getting strategic about cost management - first illinois...

Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.

Getting Strategic About Cost Management



August 28, 2012

Brian S. Channon Senior Vice President, Kaufman Hall



Today’s Objectives

1. The Need: An Unsustainable Situation

2. Strategic Cost Management Defined

3. An Approach to Strategic Cost Management

– What Are the Cost Reduction Building Blocks?

– What Are Some Relatively Untapped Opportunities Beyond the Low-Hanging Fruit?

– What Are the Key Lessons From the Trenches?

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Strategic Cost Management:

“You Must Start with WHY”

External Factors Internal Factors

Strategic Needs

Capital Needs

3



Achieving Sustainable Cost Transformation Requires Changing the Way Business Is Done + Strengthened Execution

4

Sustainable Cost Transformation

Changing the Way

Business Is Done

Cost Management

Cost Structure

Clinical Utilization

Strengthening Execution

Better Targets, Plans, and Execution

In-house Capabilities/ Self-Sufficiency

Robust Tools to Accelerate and “Hardwire” Process

Cost transformation requires sustained effort and attention across multiple dimensions



Five Immediate Cost Reduction Building Blocks

Owner: Brian Channon

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5. Strengthen Execution

4. Hardwire Value and Affordability

3. Understand What Is Driving Your Cost

2. Build a Compelling Case for the Identified Opportunities

1. Build a Compelling Case for Change



Build a Compelling Case for Change: Quantify the Need

6

Survive on Medicare reimbursement

Gap to maintain desired capital access

Required to support identified strategic capital expenditures

Expense

reduction

need

$__M

$__M

$__M

“Triangulation” of data from key sources helps to identify the need



Build a Compelling Case for Opportunity: Validating Cost Reduction Opportunities

Owner: Brian Channon

7

Internal historical performance External benchmarks

Budget gap

Expense

reduction

opportunity

$__M

$__M

$__M

“Triangulation” of data builds a compelling case that sufficient expense reduction opportunity exists to meet the need



Understand Willingness to Make Tough (and Easy) Decisions

8



Understand What is Driving Your Cost: Are Staff Schedules Aligned With Demand?

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Understand What is Driving Your Cost: Diseconomies of Scale

Dept. Location

Average

Daily

Volume

Paid FTEs PPE

2/28/09

Benchmark Paid

FTEs Based on

Volume

Pediatrics All Saints 1.84 11.54 4.73

Labor & Delivery SFH 2.59 18.69 12.33

Intensive Care

NurseryCovenant 4.51 21.80 10.53

Radiation Oncology EMH 6.86 4.33

Sleep Lab St. Jos 3.47 0.95

Illustrations of Departments Where Staffing is Driven More

by Coverage Than By Volume-Based Requirements

Dept. Location

Average

Daily

Volume

Paid FTEs PPE

2/28/09

Benchmark Paid

FTEs Based on

Volume

Pediatrics All Saints 1.84 11.54 4.73

Labor & Delivery SFH 2.59 18.69 12.33

Intensive Care

NurseryCovenant 4.51 21.80 10.53

Radiation Oncology EMH 6.86 4.33

Sleep Lab St. Jos 3.47 0.95

Illustrations of Departments Where Staffing is Driven More

by Coverage Than By Volume-Based Requirements

Dis-economies of Scale Are Easy to Find… But Often Difficult to Address

10



Understand What is Driving Your Cost: How Fixed Is Your Cost?

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Understand What is Driving Your Cost: Plans or the Execution of Plans?

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0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

8.25

8.75

9.25

9.75

10.25

27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

Census Frequency PHPPD per Grid Weighted Avg. PHPPD per Grid Target PHPPD Actual PHPPD

Sweet Spot Census



Understand What is Driving Your Cost:

Plans or the Execution of Plans?

Productivity is 22 percent worse than the benchmark target

Many hospitals start and

end their analysis here

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Plans or the Execution of Plans?

