Brad SmithPressure to drive financial performance has caused hospitals to aggressively seek new methods for decreasing their cost structures. As part of this improvement activity, physicians, clinicians, and healthcare executives have begun to dig deeply into lowering costs by reducing variation in acute care. They have worked tirelessly to identify variation in care, commit to standardized best practices, and diminish outlier behaviors.

Has the work been fruitful in reducing bottom line costs? Not to the degree that was expected. Failure to take into account some simple truths about variation in care and cost reduction has impeded success.

The major challenge to achieving success is on the labor side of cost. Many people confuse decreasing inpatient charges or the volume of activity with reducing costs. Put simply, until a hospital reduces an FTE, or adjusts skill mix, it has not decreased its labor costs. Sounds obvious, but the reality of how clinical care variation impacts labor cost is not obvious. A few examples will clarify some of the challenges we see in decreasing labor expense.

Significant attention has been given to standardizing and decreasing the use of various exams in Radiology. Reducing the volume of these exams is one of the easier types of “improvements” to be make and measure. Unfortunately, from an operations perspective, it takes a significant reduction in the number of tests, sustained over an extended period of time, before a hospital can remove a piece of equipment from service or eliminate a technologist position. As an extreme example, a small, full-service hospital that staffs only one computed tomography (CT) machine at times other than prime time on weekdays probably will not be able to reduce CT staff by decreasing CT volume.

A second labor challenge comes from some hospitals’ overreliance on the use of unrefined productivity standards. In general, productivity tools and benchmarks are extremely helpful in driving efficiency. Yet if they are not managed appropriately, these standards can impede progress in decreasing costs. 

Consider the complexity of an inpatient nursing unit, whose productivity is typically measured based on “worked hours per patient day.” This fixation on “worked hours per patient day” can become problematic in instances where decreasing variation does not affect length of stay (LOS). For example, a hospital might aggressively redesign care delivery, decreasing duplication of efforts, increasing standardized work activity, and removing 15 percent of the actual daily work performed by staff on the unit, but if LOS is not reduced, there is no impetus to decrease staffing because the denominator of “patient days” has not changed through redesign activities. This same issue occurs when nursing units lock in on fixed RN-to-patient ratios as the “community” or national standard. 

Although the labor side of cost reduction is challenging, there is good news on the supply side of cost. Supply costs essentially self-regulate. If a hospital standardizes the items it purchases to achieve a volume-based price reduction or decreases the utilization of an item, cost will go down. The standardization work that many hospitals have accomplished within physician preference items such as orthopedic implants is a primary example of success, as are more mundane initiatives such as decreasing and standardizing linen utilization at the bedside.

As we think through the opportunities to decrease cost through decreasing variation in care, we must be realists. Organizations should continue to implement initiatives that can rapidly decrease cost through decreasing variation in supply chain expenses and LOS. At the same time, hospitals should continue to identify the nexus points between variation in care and labor costs while building measurement systems that capture true costs and not just process variables, phantom charges, or irrelevant activity measures.  


Brad Smith is the National Practice Leader for Clinical and Operational Effectiveness , Navigant Healthcare, Chicago.