by Kaufman Hall Cost Accounting Provides Keys To Continuous Cost Management By Dan Seargeant A cost accounting system can help healthcare leaders make informed decisions about which cost management opportunities present the greatest promise and which tactics should be pursued to help the organization best meet its goals. To succeed in the evolving value-based business model, hospitals and health systems will need to embrace cost management as a cornerstone of planning and operations. It should become an ongoing and integral management function, rather than a periodic effort. Having a robust and reliable cost accounting system provides capabilities that support this imperative organizationwide. These include the ability to accomplish the following actions. > Identify cost improvement opportunities > Establish priorities and develop initiative-specific plans > Monitor progress and evaluate the impact Each of these is discussed in the following sections. Identify Cost Improvement Opportunities Optimizing cost management efforts requires that healthcare leaders look beyond traditional methods and information sources such as departmental budgets using financial information, productivity based on payroll information, and supply chain management using standard purchasing and accounts payable information. Instead, they should look toward cost accounting, which provides a means to examine costs at a much more granular level. It serves as a magnifying glass into patient- and encounter-level costing data. From there, organizations have the ability to drill down to both chargeable and nonchargeable activities and items that may not directly generate revenue but that are nonetheless vital to understanding the total cost of providing patient care. Cost accounting also allows organizations to analyze costs across the continuum of care. General ledger and payroll data are typically organized around specific entities or departments. Cost accounting data, however, allow organizations to tie information together in ways that cannot be done using these traditional cost management data sources. To help find cost improvement opportunities relative to specific service lines, finance leaders can group data by care setting, diagnosis, procedure, physician, and post-operative and follow-up care. Costs associated with hip and knee implants, for example, may be disproportionately high and thus represent significant opportunities for cost reduction. Having a cost accounting system allows organizations to assess important details, including how often a particular type of implant is used or how changing vendors might affect costs. For example, in the case of knee implants, Total Knee Replacement Average Cost per Provider Encounter-level data on knee implant procedures can be analyzed at the physician level to pinpoint significant variations in costs between two or more physicians. $25,000 $20,000 $15,000 15,015 15,300 15,579 15,771 16,073 16,291 16,528 17,640 17,692 18,237 18,328 20,374 $10,000 $5,000 0 Dr. A Dr. C Dr. B Dr. G Dr. E Dr. F Dr. M Dr. P Dr. Z Dr. V Dr. R Dr. S Source: Kaufman, Hall & Associates, LLC, Skokie, Ill. Used with permission. 12 October 2016 Healthcare Cost Containment

13 organizations can answer the following questions. > > What implants are our surgeons using? > > How much are we spending on implants? > > What types of procedures are we doing with those implants? > > What is the patient or payer mix for those procedures? With this level of analysis, organizations can thoroughly assess the full spectrum of cost management opportunities, such as whether the greatest costs are driven by variations in the vendors supplying implants or through implant procedures performed on high-risk patients. Establish Priorities and Develop Initiative-Specific Plans Patient care cost information can be factored into comprehensive cost containment initiatives. Finance leaders can quantify the estimated impact of a particular initiative across the continuum of care. Having this insight into costs across service lines, care sites, and episodes of care is becoming increasingly important with highly integrated delivery systems, trends toward bundled payments, and the mounting focus on the quality of care. By integrating cost accounting information into other standard financial and operational reporting capabilities, healthcare leaders can make informed decisions about which cost management opportunities present the greatest promise, and which tactics should be pursued to help the organization best meet its goals. Once priorities are established, cost accounting systems can be used to develop a plan with clearly defined next steps. For example, encounter-level data on knee implant procedures can be analyzed at the physician level. Doing so allows organizations to pinpoint significant variations in costs between two or more physicians who are performing the same types of procedures and determine which physicians are generating the highest costs. Such data then can be shared with those physicians in helping them make necessary adjustments. Monitor Progress and Evaluate the Impacts Healthcare leaders should continuously track progress on strategic initiatives. Patient costing and decision support systems provide the best lens for monitoring progress and evaluating the real impact of many initiatives, and for examining contribution margins in patient care. For example, organizations can track cost savings over time resulting from the establishment of standardized hip replacement protocols and implant vendors. Because many initiatives will impact different patient populations, finance leaders should isolate those populations when evaluating and reporting results. Having accurate costing methods and the ability to regularly update cost information are vital for organizations to monitor cost changes over time. To garner the most