Of the 22 percent gap to benchmark, an additional 6 percent may be

attributed to excess (or standby) capacity

Even at peak volume, this department did not

meet benchmarked productivity levels

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15

Finance Department 25% 40% 50% TGT Actual Gap

Financial Planning and Control 14.32 19.09 22.09 26.56 28.00 (1.44)

Hospital 1 4.62 6.15 7.12

Hospital 2 0.78 1.04 1.21

Hospital 3 2.65 3.52 4.08

Hospital 4 0.95 1.26 1.46

Hospital 5 2.87 3.83 4.43

Hospital 6 2.45 3.27 3.79

General Accounting 42.01 48.24 54.57 42.73 44.00 (1.27)

Hospital 1 17.99 20.65 23.36

Patient Accounting Services 137.55 149.81 156.72 160.54 168.00 (7.46)

Hospital 1 44.58 48.55 50.79

Hospital 2 7.86 8.56 8.96

Hospital 3 26.53 28.89 30.22

Hospital 4 9.51 10.36 10.84

Hospital 5 26.67 29.05 30.39

Hospital 6 22.40 24.40 25.52

Payroll Services 7.90 9.20 9.89 8.34 8.34 0.00

Hospital 1 2.55 2.96 3.19

Hospital 2 0.43 0.50 0.54

Hospital 3 1.46 1.70 1.83

Hospital 4 0.52 0.61 0.65

Hospital 5 1.59 1.85 1.98

Hospital 6 1.35 1.58 1.69

Grand Total 201.78 226.33 243.27 238.16 248.34 (10.18)

Paid FTE Benchmarks Actual v. Target

This benchmarking approach assumes that, for a service or function to be centralized,

it must be demonstrated that it is performed more efficiently


Getting a Handle on Overhead Cost



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Function Location Cost Center # Cost Center Name 2010 FTEs

Combined Strategic

Planning, Marketing and

Community Relations Corporate 0011407 ADVERTISING/CREATIVE SERVICES 5.02

0011417 PUBLIC RELATIONS 6.47

0011425 CLINICAL SERVICE LINE MKTG 11.09

0011440 CUSTOMER CALL CENTER 20.7 6

Corporate T otal 43.34

Local Entity 005147 0 BUSINESS UNIT MARKETING 0.01

0052550 MARKETING 0.99

0332602 CORPORATE MARKETING 10.84

041147 0 BUSINESS UNIT MARKETING 1.88

0691300 BUSINESS DEVELOPMENT 5.15

1292550 MARKETING 1.22

1331405 CUSTOMER RELATIONSHIP MGMT 1.00

1331415 PUBLIC RELATIONS -

137 147 0 BUSINESS UNIT MARKETING 5.84

1422550 COMMUNITY REL / MARKETING 2.88

241147 0 BUSINESS UNIT MARKETING 2.01

5832550 COMMUNITY RELATIONS 3.83

Local Entity T otal 35.64

Com bined Strategic Planning, Marketing and Com m unity Relations T otal 7 8.99


Getting a Handle on Overhead

Growth in “shadow” FTEs frequently outpaces growth in centralized functions



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Cost Management: Attack Overhead

Is Your Organization a Breeding Ground for Carve-Out Departments?

“Carve-Out” Departments Can Obscure Accountability and Lead to Overhead Growth

• Nurse Interns

• OB Support Services

• Oncology Support Services

• Clinical Specialists

• Cardiac Intensive Support

Services

• ICU Support Services

• Medical Staff Liaison

• Care Management Call Center

• Care Mgmt Resource Center

• Central Processing Admin

• Nursing Education

• Nursing Orientation

• Advanced Practice Nursing

• Patient Sitters

• Staffing/Scheduling

• Psych Administration

• Clinical Info Management

• HIPAA

• Release of Information



To Achieve Aggressive Cost Reduction, Your Organization Needs to Pursue Cost Structure Opportunities

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Cost Structure “Pathways”

Rationalization of clinical service distribution across system

Reduced Clinical & Technology Duplication

Achievement of economic scale

Improved Quality Related to Critical Mass

Potentially significant capital avoidance

Cardiovascular

Women’s Health

Pediatrics

Cancer

Ortho

Neuro

What services should we be offering in each location and to what scope and scale?



