The Road to Sustainable Cost Reduction for Healthcare Delivery Organizations

As CSC’s Global Health Economist, I have had my share of inquiries and requests about how we could talk to clients about helping them reduce costs and making their workload more cost-effective. I have also had a long-standing conversation with our CTO, Femi Ladega, on how to model cost-effective solutions for healthcare delivery organizations (HDOs) – a very interesting but also very elusive topic, so I decided to write down my thoughts.

By Boris Rachev, Global Health Economist, CSC

HDO CIOs and CMIOs face an uphill battle. They need to find the right balance between running the business and building new capabilities to grow the business. They must understand the new strategic imperatives that their hospitals are pursuing at the same time that they are transforming their IT operations. They need to adopt a better approach to demand management by restructuring the delivery model and by optimizing operational processes.

Easier said than done. There is no other sector in the economy undergoing more of a squeeze than U.S. health system. The combined forces of healthcare reform and declining reimbursement rates from insurers are putting enormous pressure on reducing costs and becoming more efficient. How to address this is still a big dilemma for CIOs and CMIOs. In my analysis on how to better address this, I have come to the conclusion that HDO leaders should ask themselves three questions, the answers to which will pave the way to sustainable cost reduction.

Man with bicycle on car park roofWhat do we do?

This question is about demand management, or how the enterprise governance process will ensure the elimination or reduction of IT projects that don’t have a clear link to business strategy and that don’t produce a financial or qualitative return on investment. Empirical studies have estimated that asking this question and acting upon it can produce savings of 3% to 7% of the IT baseline, i.e., permanently reset the cost structure at a more economical level.

Let’s take as an example the oncology department of a research medical center that has asked its IT department to create a custom cancer patient registry. From the point of view of the IT department, the project makes sense because the registry helps the HDO automate the management of the department’s clinical studies. But the IT department has a bigger decision to make: whether to devote its IT data architects to building the cancer registry or to put those scarce resources on an enterprise-wide data analytics or business intelligence project, etc.

Where do we do it?

This question addresses the issue of how should the delivery of services be organized and to what extent should the services be delivered by in-house resources. So far, HDOs have given preference to the localized delivery model with IT people providing at-the-elbow support. This may make sense for services that affect the patient care experience, but there are also IT services that fall outside these parameters, and health systems should investigate alternative options – especially for commodity IT services.

Balancing in-house with purchased services requires that HDO IT departments develop deeper capabilities in vendor management, and may also need to become efficient in application design processes. Delivery model changes have the potential to produce comparable or improved services at a cost savings rate similar in magnitude to the savings from demand management changes – empirical evidence indicates a cost reduction of 5% to 10%.

How well do we do what we are already doing?

This question is, of course, about operational efficiency. Achieving operational efficiency involves streamlining day-to-day processes, consolidating redundant applications, and making better use of infrastructure assets. It’s no secret that most health systems have redundant applications in their portfolios as a result of health system consolidation or of changes in the vendor landscape. Vendor maintenance contracts are often suboptimal, with IT departments paying for outdated or overlapping service-level agreements that are no longer tuned to what is actually needed. Sound familiar? This can be compared to consumer experience with optic cable networks – when consumers rarely know what they have and are paying for services they may never use.

Rationalization of HDO application portfolios and improving operational efficiency tend to require a sizable up-front investment, but can ultimately yield a net payoff in the neighborhood of 4% to 10%.

In summary, empirical evidence suggests that all three areas of IT optimization can help HDOs reduce their IT costs on the order of 12% to 27%.

Healthcare IT optimization makes a significant contribution to the effectiveness of HDOs. The issue isn’t having good processes, but having the right processes given the need and the situation. We at CSC specialize in HIT optimization and have developed a highly customizable, value-driven Agile Health approach. This approach is built on a cloud-based, as-a-service technology, allowing for increased asset utilization and better balance of demand and supply. Through new technology partnerships with HDOs we deliver forward-looking capabilities and flexible go-to-market solutions.

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