benefit from a cost accounting system, organizations should be willing and prepared to supply adequate time and resources to support that system. Cost accounting should not be viewed as a single, part-time occupation. It requires full-time, dedicated staff who can engage and work with a wide spectrum of senior leaders and middle managers toward achieving cost management goals. Generating and maintaining valid and reliable cost accounting information requires ongoing investment in and management of people, processes, and systems. Hospitals and health systems will need to ensure they have adequate staff with the time and expertise to accurately analyze and interpret the data. Such investment can have substantial return when the information is applied through effective, results-oriented cost management programs. The more valid the costing data are and the more organizations can demonstrate the direct causes of disproportionate costs, the better they will be able to contribute to improved financial performance over time. Dan Seargeant, DrPH, is vice president, Kaufman, Hall & Associates, LLC, Skokie, Ill. (dseargeant@kaufmanhall.com). value-based care Joint Effort Exemplifies Volume- To-Value Shift South Carolina s Medicaid program and the state s largest commercial insurer adopted a policy of declining to pay for elective deliveries before 39 weeks of gestation and saw early deliveries drop by 50 percent. That improved birth outcomes, keeping premature babies out of neonatal intensive care units, and saved $6 million in Medicaid spending in a single quarter. That bold move is one of my favorite examples of evidence-based care and paying for value that I ve seen to date, says Suzanne Delbanco, executive director, Catalyst for Payment Reform. Her comments appear in HFMA s recently released Health Care 2020: Transition to Value report (hfma.org/healthcare2020). The payment strategy was one of many elements of the state s Birth Outcomes Initiative, a joint effort launched in 2011 by the South Carolina Department of Health and Human Services, BlueCross BlueShield of South Carolina, the South Carolina Hospital Association, and the March of Dimes. The initiative shows how collaboration between providers, health plans, and other stakeholders raises the value of care. Delbanco also says organizations should be aware of where they stand relative to their competitors. Purchasers do not want to push payment reform so quickly that they hurt provider organizations, but they are concerned about the wide variation in care and costs from one organization to the next. Most people understand it s going to take providers some time to be perfect partners in producing high-value care, Delbanco says. But everyone feels desperate about how much money they are spending on health care and very frustrated about the uneven value that they are getting for their dollar, because of the variation in quality and the wide range of payment amounts they are making for the same care, regardless of quality. hfma.org/hcc October

14 laboratory costs Transforming Your Lab from a Cost Center to a Strategic Asset By Erin Lafferty The hospital laboratory can be a source of value enhancement with several areas for optimization. Hospital labs are challenged on multiple fronts, including growing reimbursement pressures, increasing breadth and complexity of laboratory technology, rising laboratory costs, and ongoing staffing pressures. These challenges are leading health systems to reevaluate the financial benefit of running their own labs and to assess alternatives that can optimize hospital lab financial returns while retaining control of the continuum of care. The Challenge Hospital labs deal with many of the same challenges faced by health care in general, including an aging workforce, a shortage of new talent entering the field, reimbursement and bundled payment pressures, and quality and service challenges. These challenges are further complicated by a proliferation of new technology driving increased utilization of expensive laboratory tests, which increases the diagnostic cost of clinical care. Hospital labs provide percent of the clinical information in all electronic health records and are a rich source of data for patient care and broader population health opportunities. In spite of this rich resource, hospital labs are often seen as cost centers and are not effectively integrated with the clinical operations. This separation leads to waste and poor quality and service that can result in a delayed discharge, delayed admission from the emergency department (ED), and potential misdiagnosis. The Opportunity Hospital labs offer an immediate opportunity to transform and be utilized within the health system as a strategic partner by implementing innovative approaches for process improvement and cost control. The top priority should be to ensure all service lines are operating at their best. Work should be based on experience, freeing up critical team members to perform more complex testing while using entry-level staff to fulfill routine tasks. The improvements can come from several key areas, such as cross-training, management and reporting of critical performance measures, and implementation of Lean strategies. Cross-training can help address natural workforce fluctuations caused by attrition and paid leave without adding resources or missing on quality and service. Work should be based on experience, freeing up critical team members to perform more complex testing while using entry-level staff to fulfill routine tasks. Another efficiency drain is the placement of critical equipment, which is often located where it fits physically rather than where it fits in the workflow. Hospitals optimize productivity by eliminating wasted steps and creating work cells to allow team members to operate more than one piece of testing equipment at