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What are the Key Lessons from HFMA’s research on strategies for
reconfiguring cost structure?

The Healthcare Financial Management Association’s Value Project
2015 report demonstrates the practicality of managing cost containment and
reconfiguration simultaneously. Based on surveys of HFMA’s senior financial
executive members and interviews with analysts, along with site visits to four
health systems, the HFMA’s report researchers recommend several strategies for
healthcare finance professionals who are leading the process of reconfiguring
cost structure.  The report also outlines
opportunities, challenges, and strategies for reconfiguring cost structure in
various sectors of health care systems such as labor, supply chain, clinical
transformation, service line and asset rationalization (HFMA, 2015, p.
10).  According to the report, focusing
on these strategies can help healthcare systems that are preparing for the
transition to value-based health services, using the process of reconfiguring
cost structures.

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The first strategy is to consider local market and political
factors. When seeking to streamline assets or service lines, an organization
must realize that consolidating in a single facility or reducing capacity because
of cuts to funding, can have both competitive and economic impacts (HFMA, 2015,
p. 19).   The second is to balance
short-term and long-term considerations. For instance, investing in population
health management infrastructures for the long term is a good idea, however the
report also suggests to be aware of opportunities for short-term returns that can
help mitigate that expense sooner. An example would be the one described in the
case with Swedish Health Services. In this example, by implementing a
self-funded employee health plan, the Swedish organization was able to produce
a higher first-year return on their initial investment of $5 million to create
a “population health infrastructure” (HFMA, 2015, p.24-25).  The third strategy would be to engage staff
and physicians. Engagement maintains morale and draws on insights from those in
the staff best positioned to identify opportunities for and barriers to
improved financial efficiency. Diagnostic teams and clinical performance groups
are examples provided in the report of staff and physician engagement, which
can help with information exchange and the overall expertise necessary for all
staff during the transitional period (HFMA 2015, p. 18-19). 

a distinction that was very important in this report was that reconfiguring
cost structure is different from reducing it (HFMA, 2015, p.7). In any case,
when dealing with service costs, the implementation of the reconfiguration
couples with cost reduction in mind. Moreover, a successful transition to a
value-based service for healthcare requires a necessary balance of both
reconfiguration and reduction.  Cost
savings in one area enable increased investment in others. Efficiencies gained
by reducing operating costs can both increase margins under existing
fee-for-service arrangements and prepare an organization for accepting
risk-based contracts.  Essentially the
need to reduce costs in established operations and services (e.g., inpatient
facilities) along with the need to invest in the infrastructure for risk-based
contracting and population health management (e.g., IT, primary care, care
coordination) are both driven by the imperative to improve the value of these
services by providing higher-quality care at a lower cost to the patient.   Therefore in these cases, the cost reduction
efforts ought to be sustainable, and cannot be a ‘zero-sum game’, where the
losses (or potential gains) of one stakeholder, directly affect one area of
operation, or service. Furthermore, the savings should not accrue to only one
party. They should share the savings amongst key stakeholders to create an
incentive for further reductions, which will ultimately pass through to
patients to maintain their cost for health services. Most importantly, this
effort will require an unprecedented level of cooperation among hospitals,
physicians, and payers.  The need for
collaboration amongst these parties poses challenges finance leaders did not have
to deal with in the past. Nevertheless, the potential rewards for this
collaboration, along with efficient spending and cost control prove



is the relevance of the following tables and what can be learned from them?

A. Estimated reductions in Medicare and Medicaid payments
This table directly relates to one of two market influences which are presently
driving the need for healthcare systems to reevaluate cost structures. In this
table, on page 3, the HFMA analysis demonstrates the anticipated reduction in
Medicare and Medicaid payments, due primarily to the Affordable Care Act
of 2010, as well as other recent legislative actions. There is a projected $460
billion in federal hospital cuts, of which 85 percent will be as a result of
the Affordable Care Act. The productivity of Medicare, along with the Medicare
and Medicaid disproportionate share hospital programs will mostly reflect a
large portion of the cuts that the ACA is estimated to bring about. The more
reductions that are estimated to occur within the next decade (since 2014), the
more out-of-pocket costs will increase for patients in the coming years.

B. Declining payment and utilization are leading drivers of cost control
The table on page 4 of the report describes which factors are contributing most
to driving the need for cost control.  The
decline in Medicare and Medicaid payments, along with the decline in their
utilization have been identified as the two prevalent driving forces for cost
control. The report indicates that the perception is that the decline in
utilization is mainly because of the effects of the Great Recession, as well as
changes in the healthcare delivery systems (HFMA, 2015, p. 3). Another driver
to control costs, besides declining payments and utilization include factors
like changes in competition, which affect the both the price and accessibility
of health care services.   The importance
of this chart is help us recognize some of the most important factors
supporting the need to reconfigure cost structures in health care.

