This is a five part blog that will cover the following areas:

Part I: Labor

Part II: Align Incentives

Part III: Optimize Operations

Part IV: Supply Chain

Part V: Optimize Customer Service

Reduction of operating costs without the full support of physicians is impossible and whereas management’s role is to strategize, plan, and facilitate programs designed to reduce costs, physicians must execute and lead these initiatives to ensure success. Management can: downsize staff/services, squeeze and consolidate vendors, squeeze third party payers/managed care contracts, reduce days in accounts receivables due to more aggressive collection policies, and postpone projects/capital investments; however, these measures only maintain the organization’s operating costs and net margin temporarily as healthcare transformation requires a continuous infusion of capital and reinvestment in order to build a population health infrastructure to provide high quality/low cost care.

This series is intended to assist executives and leaders to think about cost reduction in new ways to re-think cost reduction initiatives as an investment to grow new sources of revenue and not as a cut in services or capital potential.

Part I: Labor

Labor makes up the most significant operating cost running from 39% to 65% of total operating costs. The labor ratio is an important operating metric that is often neither measured nor followed and is a simple calculation of: total labor costs/net operating revenue. Unfortunately, most organizations do not recognize physician labor (whether employed or self-employed) as a key driver of labor costs and so job analyses, job descriptions, and job redesign (which are traditional HR activities) are seldom performed for physicians who are responsible for the lion’s share of operating revenues and costs.

According to the American Medical Association (AMA), approximately 50% of physician time is spent in non-revenue and non-clinically relevant activities such as: computerized physician order entry (CPOE), data entry, and other sources of ‘waste’ that include waiting, unnecessary movement, and redundant or duplicative activities. Physicians traditionally perform their own documentation; however, like the ‘boiling frog’ syndrome, the complexity of this activity and its financial impact on a healthcare organization has grown to the point that physicians have neither the expertise nor desire to perform this activity accurately or correctly.

For instance, there are over 9,000 CPT codes with hundreds of clinical modifiers in each clinical specialty responsible for over 20% of the total reimbursement. There are over 16,000 ICD9-CM codes with an additional 130,000 ICD10-CM codes to be added in October, 2015. Imagine the amount of revenue being left ‘on the table’ because physicians have no idea as to what codes they are documenting for!

Many organizations rethink their approach. The University of Pittsburgh, Hamot in Erie, Pennsylvania works with a vendor (BCE) to create 24/7 documentation support to all inpatients admitted for over 48 hours with an increase in case mix index (CMI) from 1.4 to 2.2. Many emergency departments and hospitalist services add scribes with an increase in productivity and revenue generation of between 15%-20%. Those that add a certified coder (certified in the relevant clinical specialty) further increase the rate of return on every clean claim by 15%-25%. Taking both of these enhancements into consideration creates a breakeven point during the first patient of every shift (assuming a cost of a scribe of $25/hour with appropriate software support.) This is neither ‘up-coding’ nor ‘fraud/abuse’ as most physicians seldom document with enough specificity or accuracy to receive the optimum revenue for most patient encounters.

A second major shift in approach is to create ‘focused factories’ to enable physicians to focus on specific activities. For instance, at some organizations (e.g. Lahey Clinic and Cedars Sinai Medical Center), physicians are organized into pods or teams to manage a patient with specific duties assigned on a daily basis. For instance, one surgeon may be assigned pre-operative care and risk assessment whereas another the operating suite or post-operative care, office follow up, or call coverage. Thus, physicians can focus on specific clinical activities and functions with little distraction, wasteful movement, or loss of efficiency that is often the sources of decreased revenue and inadvertent errors.

Finally, many pundits feel that 80% of what physicians do can be done by non-physicians (e.g. advanced practice nurses and physician assistants) and that 80% of what non-physicians do can be done on line with software developed by American Wells and other disruptive innovators. Non-physicians can perform routine, low risk, protocol driven processes with excellent accuracy and with 20%-40% cost savings whereas on-line services can be provided for 95% lower costs for transactional interactions with stable or healthy patients and are reimbursed in 45 states.

Conclusion:

Significant cost reductions without any sacrifice in quality and service can be provided through a thoughtful redesign of how physicians are deployed. Many organizations reap significant value by helping physicians to focus on the unique clinical skills they are trained to perform with both significant cost savings and greater professional satisfaction and support.