a time. Opportunities to reduce costs in the hospital lab are not only driven by the process improvement strategies noted above but also achieved through reducing the costs of supplies and send out tests and ensuring an effective patient blood management program. Laboratory supply spend should be analyzed to ensure the test menu is optimized (tests are performed with the fastest turnaround and highest quality and at the lowest cost). This requires a comprehensive assessment of the hospital s technical capabilities to determine if the work should be brought in-house as well as a competitive pricing analysis. Patient blood management programs are focused on reducing unnecessary transfusions to patients through education and monitoring, and they are highly correlated with better patient outcomes and directly tied to savings in blood spend. Through these opportunities, hospital labs can achieve cost savings ranging from 15 to 25 percent or more in a period of three years or less. Such financial improvements can give hospitals flexibility to expand their service offerings. Hospital leaders can continue to drive value to the health system by developing an effective physician outreach program. Community physicians are interested in delivering top-quality service to their patients at a competitive price. Effective outreach programs deliver this value to physicians, patients, and hospitals. Same-day testing is a key benefit to using a local lab, as well as robust and timely reporting of results. In addition, an outreach lab creates an additional revenue stream for the health system, leveraging the existing equipment and resources needed to provide all of the inpatient testing. A transformed hospital lab can add value to the broader continuum of care by providing insights on patient populations and monitoring key disease trends. Consider the following questions. > > Are test results showing a disproportionate number of chronically ill patients compared with the community at large? > > Are there opportunities for other service lines within the hospital to leverage this insight and improve patient care? > > Is there a way for the lab to identify critical population risks through testing already performed by the lab? 14 October 2016 Healthcare Cost Containment

15 By developing a cooperative relationship between hospital lab leadership and the clinical leaders of the hospitals, health systems can drive true advances in patient care. The Approach There is a clear path to ensuring transformation in the lab, which can only occur with a well-executed process improvement program, leveraging a variety of subject matter experts, including medical Hospital Lab Savings Opportunities A typical health system has the opportunity to reduce lab spend by 18 percent over a 3-year period. Transformation Opportunity Service Line Cumulative 3-Year Cost Savings Blood 31% Supplies 15% Reference 15% Labor 16% TOTAL 18% Lab Spend ($MM) $70 $60 $50 $40 $30 $20 $10 $0 System Lab Spend Other, $7M Blood, $8M Supplies, $18M Reference, $7M Labor, $30M Amounts represent sample savings opportunity by area. Results vary across health systems. Source: Accumen Inc. Used with permission. technicians, operations excellence experts, clinical patient blood management experts, supply chain experts, and financial analysts, along with a strong executive sponsor. A successful program requires the following elements. Physician buy-in. Physicians are the key stakeholders of lab results and information, and clear communication and engagement is critical to ensure their support. Evidence for change. Whether it is cost improvement or clinical quality, stakeholders require evidence that the changes made will succeed and that patient care is not affected. A variety of subject matter experts all rowing in the same direction. Healthcare services require multiple inputs, and the lab is no exception. Key stakeholders for a successful lab transformation program include pathologists, those responsible for lab operations, the chief medical officer, ED physicians, supply chain leaders, the finance team, and IT staff. Ensuring stakeholders understand their roles in delivering the transformation and the expected results requires a well-coordinated, focused approach. Once the transformation has been started, key initiatives should be put in place to lead the change, and ongoing performance should be monitored. Dedicated Resources to Sustain Change Hospital leaders should take a close look at the effectiveness of using internal staff. There are several competing pressures on systems operations experts, and this pressure may delay or reduce the opportunity for true transformation. Some key factors to consider are the following. Timing. Now is the time for health system leaders to maximize the value of their hospital lab. Labs will continue to grow as a source of clinical information, and poor quality and service as well as increasing costs can no longer be absorbed by the hospital. Teamwork. To drive transformation in a hospital lab, you will need to establish a dedicated, multidisciplinary team that is focused on the successful outcome. For true transformation, hospital leadership should determine if existing resources have the ability and capacity to ensure success. If internal resources are unable to drive the change, hospitals can select a p artner that will work side by side with the hospital teams to ensure success, often using a riskbased payment model. The savings from the transformation should more than cover any incremental costs incurred to reach these savings. You can achieve quick hits with shortterm projects, but true savings as well as greater lab efficiency will come after a multiyear, focused effort. Erin Lafferty is CFO of Accumen Inc., San Diego, and a member of the San Diego/Imperial Chapter of HFMA (elafferty@ accumen.com). hfma.org/hcc October