Dangers of Knee-jerk Cost Cutting

To meet demands to cut costs in healthcare, administrators are reaching for the obvious—line item expenses on the profit-and-loss statement—with counterproductive results. Instead of the willy-nilly slashing of personnel, space, equipment and supplies, those responsible for managing the cost of care should consider the best mix of services to deliver excellent patient outcomes in an efficient manner.

That’s the observation of Robert S. Kaplan and Derek A. Haas in “How Not to Cut Health Care Costs,” in the recent issue of Harvard Business Review. They explore the following five mistakes that administrators make.

No. 1. Cutting support staff. Payroll is typically the first stop on the cost-cutter’s agenda, as it accounts for two-thirds of the average provider’s costs. Freezing salaries and new hires (or the more extreme reduction in head counts) typically begins with support personnel and is frequently justified because it will not affect patient care.  “A probably unstated reason is that the work of clinical staff is directly reimbursable, whereas that of the administrative staff is not,” they write.

What happens when support staff is cut, however, is that physicians (who are paid 10 times as much) end up doing the paperwork and other administrative tasks previously performed by support staff.  Integrating more nurses and physician assistants into patients’ care frees up senior clinicians to work at the top of their license, the authors point out.

An example they provide is the Anesthesia Assessment Center (AAC) at MD Anderson Cancer Center in Houston, where patients are evaluated prior to surgery. The AAC replaced two of four anesthesiologists with two midlevel staff people and reassigned the other two anesthesiologists to the operating room, reducing per-patient-spending by 45% and increasing the number of patients served by 19%.

No. 2. Underinvestment in space and equipment. In the authors’ analysis, space and equipment were consistently smaller costs than personnel in various medical conditions, but because hospital systems do not measure the cost of idle space, equipment or personnel they often make poor trade-offs and underinvest in space and equipment and lowering the productivity of their highest-cost resources.

In their study of surgical processes for joint replacement at 30 hospitals, the authors discovered that some orthopedic surgeons perform seven to 10 surgeries while others do two or three, even though they spend the same amount of time on each procedure.  The difference between the high volume surgeons and their low-volume counterparts was two operating rooms compared to one.

Using another example, the authors demonstrated that increased spending on equipment can improve care and reduce costs. When an emergency department with three x-ray machines (two fixed and one portable) got busy, patients and attending staff would have to wait for a free machine. A financial analysis revealed that the annual cost of an additional portable machine would be less than the savings in wait times and procedure times, not even considering the cost benefits of an earlier diagnosis.

No. 3. Narrow focus on procurement prices. Another popular target for cost savings is reducing materials and services from outside suppliers since these costs frequently add up to 25% to 30% of total costs. Rather than focusing narrowly on price, the authors suggest that greater savings may be found in focusing instead on how clinicians use supplies. In the authors’ multisite study of knee replacements, they found huge differences in spending on supplies that had nothing to do with negotiated prices: some sites used pre-mixed antibiotic bone cement versus hand-mixed or plain bone cement, and sites varied in the amount of cement used.

No. 4. Pushing for throughput. “It would be absurd to try to increase the productivity of musicians by having them play faster,” the authors write, drawing a direct parallel to asking physicians to see a patient every 10 minutes. The authors argue that if physician productivity were measured based on outcomes rather than inputs (or patients seen), physicians often can achieve greater productivity by spending more time with fewer patients.

Often these patients are those with chronic diseases, for example, patients with chronic kidney disease. A nephrologist told the authors that if he could spend 30 minutes counseling chronic kidney disease patients, he could significantly increase the number of patients who start dialysis with a fistula or graft. Even though this approach gives patients longer lives and fewer complications, more than half start dialysis with a catheter.

In radiology, much attention has been paid to prioritizing stat studies and routing an exam to the appropriate subspecialist. More opportunities for creating value may exist in discovering ways to better identify disease progression in patients with high-cost illnesses.

No. 5. Ignoring benchmarks and standardization. The authors cite cost differentials within the same or similar institutions of from 30% to 500% for joint replacements.  A group of five cardiac surgeons at the Mayo Clinic discovered that they all did surgeries differently. “Individual clinicians’ practices tend to go unquestioned (current practice has been described as ‘eminence-based’ rather than ‘evidence-based’),” the authors write.

In discovering that they all used blood transfusions differently, Mayo Clinic cardiovascular surgeons developed blood-products guidelines, reducing transfusions by 50% and transfusion-related kidney disease by 40%. Boston Children’s Hospital implemented a program called Standardized Clinical Assessment and Management Plans (SCAMPs) for chest pain and heart valve abnormalities, among other areas, lowering cost per episode by 11% to 51%. Clearly, there are opportunities for radiologists to collaborate on SCAMPs.

The authors urge administrators to engage clinicians in cost measurement and management activities, which surprisingly is not routinely happening, beginning with in-depth analysis of the cost of treating each medical condition.  “High health care costs are the result of mismatched capacity, fragmented delivery, suboptimal outcomes and inefficient use of highly skilled clinical and technical staff,” the authors conclude. “The current practice of managing and cutting costs from a P&L statement does nothing to address those problems.”