11/3/2014

1

Strategic Cost Management:

Our Experience

Presented by:

Al Fisk MD, MMM

Chief Medical Officer

11/12/14

Agenda

• Need for vigilance on cost throughout industry

• Engaging a consultant to help with discipline and

candor

• The Everett Clinic’s situation

• Approach to strategic cost management

• Results so far

• Lessons learned

• Unintended consequences

• Questions and answers

11/3/2014

2

Watchful Eye on Cost – Doing

Less with Less

• Need for vigilance on cost

• Patients and payers cannot afford

continued cost increases

• Growth in retail care and high deductible

plans

• Operational costs continue to increase as

we need to pay market competitive

salaries for providers and staff

Strategic Cost Management:

Required to Maintain Financial

Strength in the New Reality

• Declining utilization

• Declining reimbursement

• Increasing government payer mix

• Accelerating shift to risk-based contracts

11/3/2014

3

National health expenditures as a

% of GDP

Should We Hire a Consultant?

• Consultants (Kaufman Hall) helped provide

tools, a disciplined process, candor and

fresh eyes

• Helped us remove cost reduction execution

barriers such as:

– “We need benchmarking to understand where to

find our cost savings opportunities”

– “We already are a lean organization”

– “I run a tight ship in my area, if there are cost

savings to be found they are somewhere else”

TEC made the decision to hire a consultant to help

us develop our Cost Reduction plans.

11/3/2014

4

The Everett Clinic’s Situation

• Financially healthy but storm clouds ahead

• Historically more emphasis on top line

growth versus expense management

• Infrastructure built for growth. Adjustment

needed

• Need to reinvent the care model and figure

out how to provide care at the lowest cost

Our Goals

• $10 Million annual savings

• Develop a disciplined process for addressing

cost reduction

• Learn new tools and methods for understanding

our cost reduction opportunities

• Enhance management capabilities to produce

lasting results

• Develop a Core Competency in Cost

Management

11/3/2014

5

© 2013 Kaufman, Hall & Associates, Inc. All rights reserved. 9

Sample High-Level Work Plan

Set strategic and financial

context

Fast-track targets

Eliminate execution barriers

Improve cost “intelligence”

Fast-track plans and execution

Understand risk-reward “payoff”

Align resources with value

Provide stick-to-itiveness

Track results meticulously

Approach to Strategic Cost

Management: Steering Committee

• Accountable for results

• CEO and Executive Leadership

• Review Cost reduction plans

• Monitor progress

• Oversee Corporate Communications

• Identify and remove barriers to success

11/3/2014

6

Specific Tactics

Strategic Cost

Mgmt. Results

Labor Cost Reduction

Plans

Non – Labor Cost

Reduction Plans

Labor Approach

• Analysis of where expenses have grown

faster than revenue historically

• Negotiation of cost targets at senior

administrator level

• Targets and rules communicated

– Labor savings can substitute for non-labor but

not vice-versa

• Development of Cost Reduction Plans with

specific timelines

11/3/2014

7

© 2013 Kaufman, Hall & Associates, Inc. All rights reserved. 13

Set strategic and financial

context

Fast-track targets

Eliminate execution barriers

Improve cost “intelligence”

Fast-track plans and execution

Understand risk-reward “payoff”

Align resources with value

Provide stick-to-itiveness

Track results meticulously

Labor Approach

• Many FTE’s adjusted through attrition and

rigorous attention to approval process

• Gains made through consolidation or

elimination of duplicate functions

• Very careful with direct patient care

changes

– Centralized Nurse Call Assist

11/3/2014

8

Non-Labor Approach

• Assembled team knowledgeable of areas

of major expenditure

– Pharmacy, supply chain, IT, lab, Imaging,

major contracts

• Communicated targeted savings

• Received input from throughout the org

– No Holds Barred

Non-Labor Approach

• Impressive Results

• Renegotiation of contracts with important

partners / suppliers

• Discovered what we are doing well and

what could improve

• Little things add up!

– Printers, toner, path slides, interpretive

services, maintenance agreements

11/3/2014

9

Summary Keys to Success

• Set strategic and financial context

• Fast-track targets (labor and non-labor costs)

• Eliminate execution barriers

• Improve cost “intelligence”

• Fast-track plans and execution

• Understand risk-reward “payoff”

• Align resources with value

• Provide stick-to-itiveness

• Track results meticulously

3% Reduction in Costs ($10M)

• Dramatic impact upon profitability

• Development of core competency in

strategic cost management

• Positions us for the new reality where we

will need to reduce costs by at least 3%

per year to survive and prosper

11/3/2014

10

Lessons Learned

• Cost reduction targets engaged and challenged

our management team to deliver results

• No shortage of opportunities to reduce costs

• Costs must be right-sized to what you can afford

• Tools, structure and discipline are critical

• Organizational alignment & accountability are key

• The disciplined process used for Strategic Cost

Management can be applied other initiatives

• This is not rocket science, just hard work!

Strategic Cost Management

Checklist of Core Competencies

Accountability & Execution

Clear accountability for results

Few if any departments that "fly below the radar" of

meaningful measurement and accountability

Engaged management team willing to make tough

decisions

Demonstrated ability to identify and overcome execution

barriers to achieve planned results

Alignment

Cost reduction goals are aligned with strategy and capital

requirements

Departmental and executive targets are aligned with cost

reduction goal

Cost reduction targets are baked in budget, staffing plans,

and position controls

Improvement initiatives are aligned with planned results

Improvement initiatives align risks and rewards (pain

versus gain)

Volume metrics are aligned with results from top to bottom

Adoption of a “first things first” perspective to rationalize

overhead and align resources with value

Improvement Planning

Leadership at all levels understand cost structure and what

is driving cost

There is a structured process for developing improvement

plans to meet cost savings targets

Rigor and discipline ensures that strategic plans and

initiatives support financial objectives and projects are

appropriately prioritized

Improvement Planning (cont’d)

Leadership at all levels continually improves processes by

removing waste, lowering costs and improving quality

Planning process is comprehensive and appropriately

stages improvement opportunities related to labor, non-

labor, service line rationalization, physician comp and

productivity

Leadership has a systematic way of evaluating the

financial impact of excess capacity

Management Controls

Organization has established a disciplined process for

authorizing hiring of new and replacement positions with

demonstrated effectiveness and results

Sufficient controls in place to manage the use of high cost

premium and contract labor

Overhead Management

Mechanisms in place to rationalize overhead and

corporate/system expenditures across the organization

Disciplined approaches in place to identify and control the

level of "investment" in non-value added activities and

services

Target-setting & Tracking

Cost reduction targets rolled up and assigned to individual

executives

Timetable has been established for realization of savings

targets

Effective systems are in place to track productivity and cost

There is a solid data-driven understanding of the

relationship between cost and volume at organization-wide

and department-specific levels

11/3/2014

11

Unintended Consequences

• Morale & trust in senior management down

• Does senior leadership communicate well

with the Clinic? “not at all” jumped 20%

• Do you have opportunities for 2-way

dialogue? “not at all” jumped 14%

• We don’t expect to be on the Fortune “100

Best Places to Work” list next year

• We see these as improvement opportunities

QUESTIONS?