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Strategic cost management hospital
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Why Strategic Cost Management is Essential for Your Hospital
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
May 15, 2014Presentation document
McKinsey & Company | 2
McKinsey is one of the leading global management consulting firms, with deep experience serving providers and the healthcare industry
Depth of provider expertise Over 300 engagements for ~100 providers in past 5 years, e.g.,
7 of the 10 largest U.S. hospital systems 9 leading AMCs and 5 leading children’s hospitals Dozens of independent hospitals and small systems
US Health Reform Center founded by former special assistant to President
Global, cross industry insights▪ Founded in 1926, 94 offices in 55 countries
▪ 20 industry sectors and 7 functional practices ▪ Serve 94% of 100 leading global corporations, and 75% of top 100
US companies
Breadth across health care chain▪ Serve 9 of the 10 largest managed care firms
▪ Governments and health systems in 17 countries and 5 US states▪ 19 of the top 20 global Pharma, biotech, and device companies
▪ Foundations, multilaterals, and NGOs in global public health
McKinsey & Company |
Objective Health is a specialized group within McKinsey, focused on advanced analytics to help health systems make better decisions and achieve sustainable results
▪ Specialized group within McKinsey & Company that uses advisory expertise, advanced analytics, and tools to empower hospitals to improve, survive, and thrive
▪ We provide a unique approach utilizing proprietary healthcare analytics, detailed benchmarks, and extensive hospital expertise to quickly identify and seize the right opportunities
▪ Hospital-specific tools and services help your organization initiate, track, and sustain long-term results
Healthcare Systems & Services
Global Healthcare Practice
McKinsey & Company | 4
▪ Why is strategic cost management important?
▪ Case study: 500 bed health network
Contents
McKinsey & Company | 5
Healthcare cost is trending further upward globally
1 Assumptions: GDP growth of 2% (OECD-Prognosis, 2000-50). Healthcare spending increases 1.9 basis points faster (OECD historical rate)
SOURCES: OECD Policy Implications of the New Economy – 2000-50, 2001; Global Insight WMM, 2000-37; Espicom: World Pharmaceutical Fact Book, 2008; International Monetary Fund; World Economic Outlook Database, October 2009; McKinsey
<10 10-15 >15
Share of healthcare costs as part of GDP%1
Hong Kong
Spain
Italy
U.K.
Australia
5.9
6.0
7.8
8.8
9.3
10.5
Country
Korea
2008
Canada
Germany
France
U.S.
10.8
10.8
11.2
16.1
6.8
8.9
10.0
10.6
10.5
8.17.4
7.5
6.7
8.2
9.7 10.7
11.0
11.6
13.1
12.0
12.7
14.4
2015 2020 2025
8.9
9.0
11.7
13.2
14.0
15.8
2030
12.3
12.3
12.7
18.3
13.5 14.8
13.5
14.0
20.1
14.8
15.3
22.0
16.2
16.2
16.8
24.2
Global trend in healthcare
McKinsey & Company | 6
Operating expenses have grown consistently in recent years and the pace of growth is expected to continue to outpace inflation
7,000
8,000
9,000
10,000
11,000
2013
+1% p.a. +2% p.a.+3% p.a.
+4% p.a.
121110092008
+2% p.a.▪ Represents
10% increase over 2008 rates
▪ 3.4% higher than inflation over same time period
Source: Publicly reported provider financials (includes CYH, HCA, HMA, LPNT, THC,UHS); www.usinflationcalculator.com/inflation/current-inflation-rates
Operating expenses per AA
$ per AA
Historical cost growth
McKinsey & Company | 7
Payor mix
Non-government insured patient days as a percent of total patient days, n =1757
38
40
42
44
46
48
50
52
54
System net revenue ($M)
1500+300-500
1000-1500
500-1000
50-100
100-300
0-50
Larger systems tend to have a better payor mix, with a higher percentage of commercially insured patients
Source: CMS cost reports; OH analysis, 2009 data
▪ Larger systems have done a better job of attracting commercially-insured patients
▪ A larger proportion of favorable commercial payments results in increased operating margin
Payor mix advantage of larger systems
McKinsey & Company | 8
Cost performance as a percent of net revenue
Larger systems have higher margins despite mediocre cost performance, as they spend less of each dollar of revenue
Administrative and clinical cost as a percent of net revenue1,2
System net revenue ($M)
1500+1000-1500
500-000
300-500
100-300
50-100
0-50
45
40
35
30
25
20
15
Average administrative cost
Average clinical cost
Source: CMS cost reports; OH analysis
1 Included costs are all administrative costs as well as clinical costs attributed to the following departments: adults and pediatrics, radiology, laboratory, operating room, respiratory therapy, emergency, medical supplied and drugs charged to patients, physical therapy, ICU, pharmacy, and ECG. Administrative and clinical costs are NOT wage index- and CMI-adjusted.
