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From the Papal Nuncio's compound overlooking Port-au-Prince, Chris Van Gorder was struck by how beautiful the Haitian capital looked nestled by the sea. But as the president and CEO of San Diego-based Scripps Health descended into the city with his medical response team after the January 2010 earthquake, his impression shifted radically. "I had never seen such death and devastation in my life," Van Gorder recalls.

The jarring contrast between how the city appeared from above and on the ground helped crystallize some long-developing notions Van Gorder had about his own organization. First, it threw into sharp relief the need to make health care more affordable, effective and responsive to all patients' needs. Second, it made it clear that accomplishing this would require looking at — and managing — Scripps horizontally rather than vertically.

"Health system performance can look pretty good from above when each individual hospital and ambulatory site is in its own silo," Van Gorder says. But when Scripps compared operations horizontally across its five hospitals, 23 clinics and related services, managers discovered about $150 million in unexplained cost variations — coincidentally about the amount he estimates that the system loses on Medicare.

"We expect there is at least that much variation in the ways physicians practice," he adds.

Eliminating the inefficiency implied by this variation would go a long way toward preserving Scripps' finances and health care mission in the face of shrinking payments, Van Gorder realized. So, in October 2010, he turned Scripps' management structure on its side, making his hospital chief operating officers responsible for the financial performance of all hospitals across the system. This empowers managers to identify and implement evidence-based best practices across the organization and consolidate administrative services. "The goal is to eliminate variation that does not add value for patients," he says.

In the first nine months, Scripps is on track to save $51 million in operating costs this year, $11 million more than initially identified. These include more than $8 million through consolidating pharmacy management and purchasing, and $6 million through standardizing lab processes. Revised emergency department protocols have cut waiting times, increasing volume and adding $9 million to the bottom line. Van Gorder projects that these cost-saving efforts will enable Scripps to break even on Medicare by 2016.

Planning to live within Medicare rates is wise, but not easy, says Joan Moss, R.N., senior vice president at Sg2, a health care intelligence and information services firm in Skokie, Ill. Based on 2010 data, Sg2 estimates that on average, a hospital would need to reduce direct costs per case about 14 percent to maintain current contribution margins if all payers reimbursed at current Medicare rates.

But with the federal and state governments in deficit-reduction mode, and private payers cracking down on cost shifting, hospitals may have to cut even more. Moss has been mostly hearing estimates in the 15 to 20 percent range from hospital executives. Lani Berman, senior director of analytics and gain-sharing for health alliance VHA, says she's seen hospitals preparing for 30 percent.

Whatever the actual number is, achieving such massive cuts will be difficult if not impossible for most hospitals and health networks.

Where to Begin?

Hospitals will "need to focus on the cost per episode and more broadly on the cost per capita and the broader cost across the entire continuum for the entire population you serve," says Caroline Steinberg, vice president of trends analysis for the American Hospital Association. That means coordinating care to reduce outpatient-sensitive admissions and hospital readmissions, and providing preventive and wellness care to keep people out of the hospital. "This is the new frontier hospitals are moving into," she says. "The good news is that payers are looking at different ways to bundle and capitate payments, so there will be positive incentive to focus on cost per episode and cost per capita."

Moss advises approaching cost reduction in four phases. The first is reducing variation by standardizing protocols, purchasing and service location at the DRG level. Second is removing unnecessary care, including reducing provider errors, preventable readmissions, avoidable conditions and unnecessary diagnostic tests. Third is cost restructuring to use the lowest-cost setting and provider possible for each service. Sg2 estimates these three steps may save hospitals about 10 to 15 percent.

The fourth phase is adopting a system of care strategy. This includes strategies such as medical homes and disease management that will reduce the overall need for hospital services. It involves redesigning care focusing on the disease level, engaging physicians and other clinic partners inside and outside the hospital, and continuously measuring and improving performance, Moss says. "When you are looking at 15 to 20 percent, you can't get there any other way."

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Metrics That Matter

At hospitals and systems around the country, executives already are reinventing care delivery to cut costs while improving outcomes. Like Scripps, many are starting inside the hospital, reorienting management on coordinating care and reducing variation through new, more efficient and effective evidence-based care processes. They also are looking at new cost-based metrics rather than margins to evaluate and improve the efficiency of services.

Novant Health got in the game in 2008. The North Carolina-based system adopted Medicare costs as its payer-neutral internal performance benchmark, as well as a horizontal management structure that compares performance across departments at its 13 hospitals. "Everything in the hospital is up for review," says Gregory J. Beier, the system's president of operations. One change was creation of a "virtual pharmacy," which saved the system $9 million by standardizing the evidence-based formulary at all hospitals and consolidating purchasing.

Altogether, the program saved about $120 million in each of its first two years, lowering Novant's costs from 113 percent of Medicare to about 105 percent — while maintaining top tier Centers for Medicare & Medicaid Services core measures scores, Beier says. Novant now is sharing data with five other health systems to identify best practices from outside. "Every one of these systems is the best at something. By working together, we all get better."

Novant now is applying the approach to outpatient care, establishing medical homes that Beier believes will reduce overall costs.

Novant attacked costs as part of a comprehensive effort to improve the patient experience. "We conducted hundreds of interviews and three things came through again and again," Beier says. "Number 1 was, 'I want more meaningful time with my doctor.' Number 2 was, 'Don't make me wait.' And Number 3 was, 'Can you make this more affordable?'"

Based on this and the fundamental need for safety and clinical quality, the system constructed a six-faceted model for creating an excellent patient experience. "All of the facets are important. We owe it to our patients and our community to make care affordable."

