LEADERSHIP ASSIGNMENT PART 2
performance improvement
A New Framework for Healthcare Performance Improvement Building a new, patient-centric continuum of care requires a fundamental restructuring of the healthcare system.
By Gary Auton
The move to value-based payment is alter- ing the structure and focus of healthcare organizations. Every sea change demands strong leadership and a winning game plan to achieve enduring success. That game plan is performance improvement.
However, health systems have perfor- mance improvement strategies that often are not in sync with emerging marketplace requirements. Performance improvement plans are frequently based on slow, incre- mental improvement centered on labor productivity, supply, and other non-labor costs. These traditional approaches, while useful, cannot alone offset payment and volume declines for most organizations.
Building a new, patient-centric con- tinuum of care requires a restructuring of the healthcare system and a new taxonomy of performance improvement interven- tions that are faster, broader, and more strategic than those adopted in the past. Improvement initiatives must increasingly focus on long-term, high-impact areas that re-engineer clinical care, sharpen service portfolios, and exploit scale of operations.
Levels of Performance Improvement Performance improvement opportunities accrue at different points and with varying scope in a health system. Specifically, per- formance improvement takes place at three levels: the department or program (pro- cess) level, the cross-functional or cross- site (structural) level, and the cross-market or cross-population (portfolio) level.
Process Level Process changes represent the routine operational modifications leaders make daily in their areas of responsibili- ties. Process initiatives include routine
department-level changes in work sched- ules, role design, and workflow improve- ments that improve staff utilization and service to patients. Specifically, program level changes include:
Process improvement. Strengthens the services and value provided to patients, families, physicians, and other stakehold- er groups. Department-level initiatives usually focus on reducing waste, improving cycle time, and building reliability into key work processes.
Facilities optimization. Modifies the layout and workspace of a department to improve patient flow and facilitate the effective use of resources.
Demand smoothing. Improves patient and work activity scheduling to balance work- load across days and weeks.
Role and team design. Creates jobs and as- signs responsibilities to improve flexibility and workload balance across work teams.
Dynamic staffing. Improves staff scheduling and deployment to meet variable workload demand.
The organizational impact resulting from process-level changes depends on depart- ment size and complexity. Organizations in the early stages of performance improve- ment should first focus on building depart- ment-level processes and systems.
Structural Level At some point, health system leaders find that further improvement only can occur by addressing processes and systems that
2 Fall 2018 Strategic Financial Planning
ISSN: 1934-7103
Betty Hintch Senior Editor
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cross over into other areas of organizations. These improvement opportunities occur at the second, or structural, level. Structural improvements represent operational inter- ventions that are executed among functions both in single facilities and across multiple facilities in health systems. These inter- ventions often challenge and alter the foun- dational assumptions of hospital and health system processes and organizations.
Structural improvement levers include:
Structural process improvement. Improves key business processes across functions and system entities to enhance service continuity.
Management restructuring. Redesigns lead- ership roles to better leverage management resources across departments, programs, and sites.
System rationalization. Leverages the advan- tages of system scale to rationalize staffing and resources across multiple entities.
Service redeployment. Relocates resources and services to different areas to improve service and lower operating costs.
Non-labor optimization. Builds processes and systems to manage enterprisewide supplies and other non-labor expenses.
Demand regrouping. Reaggregates work to achieve better resource alignment, build proficiencies, and improve workload bal- ancing across time and functions.
Utilization improvement. Lowers case cost and contribution margins by reducing un- necessary utilization of clinical services.
Off-quality improvement. Improves clinical quality outcomes and minimizes the costs of unfavorable quality events.
Structural improvement projects are of- ten complex, requiring a great deal of time and effort and the involvement of large, di- verse groups of leaders and staff. When ex- ecuted effectively, structural improvement
initiatives can yield substantial gains in organizational performance.
Portfolio Level Beyond process and structural changes, further performance improvement is achieved through alterations in health sys- tems’ portfolio of services and programs. Portfolio-level changes occur when health systems reconfigure and redesign programs and services to respond to changes in
market demand. The aim of portfolio man- agement is to maintain a service offering that meets market demand and maximizes revenues and margins. For health systems, portfolio improvement includes:
Service divestment. Identifies services to eliminate or markets to exit.
Service outsourcing. Determines which care continuum components should be
Performance Improvement Levels in Health Systems
Performance improvement takes place at the department or program (process) level, the cross-functional or cross-site (structural) level, and the cross-market or cross-population (portfolio) level.