2 For administrative cost percentage of net revenue, n=1200. For clinical cost percentage of net revenue, n =586, 2009 data
▪ Overall cost as a percentage of net revenue decreases as scale increases despite poorer absolute cost performance
Cost performance by size
McKinsey & Company | 9
As a result, larger hospital systems tend to have better margins
Median operating margin by rating
Percent
Source: Fitch report on non-profit hospitals, 2011; Kaufman & Hall
Median operating revenue by rating
USD, Millions
1.1
1.3
2.0
2.7
2.5
3.1
4.7
4.1
‘BBB−’
‘BBB’
‘BBB+’
‘A−’
‘A’
‘A+’
‘AA−’
‘AA’
1,141
379
198
300
413
470
556
2,245
‘BBB−’
‘BBB’
‘BBB+’
‘A−’
‘A’
‘A+’
‘AA−’
‘AA’
Why size is relevant
McKinsey & Company | 10
Governance and strategy are the two most important factors for assessing a hospital’s continued success
Observed performanceDrivers of performance
▪ High quality management team– Stable and experienced– Record of predictable and
strong performance▪ Competent and experienced board
of directors
Governance1
Strategy2▪ Clearly articulated strategy to
succeed in its market, including:– Clinical service line strategy– Regional/ market
strategyPerspective on how hospital will participate in new business models/partnerships
– Physician alignment/ partnership strategy
– Cost management
Profitability3
Liquidity and leverage4
Drivers of performance
McKinsey & Company | 11
Meanwhile NR/AA has been flat and actually declined in over the past few years
$ per AA
Source: Publicly reported provider financials (includes CYH, HCA, HMA, LPNT, THC,UHS); www.usinflationcalculator.com/inflation/current-inflation-rates
Financials per AA
8,000
9,000
10,000
11,000
12,000
121110092008 2013
Op ExNR/AA
0%
2%
CAGR1 2008–13
1 Compound annual growth rate.
Cost vs NR/AA
McKinsey & Company | 12
Providers are responding in a variety of ways – five are particularly common
Enacting broad-ranging cost control programs, including lean operations, back-office cost control & clinical transformation (“Medicare margin” efforts)1
Engaging in a frenetic wave of transactions (M&A) across the for-profit, not-for-profit, and outpatient-focused spectrum2
Continuing to invest heavily in services & specialists with differential reimbursement & margin (leading to “tragedy of the commons” in places)3
Considering innovative incentive relationships (e.g., ACO-like or “Clinical Integration”), but cautious of appropriate strategic & business model rationale5
Continuing to move towards greater physician alignment through structural options (employment and “employment-like” in strong CPOM1 states)4
Focus of case study
McKinsey & Company | 13
High degree of experimentation with a variety of new reimbursement and risk-sharing models…
▪ Provider system builds a health-plan, leveraging brand name to drive volume to provider system “Provider-led”
integrated network
Select examples Description
ACO ▪ An organization of health care providers accountable for quality, cost, and overall care; share cost savings if performance metrics are met
“Basic P4P” ▪ Payment upside based on performance metrics linked to value creation (e.g. BCSMA Alternative Quality Contract / AQC)
▪ Payor-led affiliation or acquisition of health system which seeks full clinical and operational integration to reduce costs, improve member experience, and manage referral volume
“Payor-led” integrated network
Patient centered medical home
▪ Team of physicians and extenders, coordinated by a PCP, coordinate provide high levels of coordinated care; typically tied to P4P contract
Episodes of care ▪ Covers all aspects of preadmission, inpatient, and follow-up care, including postoperative complications within a set time period for procedures, e.g., hip replacement
Pay for value ▪ Payment bonus tied to efficiency metrics (e.g., reduction in ER visits, imaging)
Bot
h up
side
and
dow
nsid
e ris
kIn
cent
ive
paym
ent
Ris
k sh
arin
gFu
ll ris
kG
ain
shar
ing
Excl
usiv
ely
upsi
de o
ppor
tuni
ty
McKinsey & Company | 14
Business results
Time
People involved
1-3 years
10s 100s 1,000s
Failure to launch▪ Stuck in diagnostics – leaders
unable to align on what to do, where to start
▪ Managers not held accountable for performance
▪ Employees resistant
Failure to sustain▪ No change in day-to-day behaviors▪ Change agents – not the line –
leading the change ▪ No capability upgrade at the site level▪ Improvements not baked into budgets
Failure to scale▪ Multiple bottom-up efforts with
competing methodologies and no overarching blueprint
▪ Limited leadership capacity▪ Waning focus from senior team
Failure typically comes about in one of three areas of a transformation….