Eliminating 'White Space'

Managers at Mercy St. Vincent Medical Center in Toledo, Ohio, are looking to improve efficiency by adopting the industrial concept of eliminating "white space." That means reducing any excess resources, such as extra inventory, extra staff and, most of all, wasted time from hospital processes, says Steve Mickus, now COO for Catholic Health Partners. He launched the effort two years ago as CEO of Mercy St. Vincent.

Mercy St. Vincent started by examining patient flow. At the outset, it took an average of four hours to find a bed for patients entering through the ED, says Imran Andrabi, M.D., who was chief medical officer at the time and is now CEO. "It took seven to 10 phone calls to get a bed. So you had backups in the ED and people leaving without being seen."

The problem was further up the chain. The hospital had no set way to clear beds in its eight critical care units. So the hospital created a care coordination center. Senior nurse coordinators now are assigned to each unit including the ED and operating rooms. Their job is to make sure that all patients in their area are receiving care according to the protocol and are moved to the next care level on schedule. When beds open up, they report to the care coordination center, which posts them electronically.

The system, which Mercy St. Vincent built in partnership with a software developer, also tracks the status of all patients in the system, along with their scheduled procedures and transfer times, as well as scheduled medications, intravenous feeds, lab tests and other services. "People can see who is coming and get things ready for them," Andrabi notes.

Mercy St. Vincent also made significant management and personnel changes to implement the system. Mickus realized he needed managers skilled in logistics, but had few in-house. So he hired managers with process experience from manufacturing and trained them to work in a clinical environment. He also implemented a closed-loop management system that enables top managers to implement process changes quickly. The hospital CEO meets weekly with all department heads to review performance and identify opportunities for improvement. The frequent meetings mean solutions are tested in near real time, and can be adopted quickly.

Mercy St. Vincent now is piloting a program to extend the approach to ambulatory care and physicians' offices. Andrabi anticipates that physicians will cooperate even though only about 10 percent of the system's doctors are employees. He notes that the changes in the hospital to date have been very popular with physicians because they greatly improve their efficiency and productivity.

Mercy St. Vincent has cut average length of stay from 5.2 to 4.0 days and direct costs by $8.6 million; the hospital operating margin rose from 2.7 percent to 5.3 percent. This has enabled the hospital to increase capacity by the equivalent of 100 beds with no new construction, Mickus says. While the hospital has enough demand that it can use the extra capacity to increase volume, improving efficiency also can make it possible to reduce costs, particularly staffing costs, by closing units or even entire facilities, he notes.

With inpatient admissions projected to fall over the next few years, many hospitals may need to consider this option, says Fred Campobasso, a managing director specializing in health care facilities planning and development at Navigant Consulting in Chicago. The changing mix of inpatient and outpatient services creates opportunities for hospitals to save on new construction by not building all hospital spaces to the higher inpatient standard.

On the other hand, spending more to create universal beds that can be used for critical care or other purposes as needed may be worth it in the long run because it gives greater operating flexibility, he adds. "Sometimes you will spend more on the front end to get better efficiency over time. It's always a balancing act." He recommends thoroughly thinking through services, program needs and operational issues before investing in new construction.

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Resources for Smaller Hospitals

Catholic Health Partners is rolling out its coordination system at its other hospitals, which range from 75 to 400 beds. Mickus says the system is highly scalable and can be implemented without adding staff at smaller facilities. The electronic, patient-tracking system also is available as a commercial product.

VHA also makes sophisticated care restructuring services available to smaller organizations. "We take a comprehensive approach from the time patients enter the hospital until they leave," Berman says.

Patient flow issues, such as when patients are moved from intensive care to step-down units, as well as supply and ancillary service costs, are examined. For example, at Delaware County Memorial Hospital, a 225-bed facility in Drexel Hill, Pa., VHA clinical consultants identified opportunities to save more than $500,000 annually by changing antibiotic prescription preferences and adopting best practices for use of specialty beds, ancillary services and diagnostic tests, including CT scans and blood tests. Addressing bottlenecks in patient flow cut length of stay by half a day in several service lines.

Berman says several smaller hospitals with which she works are extending the approach beyond the hospital walls to help physicians prevent readmissions and better manage patients. Physicians generally are eager to improve efficiency because it frees them to see more patients. She emphasizes, however, that executive leadership is essential for care coordination efforts to succeed.

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Staffing Costs

With staff typically running 50 percent or more of health system costs, reducing the workforce has been the go-to strategy for many systems looking for quick savings. But this strategy may be self-defeating, especially when you rely on staff innovation to drive care process redesign, Scripps' Van Gorder says. "If you're worried about losing your job, you're not going to be very creative."

So Scripps has set up a workforce retention program committed to retraining and placing staff within the organization. Last year, 100 employees participated and 96 were placed in new positions. Scripps saved nearly $750,000 by hiring from within rather than paying recruiters, and avoided nearly $1 million in potential layoff costs, Van Gorder says.

At Novant, ensuring that staff skills are used appropriately is a big part of improving the patient experience and saves money, Beier says. For example, care technicians pull meds from the Pixis dispenser, leaving nurses with more time at the bedside. Some routine recordkeeping, formerly done to comply with care reporting requirements, has been taken over by records staff and others. These moves also can reduce the number of nurses needed.

Despite the progress, the road ahead is long. Andrabi notes that while Mercy St. Vincent already has cut inpatient direct costs by more than 20 percent, it remains to be seen how much can be achieved through broader care coordination.

Van Gorder emphasizes that his organization is committed not to a specific cost-cutting target, but to maintaining a healthy margin that allows Scripps to continue its mission.

Beier simply says there's no target. "Five or 7 or 10 percent won't be nearly enough. We will just keep going."

Howard Larkin is a contributing editor at Hospitals & Health Networks magazine.

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