Pro ces
s
Str uct
ure
Por tfol
io
Department/ Program-Level Improvement
Cross-Functional, Cross-Site Improvement
Cross-Market, Cross- Population Improvement
Source: Galloway Consulting, an ADAMS company. Used with permission.
5 Keys to Successful Performance Improvement
Think big. Leaders need to break with traditional, incremental improvement approaches and pursue broader, bolder interventions that have the promise of long-term strategic and opera- tional payoff.
Leaders don’t have to start from scratch. Most health system improvement opportunities can be anticipated. The key is to apply the appropriate “levers” to the most important areas and issues.
Don’t wait too late. This work should begin while health systems are prosperous and are still evolving as integrated systems. It is difficult to make long-term changes when an organization is struggling with immediate margin challenges.
Engage key constituents. Leaders must align and motivate physicians, employees, and other stakeholders throughout the process or face a lack of support and opposition.
It’s mostly about leadership. Large-scale performance improvement requires strong, visionary leadership from assessment through implementation. Organizational change and renewal is not possible without effective executives leading the way.
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Example of a System-Level Gap Closure Plan
A hospital executive team developed a multiyear gap closure strategy featuring the deployment of 11 expansive performance improvement initiatives, including three initiatives focused exclusively on the physician practices division. The plan enabled the organization to achieve a positive operating margin by the second year.
Performance Improvement Initative Improvement Levers
Economic Improvement Targets
Year 1 Year 2 Year 3 Year 4
H os
p it
al -
an d
S ys
te m
-L ed
In it
ia ti
ve s
Labor productivity* #1-Process improvement, #2-Structural process improvement, #3-Facilities optimization, #4-Demand smoothing, #5-Demand grouping, #6-Role and team redesign, #7-Dynamic staffing, #10-Service redeployment
$10,450,000 $11,495,000 $12,644,500 $13,908,000
Leadership restruc- turing and functional consolidation†
#8-Management restructuring, #9-System rationalization, #10-Service redeployment
$2,000,000 $5,340,000 $9,450,000 $10,395,000
Supplies and purchased services‡
#11 Non-labor optimization $3,500,000 $4,025,000 $4,628,500 $5,323,000
Portfolio review§ #16-Service outsourcing, #17-Service divest- ment, #18-Continuum realignment
$500,000 $1,000,000 $3,200,000 $4,000,000
Clinical utilization|| #12-Utilization improvement $2,500,000 $3,250,000 $4,387,500 $6,142,000
Quality improvement# #13-Off-quality improvement $0 $1,950,000 $2,340,000 $2,808,000
Revenue cycle** #15-Revenue optimization $5,800,000 $5,280,000 $5,280,000 $5,280,000
Growth†† #14-Demand growth $2,580,000 $2,760,600 $2,953,842 $3,614,000
P hy
si ci
an E
nt er
p ri
se
In it
ia ti
ve s
Labor productivity‡‡ #1-Process improvement, #2-Structural process improvement, #3-Facilities optimization, #4-Demand smoothing, #5-Demand group- ing, #6-Role and team redesign, #7-Dynamic staffing, #10-Service redeployment, #17-Service divestment
$1,580,000 $1,896,000 $2,370,000 $2,844,000
Revenue cycle§§ #2-Structural process improvement, #15-Reve- nue optimization
$1,500,000 $3,000,000 $3,000,000 $3,000,000
Growth## #14-Demand growth $4,950,000 $5,692,500 $6,546,500 $7,528,000
Forecasted gap $36,500,000 $45,000,000 $51,000,000 $60,000,000
Gap closure total $35,360,000 $45,689,000 $56,800,000 $64,842,000
Remaining gap $1,140,000 -$689,000 -$5,800,000 -$4,842,000
Source: Galloway Consulting, an ADAMS company. Used with permission.
* Target 35th percentile benchmark staffing in all departments † Start initially with regional management restructuring ‡ Physician preference, commodity, pharmaceuticals, and purchased services § Will take longer to implement || Focus on length of stay for Medicare patients and cost per case on cardiac, neurology, and orthopedic patients # Focus on reducing readmission, deep vein thrombosis, and ventilator-associated pneumonia ** Improve charge capture and coding; reduce denials †† Reduce leakage; build service line referrals ‡‡ Improve staffing to 65th percentile Medical Group Management Association Benchmarks, divest low-performing practices, and consolidate support and administrative
services §§ Improve clinical documentation and coding ## Open new practices and improve access to existing practices
4 Fall 2018 Strategic Financial Planning
produced internally versus by partnering entities.
