Multiple factors are rapidly converging to push the current model for health care delivery to the brink. Demographic shifts, an increasing number of uninsured patients and escalating treatment costs are challenging the financial viability of many health care systems. From a national perspective, even as the total cost of health care approaches the breaking point, payers continue to curtail reimbursement, steadily squeezing operating margins.

The Obama administration has made it clear that the industry must make some truly transformative changes. Better care at lower cost is the new bar being set. While cost reduction has been a constant pursuit for many years, what's often been tried hasn't been enough or hasn't been sustainable. Now even more is expected.

There should be legitimate concerns and questions among health care governance regarding the adequacy of the strategic response many health care organizations are taking to these market pressures. It's time to try some new approaches to reducing costs.

No Plug-and-Play Solution

There is a growing trend of implementing expensive programmatic initiatives to reduce costs and improve processes. It would be a wonderful world if formulaic approaches to running organizations actually worked as well as promoted. It is this perpetual hope that drives virtually every organization to launch a continuous improvement, Six Sigma or lean corporate initiative. The faith is based on the assumption that providing common tools and methodologies to all managers and requiring certain process examination events (in other words, scripting behavior) will result in the improved outcomes specified in the strategic plan.

The reality is both simpler and harder. Implementing any strategy in any organization or industry requires the same thing. That strategy must be translated into the design of work throughout the organization, including:

  • Clarifying key job roles and how they affect strategy. The more transformative the strategy, the more likely key assumptions about work must be re-examined, resulting in new, changed and obsolete job roles.
  • Identifying key work processes and process redesigns that reflect the new strategy. Automating a process does not necessarily improve it. Every day, information technology is implemented that does not help to improve customer value or quality, or better manage work throughput.
  • Identifying the appropriate outcome and process metrics—not activity metrics—and monitoring them so corrective action can be taken the moment variances occur.
  • Establishing clear and specific accountability for outcomes, monitoring, corrective action and change management throughout the organization, and then holding people accountable.
  • Building an organizational competency to manage complex projects, meaning all strategy-driven change in the organization is translated into action via a project plan that comprehensively identifies every action needed, who will do it, when and what resources they will require. Without this discipline, organizations find out too late that goals won't be met and they have no basis for diagnosing what went wrong.

This is straightforward but difficult work. It requires constant problem diagnosis, adaptability, willingness to engage in constructive conflict and a disciplined approach to building sustainable role and process infrastructure. To be effective, executive leaders must be engaged and hands-on in the strategy implementation effort. There is no plug-and-play approach that will work.

Spending More in a Cost-Constrained Environment

All of the popular formulaic approaches to implementing strategy and improving organizational performance have one thing in common. They represent a new cost center in the organization at a time when reducing costs has never been more important. New corporate departments are created, black belts and lean experts are hired, and mandated meetings consume valuable time. A more important question is rarely asked or answered first: "Why aren't we getting the continuous efficiency and effectiveness improvement we're already paying our managers to achieve?"

In effect, the new cost center enables managers to further abdicate what little accountability they felt for strategy implementation and process improvement. "This is a Six Sigma project," becomes a common response when a problem is identified in a manager's area of responsibility. Over time, the role of the manager in many organizations has devolved to one of scheduling and managing daily task activity rather than challenging current process and driving improvement. Creating a new cost center and resource as a Band-Aid for this accountability gap is an expensive solution that no organization can really afford.

To embed and sustain a higher level of performance in the organization, executive leaders must build management infrastructure, accountability and performance capable of translating strategy into action and managing change. No significant strategic change can be sustained without a highly competent manager. Just when they are needed most, organizations are beginning to realize they haven't developed managers to do what they are paid to do. Executive leaders serious about implementing transformative, competitive strategy must address this gap in a hurry, focusing on developing the manager's role rather than creating Band-Aids for what's missing.

Financial Turnarounds with a Sense of Urgency

Investing in and building up management infrastructure to tackle health care's new challenges is a long-term strategy all organizations should be pursuing. This is the key to getting what you're paying managers to achieve. Unfortunately, many hospitals face pressing financial constraints that must be addressed immediately. They need the cost and quality improvements they haven't developed their managers to provide.

Organizations in this situation should have a focused and concrete short-term operational plan to kick-start the managerial performance they need. These plans can be built around the key elements of the management infrastructure they need to ultimately build. A sequence of milestone steps should include:

  • "Re-chartering" the role and expectations of the manager. This includes setting clear expectations for having measurable, important outcome goals (cost or quality of care); establishing a system to monitor actual results; and having concrete, actionable plans to address variances in outcomes against goals.
  • Conducting an operational review three to four weeks later to assess the quality of the outcome measures that have been established and the processes to monitor them. An important note: If the IT department cannot respond to managers' needs for automated process monitoring and metrics then those managers need to establish a manual process. "No excuses" needs to be the mantra. There must be a sense of urgency in improving results.
  • Conducting operational reviews every four to six weeks to assess measured variances against objectives and the progress of corrective action plans.

Blaming the economy or payers for deteriorating financials doesn't fix the problem. Nor does "starting the Baldrige journey" or hiring black belts and training managers on Six Sigma principles. By redefining expectations and planning monitoring and reinforcement, health care organizations can get immediate results, manager by manager, department by department. The alternative—launching a cross-system programmatic initiative—runs a high risk of waiting at the end of a long pipe and finding that what you expected isn't coming out.