1. How does our cost and quality compare?

2. Are there administrative functions whose value no longer justifies the level of investment?

3. Are there programs & departments that have historically flown below the radar of cost reduction efforts?

4. How should value and opportunity cost be considered when position requests are evaluated?

5. Can we afford to duplicate services across our facilities?

6. Should we exit underperforming strategies and non-core assets?

7. Has the organization become overly complex with too many projects and initiatives?

8. Are there opportunities to re-allocate resources to better advance organizational priorities?

Hardwiring Value in Daily Management: Questions to Consider

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20

4.0

4.5

5.0

5.5

6.0

6.5

3.0 3.5 4.0 4.5 5.0 5.5 6.0

Marketing

OCLP

Philanthropy

Strategic Planning and Government Relations

Communications/

Public Relations

Patient Accounting Information Services

Finance & Accounting

Human Resources

Compliance

Risk Management

Supply Chain General Counsel

Mission Services

Somewhat

Important

Extremely

Important

Performing

Adequately

Performs

Optimally Service Level

Import

ance

High Importance, Low Performance High Importance, High Performance

Low Importance, Low Performance Low Importance, High Performance

Figure out if: 1)You are getting your money’s worth; and 2) Whether you can afford it

Where Should We Improve Service Levels?

Do We Need to Perform Function at All?

Can We Lower Cost without Affecting Service?

Are We Providing a Level of Service Not Needed?

Figure Out If You Are Getting Your Money’s Worth



Figure Out If You Are Getting Your Money’s Worth

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Import

ance



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What are the Critical Processes and Structure Required to Support Cost Reduction Effort?

Improvement Planning Process

Plan Vetting & Authorization

Engaged Management and Project Oversight

Results Tracking and Benefit Realization

Better Targets and Alignment

Strengthened Management Controls

Zero-Based Budgeting and Value Engineering



Strengthen Accountability and Improve Execution: Seven Target-Setting Tips

Cost ManagementImproved Execution $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx

Labor Expense $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxxNonLabor Expense $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx

Supplies & Drugs $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxxPurchased Services $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxxProfessional Fees $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx

$xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx

Tighter Plans, Targets $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxxLabor Expense $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxxNonLabor Expense $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx

Supplies & Drugs $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxxPurchased Services $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxxProfessional Fees $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx

$x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx

No Current Targets/Under the Radar $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx

Total Cost Management $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx

Cost StructureOverhead Rationalization $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxxCapacity/Service Line Rationalization $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxxCore v. Non-Core Assets $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxxProject Portfolio Management $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx $x,xxx,xxx

Total Cost Structure $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx

Total Strategic Cost Management Opportunity $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx $xx,xxx,xxx

Strategic Cost Management Opportunity $Exec 1 Exec 2 Exec 3 Exec 4

1. Make sure productivity targets and reports

are aligned with financial statements

2. Greatest results are achieved when

targets are assigned to improvement

initiatives and specific executives

3. Targets are necessary, but not sufficient

4. Stretch targets must allow for “slippage” in

planning and execution

5. “Striving” to achieve benchmarks is not a

target!

6. Targets can be set without benchmarks

7. Beware of an unwillingness to set targets!

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Begin with an end in mind, i.e., compelling reason to reduce cost

Engaged management team willing to make tough decisions

Stretch targets set and aligned with no whining, no haggling, no

excuses

Changes in the way business is done (without resorting to “boiling the

ocean” approaches to redesign)

Strengthened accountability resulting in managers stepping up to

produce well-informed cost reduction plans

Ongoing strengthening of management capacity, capabilities, and self-

sufficiency

Adopt a “first things first” perspective in making resource allocation

decisions

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Keys to Successful and Sustainable Cost Reduction



Cost Reduction:

Resource Options

Employ Implementation Firm(s)

Many “boots on the ground”

Consultants develop the majority of solutions

Perform On Your Own

Need tremendous will

Must know where to look

Engage “Trusted Advisor “

Helps identify opportunities

Focused on building client self-sufficiency

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For More Information

James J. Pizzo Executive Vice President and

Physician Advisory Leader 847.441.8780

[email protected]

Brian S. Channon Senior Vice President and Strategic

Cost Management Leader 847.441.8780

[email protected]

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