Demand growth. Identifies strategic mar- keting opportunities and tactical growth initiatives to build top-line revenues.
Revenue optimization. Improves net reve- nues and margins through enhancements to organizations’ revenue cycles.
Continuum realignment. Realigns programs, resources, and investments to build a stronger service continuum.
Portfolio improvement is a growing area of focus for large healthcare systems. As accountable care and population health initiatives transform healthcare delivery, health systems must institute changes to their service portfolio by reducing invest- ments in existing programs and building new programs and capabilities. Similarly, growth and revenue cycle improvements are necessary for building and sustaining operating margins.
System-Level Gap Closure Plan Performance improvement strategies must address an increasingly broad range of operational issues and extend for multiple years. For example, in a four-year financial gap closure strategy for a regional health- care system, a hospital CFO prepared a forecast of the organization’s expected de- cline in operating margins under a scenario that net revenues per inpatient case for all payers would approach prevailing Medicare rates. Based on this scenario, the organi- zation’s operating margins would drop by $36 million in the first year and grow to $60 million by the fourth year.
The executive team then developed a multiyear gap closure strategy featuring the deployment of 11 performance improve- ment initiatives, including three focused exclusively on the physician practices division (see exhibit on page 4). The plan enabled the organization to achieve a posi- tive operating margin by the second year.
Of note is that the strategy was built on assumptions of when benefits were expect- ed to be achieved and that these savings
would be sustained over time. For example, the labor productivity team forecasted a savings of 175 FTE staff in the first year. The $10.4 million savings would be sustained and accrue over subsequent years.
This example illustrates several dynamics of multiyear performance improvement:
> Financial gap closure requires a multiyear portfolio of short-term and longer-term initiatives. > Short-term improvements are found primarily through a focus on labor pro- ductivity and non-labor expenses. > Revenue cycle improvements may generate substantial revenue gains in the short term as well, depending on organizations’ current performance. > These short-term initiatives are nec- essary but insufficient for closing large financial gaps over extended periods. > Savings resulting from clinical utiliza- tion, quality, and portfolio improve- ments can be substantial, but they take longer to implement than other cost and revenue improvements, with benefits from the long-term initiatives generally accruing two to three years after launch. > Revenue growth normally includes short-term tactical improvement and long-term strategic opportunities.
The work required to transform health- care systems can be daunting. Large-scale performance improvement challenges leaders at all levels of the organization and usually surfaces unaddressed operational, strategic, and cultural gaps. Paradoxically, leaders who are tasked with driving per- formance improvement are often those individuals most threatened by the change. It is not surprising that many transforma- tion initiatives fall short of expectations. However, by demonstrating organizational value and the impact on future viability, performance improvement champions can bring others on board.
Gary Auton is senior director, Galloway Consulting, an ADAMS Company (gauton@gallowayconsulting.net).
data analysis
Hospitals Are Using Cost Reduction To Reduce Patient Charges By Jamie Cleverley
Within a decade, average charge inflation for U.S. acute-care hospitals fell from 6-8 percent.
I was talking with a group of hospital ad- ministrators recently, and we were discuss- ing levels of price and cost inflation in the industry. I remarked that when I started in the industry more than 15 years ago, it was common to see price inflation exceeding 10 percent per year. It’s almost difficult to imagine or remember those times now with significantly lower rates of gross charge inflation.
That discussion prompted a question from the group about how cost changes have influenced or aided the reduction in gross price inflation. The thought was that perhaps a portion of the lower gross charge inflation rates in the industry today could be attributed to the efforts hospitals have made at containing cost growth. As a result of lower utilization of services per patient encounter, overall charge growth could be reduced. This speculation should be explored further.
A Construct to Measure Inflation Although there are multiple ways to eval- uate cost and charge inflation, we decided to consider the average cost and charge for the “products” that acute-care hospitals provide: patient encounters. To measure, we used Medicare claims data and reviewed average claim charges in 2005-06, as well as, 2015-16. Costs were estimated by using department-specific ratios of cost-to- charge (RCC) found on filed Medicare Cost Reports applied to corresponding
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