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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Getting Strategic About Cost Management
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
August 28, 2012
Brian S. Channon Senior Vice President, Kaufman Hall
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Strategic Cost Management:
“You Must Start with WHY”
External Factors Internal Factors
Strategic Needs
Capital Needs
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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Achieving Sustainable Cost Transformation Requires Changing the Way Business Is Done + Strengthened Execution
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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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Build a Compelling Case for Change: Quantify the Need
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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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Build a Compelling Case for Opportunity: Validating Cost Reduction Opportunities
Owner: Brian Channon
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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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Understand Willingness to Make Tough (and Easy) Decisions
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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Understand What is Driving Your Cost: Are Staff Schedules Aligned With Demand?
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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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
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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Understand What is Driving Your Cost: How Fixed Is Your Cost?
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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Understand What is Driving Your Cost:
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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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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
Understand What is Driving Your Cost:
Getting a Handle on Overhead Cost
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
16
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
Understand What is Driving Your Cost:
Getting a Handle on Overhead
Growth in “shadow” FTEs frequently outpaces growth in centralized functions
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
17
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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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?
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
Figure Out If You Are Getting Your Money’s Worth
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Import
ance
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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
Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
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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Copyright 2012 Kaufman, Hall & Associates, Inc. All rights reserved.
Getting Strategic About Cost Management
26
For More Information
James J. Pizzo Executive Vice President and
Physician Advisory Leader 847.441.8780
Brian S. Channon Senior Vice President and Strategic
Cost Management Leader 847.441.8780
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