C.  Anticipated changes in cost structure

This table on page 6 depicts six areas where survey respondents
anticipated changes in organizational costs are most likely within five years
from when this report was compiled in 2014. Information technology (IT) had the
highest anticipated change at about 77%. Physician organization and services,
along with equipment followed at 61% and 44% respectively, in changes in cost
structures. These figures indicate that with the inevitable introduction of new
information technology tools, costs for physician services will drastically
increase, as well as the equipment that these services will demand. Essentially,
the expected increase in IT costs for organizations will inevitably increase
the costs for all of the other listed areas of anticipated changes in cost
structure, down to the facilities, and both the clinical and administrative staff

D. Assessment of cost-reduction capabilities

This table on the bottom of page 6 refers to a survey taken from
respondents who majority believe that their organization is strongest at
quantifying the initiatives necessary for cost reduction; on the other hand,
the respondents feel least confident in their organization’s ability to accurately
figure out all the costs for all the anticipated changes necessary in cost
structure. The relevance of this chart is that it is outlining some very
important metrics by which to assess how ready and prepared an organization is
to begin any process of cost-reduction. The assessment of leadership and
identifying cost reduction initiatives already in place for cost reduction,
will help health professionals make the necessary adjustments to prepare themselves
for whatever plan they implement for their organization’s cost reduction
initiatives. This will most likely allow organization to simply improve on the
plans they have, or make some minor adjustments to their plan of implementation
for cost reduction.

E. Areas of anticipated cost-reduction

This table on page 10 demonstrates that survey respondents believe
that within a five year period administrative staff and services are predicted
to drastically decrease their costs (as well as their staff), expecting a 68%
decrease (HFMA 2014, p. 10). The factor least anticipated to change in the next
5 years is IT; survey respondents anticipating 8%.  This most likely indicates that since IT is a
big cost expenditure for health systems currently, it is expected to remain so
in the near future as survey respondents also foresee IT contributing the most to
anticipated cost structure changes. The relevance of this table is that it is
almost a juxtaposition to the earlier table on anticipated changes in cost
structure.  From this table we can learn
that the anticipated reduction in administrative staff and their services will
have a direct effect on all the rest of the factors listed. For instance, cost
reduction in the administrative part of hospital staffing and operations, will
impact the upkeep of the facilities, the equipment that physicians will use, as
well as the clinical services and work-flow.

F. Opportunities to achieve savings

In this table on page 17, respondents identified clinical
process/workflow redesign/ greater use of clinical pathways as the greatest
opportunity for savings, either directly or through increased utilization over
the next three years. Nevertheless, respondents identified asset
rationalization and service rationalization as the least opportunities for
achieving savings because it reduces the creative opportunities possible both
quality health care that is cost efficient. The report explains why the table
would reflect that survey respondents identified service and asset
rationalization as the factors with the least opportunity for achieving savings
out of the seven listed. Many clinicians, as well as other healthcare
professionals reject the idea of cookie-cutter patient care. Dr. Charles Agee, the
Chief Medical Officer for Banner Health’s Arizona West region states, “Our
intent is not to implement “cookbook” medicine. Instead, it is to provide basic
pathways for patient care that allow clinicians to use their acumen to focus on
outliers” (HFMA, 2014, p. 17). The pathways that Dr. Agee is referring to in this
instance are the other opportunities listed in the tables like improvements in
productivity management, establishing a quality network of physicians,
centralization of administrative and operational functions, and new partnerships
and affiliations which will allow for health systems to run more efficiently,
which providing quality patient care. 
The relevance of the chart is to show the various ways that healthcare
professionals have begun to recognize opportunities within their own organization
to begin the process of reconfiguring cost structure in order to achieve

G. Strategies to reduce costs

This table highlights current strategies employed by the
respondents’ organizations to reduce costs. The top three were affiliation with
other organizations, reduction of services, and moving some staff from
full-time to part time status. (HFMA, 2015, p. 20) According to the report, these
three strategies are the ones most likely to be currently employed by
organizations that are beginning the process of cost reconfiguration as well as
reduction, because these strategies deal with operational part of health
organizations that are usually already in place. Outsourcing services and
leasing medical equipment takes the operational part of the hospital, outside
of the hospital. Usually health professionals are looking within their
organizations to see where they can start the process of cost reconfiguration.
The relevance of this table is that it underlines where organization have
already begun to actualize the cost reduction part of this process.
Understanding that cost reconfiguration and cost reduction are inextricably
linked, and should occur simultaneously, this table indicates that survey
respondents have already somehow reconfigured costs in their organizations with
the necessary partners and stakeholders, identified where the excess and
wasteful expenditures were going, and are now actively mitigating these issues
with implemented action plans for cost reduction throughout the rest of their



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