McKinsey & Company | 15
…and stems largely from non-technical factors
30 70
14
Other obstacles 14
Management behavior does not support change
Inadequate resources or budget
Employee resistance to change 39
33
OrganizationalHealth factors
% of efforts failing to achieve target impact
70% of change programs fail …… mainly because organizational health gets in the way
Source: Scott Keller and Colin Price, Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage. 2011
McKinsey & Company | 16
HealthPerformance
How an organization aligns itself, executes
with excellence, and renews itself to
sustainably achieve performance aspirations
What an enterprise delivers to
stakeholders in clinical, financial, and
operational results
SOURCE: McKinsey & Company, Objective Health
An organizations performance and health are equally important to sustain and build long term success
McKinsey & Company | 17
Sustainable operational improvement requires focus on 3 interrelated components of change
Mindsets,Behaviors,
and Capabilities
Changes way people think, feel, and conduct themselves in the workplace, both individually and collectively
Installs performance reporting system for management of the operating system and daily performance discussions
Management systems
Improves the end-to-end configuration of material and staff to eliminate waste and bring value to the patient
Operating system
3 components are mutually reinforcing and overlapping, which leads to sustained improvements in performance
Management systems
Mindsets, Behaviors, and Capabilities
Operating system
McKinsey & Company | 18
Lever
▪ Ensure performance tracking with IT tools/data management processes are available to support tracking and measuring of KPIs
▪ Easy–to-access performance reports are available to monitor KPIs
Clear targets & accountability
Right performance tracking
Best practices
▪ Business directions and strategic goals need to be translated into top-level key performance indicators (KPIs)
▪ KPIs must cascade effectively throughout the organization▪ Simple, measurable, achievable, results-oriented and timely goals are
agreed upon throughout the planning process
▪ Regular sequences of performance review meetings are established to track progress and review results
▪ Clear agendas and action items are established for each performance review meeting
Effective review meetings
a
b
c
▪ Encourage open recognition of good performance▪ Conduct coaching and two-way feedback discussions regularly
Reward & recognitiond
A rigorous performance management system needs to be adopted to ensure the improvements identified will stick
MANAGEMENT INFRASTRUCTURE
McKinsey & Company | 19
Understanding & commitment“I know what is expected of me – I agree with it, and it is meaningful”
2
Reinforcement mechanisms“Barriers are being removed and I’m being rewarded for making the changes I am being asked to make”
4Skills required for change“I have the skills and opportunities to behave in the new way”
3
Role modeling“I see my leaders, colleagues, and staff behaving differently”
1
“I chooseto change my mindset and
behavior if …”
▪ Senior leader/ senior team
▪ Symbolic acts▪ Influence leaders
▪ Change story▪ On-going, two-way
communications ▪ Language and
rituals
▪ Structure▪ Systems▪ Processes▪ Incentives
▪ Refreshing the talent pool
▪ Technical and relational skills
▪ Field and forum
SOURCE: McKinsey & Company
The McKinsey influence model is a proven tool for managing change within an organization
MINDSETS AND BEHAVIORS
McKinsey & Company | 20
Empirical research has proven that organizational performance and health are mutually reinforcing drivers
Correlation of Organizational Health and performance gap at a public healthcare system
Organization level Department level
The healthiest organizations and business units tend to financially and operationally outperform less healthy organizations
R2 = 0.50
StrongWeak
Low
High
Health
Per
form
ance
Org Health1
Average Total Return to Shareholders by health quartile (9 year average)
9
16
26
3x
Top quartile
Middle quartiles
Bottom quartile
TRS over time
3X greater TRS – ~$1.2B in value for the average company in our dataset
1 As defined by Organizational Health Index score; n = 272SOURCE: McKinsey Organization Practice / OHI Solution
McKinsey & Company | 21
▪ Why is strategic cost management important?
▪ Case study: 500 bed health network
Contents
McKinsey & Company | 22
McKinsey approach
Performance & culture
1
5
2
3
4
Develop a clear picture of the situation today, both internally and externally (e.g. reform, regional trends) on performance
Where To focus?
Diagnose and develop momentum opportunities, market portfolio changes and organizational readiness
Impa
ct
How to play?
