Struggling To Cut Costs? It Comes Down To Execution
Unrelenting financial pressures continue to squeeze health systems. As we detailed in the first article of this series, health systems must set their sights on reducing costs by 15%-20% over the next five years if they are going to sustain the vital role they play for their communities. But leadership teams too often focus on incremental, in-year changes to make the budget work, at the expense of higher impact opportunities. Our vantage point puts us in a unique position to not only identify which areas leaders should focus on, but how to act to drive meaningful impact today and set the organization up for long-term sustainability.
This article digs into five levers leaders can pull to achieve annual cost reductions of 5% to 7% and get their organizations started down the path of larger cost savings. While some of the areas may seem elementary, they’ve been chronic pain points for health system leaders, like proper staffing, managing length of stay, and emergency department efficiency. Health systems have long struggled to move the needle and we’ve found that it comes down to execution. Fixing these areas will create a domino effect for future savings.
1. Amplify the impact of human capital
Although industry hiring is up in recent months, staffing shortages are projected across a broad range of clinical categories for the next decade. Coupled with burnout that heightened during the pandemic, health systems are confronting the impact of an aging workforce and a looming retirement boom. The median age of registered nurses, for instance, is 52 and trending higher , according to data from the American Nurses Association. Beyond the direct impact on access and patient care, workforce shortages present sizeable financial hurdles, including increased use of expensive contract staffing firms. On top of that, there are high costs associated with staff turnover. One study of hospitals nationwide found that the average cost of turnover for a bedside nurse was more than $56,000, leading to roughly $4 million in costs per hospital in 2023.
Current workforce planning models do not adequately account for the constantly changing demands placed upon staff, especially nurses. This often results in a supply and demand imbalance. Redesigning key processes and teaming models can create more sustainable models for staff and reset the cost structure. Oliver Wyman identified five key principles for mitigating risks associated with the nurse staffing shortage. Actively managing to a target clinical model — with clear expectations for each role, and appropriate proportions — can allow hospitals to improve employee satisfaction and reduce excess costs of over- or understaffing. Automating staffing assignments and ensuring an accurate census forecast are essential ingredients to improving appropriate staffing.
2. Maximize perioperative processes
The operating room remains a pivotal profit center for fee-for-service hospital models. Constant diligence around monitoring and optimizing performance is an enduring source of value generation. Even as care shifts toward outpatient and ambulatory settings, ensuring that the OR is fine-tuned and linked more closely to demand is a central component of cost optimization. The returns on investment are impactful. In one assessment for a regional health system, we found that a 1% increase in OR utilization resulted in nearly $5 million in annual direct margin.
Key to achieving that level of performance is establishing a governance structure that can both actively measure results and provide detailed steps for operational improvement. That includes diligently monitoring and eliminating unused block time that goes straight to waste. Tracking patient flow from check-in to bed placement is also foundational, as it helps clear system bottlenecks and minimize surgical downtime. Last, it is critical to align ORs to specific high-volume types of cases, generating greater specialization in OR staff, supply standardization, and timing and utilization predictability.
The role of support services cannot be overlooked. Assigning dedicated support services — environmental, facilities, and transport — is necessary in reducing OR turnover time, enabling top-of-license nursing care, and streamlining throughput. Executing on these tactics requires coordination across the board and must be supported by real-time data and a rigorous monitoring and feedback loop.
3. Get length of stay right – from the start
Reducing length of stay is critical in environments with fixed payments and excess demand. Getting it right necessitates close and constant communication between several players, including the admitting physician or hospitalist, case manager, utilization manager, and the patient or caregiver. It’s vital to loop in the patient’s insurer early to gather necessary approvals for key elements like post-acute services, medical equipment, or physical therapy. Further, many systems have deployed hospital-at-home programs to enable patients to recover safely at home.
Basic discharge planning should start when a patient is first admitted, with an estimated discharge date entered in the electronic health record based on the admitting diagnosis. This has proven challenging to achieve for several reasons, ranging from clinicians having difficulty accurately predicting a discharge day to miscommunication or misunderstanding between clinicians and patients or caregivers. To smooth this process, discharge planning conversations need to become ubiquitous throughout the patient stay. This type of basic process change can go a long way toward improving throughput and reducing the overall cost per discharge.
4. Make the emergency department work for, not against, you
The ED represents a microcosm of all the challenges and opportunities facing hospitals. Optimizing ED operations and patient throughput is critical if hospitals are going to move the needle on costs. And there are a handful of tactics leaders should emphasize here.
It starts with getting underneath the patient population seeking ED care. Who is coming in, how often, and why? To what extent is the ED being used as a bridge for gaps in access in other parts of the ecosystem? Getting to root cause issues often reveals a host of more affordable and feasible solutions that shift patient care to more appropriate settings.
Providers also need to create a detailed workflow encompassing the entire patient journey, from check-in and triage to diagnostic tests, physician evaluations, and, ultimately, the to hospital admission or discharge. While seemingly obvious, we have found that mapping these workflows still reveals bottlenecks that emerge. Staff can then be empowered to implement interventions to improve efficiency and reduce wait times. All of this must be supported by seamless coordination and communication among various stakeholders, including physicians, nurses, technicians, and support staff.
5. Eliminate duplication of administrative functions
We’ve heard the statistic for years — up to half of administrative spending in the US healthcare system is waste. Eliminating duplicative tasks and streamlining administrative functions is essential to hitting the 5% to 7% cost reduction target we noted at the top of this article. It will also enable staff to focus on value-added work.
Administrative functions should be reviewed to identify where and how centralization makes sense, especially for work that’s repeated across business units or departments. While there may be resistance, the short-term pain is worth the long-term gain as staff can be redeployed to focus on growth areas or business units that need help.
Automation and digital tools, when deployed correctly, can also play a big role in reducing administrative costs. As we outline in this Oliver Wyman Health article, automation can help health systems improve patient and staff scheduling workflows, hasten insurance verification, and improve supply chain management, among other things. To alleviate administrative burden, hospitals must leverage zero-based budgeting to align resources with the most critical services.
Other cost saving opportunities remain
These are just a few examples of the most impactful areas of traditional cost transformation efforts. Executing against these levers typically generates 5%-7% of cost reduction. Ultimately, more innovative cost saving strategies are needed to ensure long-term sustainability within a challenging and transforming provider market. Yet, optimizing the basics is an impactful, foundational step on the path to staying viable in the future.