Appropriate governance in this environment should insist on a concrete current year operational plan to get more out of the present management infrastructure.

Is the Current Plan Good Enough?

Just as expectations for both lower cost and better quality have been ratcheted up, leadership throughout health care needs to step up its response to such demands. The old ways of reducing heads, leveraging system size and buying in to the latest program of the month won't be enough.

There are proactive strategies to seize control of your financial viability and improve the care being provided. You don't have to wait for the federal government to tell you what to do. Governance must ensure a clear and credible path is mapped now to change how care is delivered and embed better approaches as an ongoing way to do business. Conducting the business of health care as it has always been done is not an adequate strategy in this economic environment.

Rita E. Numerof, PH.D. (, is president, Bill Ott, M.B.A. (, is a senior consultant, and Michael N. Abrams, M.A. (, is managing partner at Numerof & Associates Inc., a strategic management consulting firm in St. Louis.

The range of typical cost reduction approaches can be categorized into four increasingly progressive and effective levels. These levels illustrate two points. First, health care organizations have probably gotten most of what they're going to get from more traditional cost reduction efforts. Second, it's time to identify new, more effective approaches.

Level 1: Cost Reduction Via Headcount Reduction
The most traditional approach to cost reduction has been periodic headcount reduction. Sometimes this reduction is approached under the guise of a "reorganization" or "restructuring." One key underlying assumption is that staff and management ranks can be reduced without hurting the quality of care.

There are considerable risks inherent in this assumption. Eliminating people doesn't eliminate the work they did. If the work was unnecessary, the larger question is how it became embedded in core processes in the first place. Often, much of the work is necessary and gets passed on to remaining staff who already had full-time jobs. The result is compromised quality due to staff overextension, burnout and turnover in an environment where hiring skilled, competent caregivers has gotten difficult. (Clearly, the turnover part of the equation has slowed in the economic downturn, but burnout hasn't.)

Many hospitals have already gone through multiple iterations of headcount reductions, with diminishing results, increasingly cynical morale and an inability to sustain savings. This path doesn't offer much promise as a solution to continuing financial pressure.

Level 2: Leveraging System Efficiency
Much hospital consolidation over the past decade has been driven by expectations of system efficiencies. This has been based on the assumption that consolidated purchasing volumes will result in better prices, and that back-office operations can be centralized for greater efficiency. In some cases, strategic planning has redefined roles and services of different entities within the system in order to eliminate redundancies of equipment and services.

Achieving this efficiency hasn't been easy. The expected results of centralization often have gotten lost in the activity of setting up central functions. Too much management attention and energy goes into resolving issues between system groups who feel they have a mandate to standardize and individual hospital entities who feel such groups are unresponsive to their unique needs.

A more important point is that the low-hanging fruit has already been picked by most health care systems. "Been there, done that" doesn't hold much promise for reaching an even higher level of expectations.

Level 3: Perfecting Predictive Care
At the heart of evidence-based medicine is the predictive care path. Once in place, these care paths serve as the basis for analysis and elimination of variances that cost money and compromise quality outcomes. Making caregivers and managers accountable for identifying and eliminating variances leads to continuous cost-effectiveness, not to cost-reduction events. Length of stay is shortened and unnecessary tests and drug use are squeezed out. Never events that won't get reimbursed are eliminated. Using these paths instills efficiency and effectiveness as a way of doing business, in contrast to a periodic corporate cost initiative that destroys morale.

This is easier said than done. It requires organizational resolve and nontraditional competencies because managing to predictive care paths often engenders physician resistance. Many hospitals have started measuring outlier care decisions but aren't taking any action. Reluctance to engage in difficult conversations is a luxury the industry can no longer afford. Hospitals must build the organizational capability and managerial expectation to work collaboratively with physicians to eliminate unnecessary costs and to consider evidence-based medicine in their decision-making.

Predictive care paths can also clarify roles and accountabilities. Examination of current approaches to providing care against these paths reveals redundancies that have become embedded in care processes. Eliminating redundant work activity—rather than eliminating some of the people doing the work—is real cost reduction.

Level 4: Changing How Care is Delivered
Operating in a truly patient-centered care model would result in a continuum of care for common disease states, compared with the episodic care most providers deliver today. This requires the ability to conceptualize new care models and define new outcome metrics that go well beyond the morbidity and mortality measures currently in use. It also demands collaboration with payers to move reimbursement away from episodic care. And it will require working with physicians to break down barriers between specialty and primary care areas.

Macro evidence suggests there is much room for improving how we're addressing common diseases such as diabetes, cardiovascular disease and degenerative arthritis. However, this change requires a level of innovation and structured scientific thinking that rarely exists in today's applied health care settings. Care continuums have to be developed and tested before widespread implementation as evidence-based medicine. This is an objective of health care reform, and funding is available to support such innovation.

If ongoing financial viability is a concern—and we're betting it is—trustees must be setting expectations for Level 3 and 4 efforts to reduce costs in a sustainable manner that doesn't compromise quality outcomes.—R.N., B.O., and M.A.