Identify initiatives needed to capture opportunities
Feasibility
Prioritize initiatives that drive the most value and develop overall value proposition
Create an actionable plan and identify organizational enablers to support it
Develop strategy and specific initiatives
Diagnose performance and culture
Operationalize the strategy
McKinsey & Company | 23232323232323
In the near-term, CLIENT should choose a few priority practices for focus that have high potential impact and make sense for strategic goal
High-potential practices for focus in next 6-9 months Role Clarity Operational management Process-based capabilitiesFinancial managementSupportive LeadershipStrategic clarityTop-down innovationKnowledge sharingTalent acquisitionTalent developmentPersonal OwnershipRisk management Employee involvementPerformance contractsAuthoritative leadershipInternally competitive Consultative leadership Challenging leadership
Potential impact Degree of ‘fit’ for CLIENTDrives broken outcome?
“Top 10” value desired by employees?
Fixes broken practice?
Aligns with archetype?
“Top 10” interview theme?
Highest potential practices
Source: CLIENT OHI Survey, overall (n=88)
McKinsey & Company | 24
In order to fulfill the mission and vision of the organization, the client focused on execution in six primary areas
SOURCE: Source
Redefine enterprise operating model
Realign executive and clinical structure
Realign approach to physician structure
Align governance (PAC, MEC, SL & PIC)
Develop talent across the enterprise
Initiatives for successStrategies
Improve operational efficiency
Improve labor productivity
Enhance throughput & capacity
Optimize revenue cycle and supply chain
Define, align and integrate data Infrastructure
Shift to fee-for-value
Transition into population health
Evaluate bundled payment models for the market
Cultivate development to offset declining reimbursement
Lead in patient experience
Engage patients through technology including telemedicine
Expand convenience and choice through network reach
Expand patient & family experience beyond our walls
Extend network reach
Define geographic portals to support service line growth
Explore partnerships and affiliations
Realign approach to physician recruitment & development
Revisit marketing approach
Lead in clinical excellence
Coordinate care across the enterprise
Support performance improvement with robust measurement
Enhance research and education
Reduce clinical variation w/ evidence based approach
Green = Leading the competitionYellow = Falling behind our competitionRed = Outlier in the market
McKinsey & Company | 25
Client focused on more than just lean principles, taking on physician preference and behavior related initiatives
▪ In early stages of identifying opportunities to improve patient throughput
Small local system
▪ Applying Lean principles to improve patient flow in the ED, OR, and inpatient floors
Medium-sized regional system
▪ Reducing clinical variability through evidence-based care pathways and order sets
Largest national system
▪ Improving utilization of physician preference supplies by adopting evidence-based practices
National systems
CLI
ENT
FOC
US
McKinsey & Company | 26
The operational excellence assessment has identified $43M - $70M in savings opportunities to date
4.4 - 8.8Clinical Variation
Throughput and Capacity
5.5 - 15.0
Total 42.7 - 70.1
Purchasing and Supplies 1.2 - 3.1
Revenue Cyclemanagement 3.8 - 6.7
Practice Benchmarking
12.4 - 23.2
Hospital Labor Productivity 14.9 - 13.3
Span of Control No savings
Opportunity areasPotential impact (annual)1
$ Millions
CLIENT DATA
▪ Provides enhancement of role clarity, accountability, and ability to execute strategic and operational objectives
▪ Opportunities for improvements in clinical and non-clinical departments, as well as in overall workforce policies
▪ Majority of opportunity in reducing excess length of stay across all floors
▪ Smaller opportunities in ED and OR efficiency▪ Opportunity within each service lines for
improvement▪ Majority of opportunity in high cost supplies▪ Many physician practices losing money beyond
median benchmark; comp relative to productivity and staff expenses driving loss
▪ Performs well today, but can improve with focus on cash collections and denials
▪ Opportunities predominately around managing physician utilization of preference items
Description
McKinsey & Company | 27
Throughput & CapacityExecutive Sponsor –Jason & Dr. MikeBusiness Lead – Ron
Practice BenchmarkingExecutive Sponsor –Dr. Joe & Dr. JohnBusiness Lead – Rob
Span of ControlExecutive Sponsor – Mike & Dr. Rick Business Lead – Casey
Purchasing & SuppliesExecutive Sponsor – Dr. Ian & Dr. FredBusiness Lead – Michael & Herb
Revenue Cycle ManagementExecutive Sponsor – JamieBusiness Lead – Tina
Clinical VariationExecutive Sponsor – Dr. MikeBusiness Lead – Rob
Hospital Labor ProductivityExecutive Sponsor – Chris & Dr. RickBusiness Lead – Jamie
Improve Operational Efficiency to drive value propositionExec Sponsor: Chris
Deliverables: • Set clear objectives and measurement• Set timelines for completion
Data Management and Governance Executive Sponsor – Peter & Dr. JoeBusiness Lead – Tina
Framework for improving Operational Efficiency
McKinsey & Company | 28
Resources required Notes
Mission statement and scope Priority actions
Target outcomes and metrics
Assigned Metric Target/baseline
Team leader and members
Role
Deliverables and key dates
Deliverable Due date
2013 expected capture by service line
Executive champion:
Accountable leader
Responsible individuals
Consult
Dr. Mike
TBDTBDTBD
TBD
Inform TBD
Chris
Total estimated $ impact at maturity
$4.4-8.8MM
▪ Reduce variation in high cost supplies across OR and cath lab
Scope: All credentialed physicians ▪ Improve current blood trans-fusion management to reduce unnecessary utilization
Mission: Reducing clinical variation across all providers to improve clinical quality and reduce cost
▪ Service line Executive directors▪ Clinical analyst team▪ Capitol required: N/A
▪ Each Medical director to sign off on amount of variation to be removed in fiscal 2013
▪ Update preference cards
Jan 13
A team charter should be refined to ensure that there is a clear picture on goals, responsibilities and timelines
Depends on DRG
GMLOS
Depends on DRG
Lab/imaging/blood per case DRG
Average length of stay by DRG
Supply cost per case by DRG
McKinsey & Company |
Understanding& commitment
Reinforce-ment mechanisms
2
4
Skills required for change
3
Role modeling
1
SOURCE: Moffitt progress review workshop
▪ Personnel (having the right leaders)▪ Equal accountability▪ Access to leadership▪ Physician role clarity▪ “We vs. They” mentality▪ Sense of entitlement
▪ Physician role clarity/expectations▪ Sense of team (clinical vs. non-clinical)
– Breaking out of individual silos▪ Access to data/benchmarking tools
– Team members becoming comfortable with the data
▪ Understanding the “end game”/larger picture; downstream impact
▪ Focus on the “reason”– Creating the message to get the staff
onboard with initiative▪ Facilitate two-way communication
– Transparency around both good and bad news
▪ Equal accountability▪ Lack of performance management system
▪ Inadequate training– Understanding that management can
be effective even without technical expertise
– Leadership skills▪ Building on individual strengths▪ Establishing the workforce/process in
place to drive success– Anticipating turnover
▪ Prioritization of initiatives
Exercise: Where are our greatest challenges… (CLIENT RESPONSES)
McKinsey & Company |
Understanding& commitment
Reinforce-ment mechanisms
2
4
Skills required for change
3
Role modeling
1
SOURCE: Moffitt progress review workshop
▪ Selecting/recruiting the right leaders ▪ Focused leadership retreat▪ Role clarity▪ Building/developing trust
– “Trusting team members to make the right decision”
– Being able to make decisions without having multiple meetings
▪ Formalization of data review process▪ Developing accountability
– Strive for excellence, instead of settling for mediocrity
▪ Ranking of skills▪ Time management/productivity
– Spending and using time effectively (e.g., re-evaluating the necessity of meetings)
▪ Institutional prioritization
Exercise: What can be done to improve… (CLIENT RESPONSES)
McKinsey & Company | 31SOURCE: McKinsey
Case study – Transformation effort led to significant effective-ness and efficiency gains
▪ Refine overarching ‘org design’ (e.g., overall structure, cross-cutting management processes) to align with strategy and key health practices– Strategic clarity – Role clarity – Operational management– Process-based capabilities
▪ Invest in leadership development to build key capabilities– Performance contracts– People performance reviews– Talent acquisition – Talent development
▪ Savings of $15 million achieved in FY13 over baseline projections– “Communication has been the
key to success, focusing on cost management to ensure our commitment to providing exceptional outcomes and patient experience
▪ Deep dive diagnostic – Across all functions to
benchmark current performance and identify key opportunity areas
▪ Identification of key opportunities– Focus on productivity,
patient throughput, and clinical variation
▪ Implementation design– Created end-to-end
implementation plan– Centralized project
management office to manage full scope of analysis
– Developed robust central analytics group to support on-going analysis
▪ Implementation plan to capture full 10-15% savings within 2 years of launch
▪ As part of the strategy to step up its clinical and operational effectiveness and efficiency, a large provider system is transforming all areas of its operations– Focused on maintaining
clinical excellence across all services
– History of overcoming adversary (split from former alliance)
– Finance not viewed as strategic business partner
– “Quality care at all costs” mentality pervades client
▪ Key objectives of the transformation effort– Develop best-in-class
efficiency levels– Actively engage physicians
(employed and non-employed)
– Achieve 10-15% savings (NR)
McKinsey approach
Client impact
Client situation
2012ACFO37Financial Planning &
TargetSetting