Transcript The Christ Hospital- engagement timeline

Why Strategic Cost Management is
Essential for Your Hospital
Presentation document
May 15, 2014
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▪
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advanced analytics to help health systems make better decisions and
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▪ Specialized group within McKinsey &
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Contents
▪
Why is strategic cost management important?
▪
Case study: 500 bed health network
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Global trend in healthcare
<10
Healthcare cost is trending further upward globally
10-15
>15
Share of healthcare costs as part of GDP
%1
Country
2008
2015
2020
2025
2030
Korea
5.9
6.7
7.4
8.1
8.9
Hong Kong
6.0
6.8
7.5
8.2
9.0
Spain
7.8
8.9
9.7
10.7
11.7
Italy
8.8
10.0
11.0
12.0
13.2
U.K.
9.3
10.6
11.6
12.7
14.0
Australia
10.5
10.5
13.1
14.4
15.8
Canada
10.8
12.3
13.5
14.8
16.2
Germany
10.8
12.3
13.5
14.8
16.2
France
11.2
12.7
14.0
15.3
16.8
U.S.
16.1
18.3
20.1
22.0
24.2
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
McKinsey & Company
Pharmaceutical Fact Book, 2008; International Monetary Fund; World Economic Outlook Database, October 2009; McKinsey
| 4
Historical cost growth
Operating expenses have grown consistently in recent years and the pace
of growth is expected to continue to outpace inflation
Operating expenses per AA
$ per AA
11,000
+2% p.a.
▪ Represents
+4% p.a.
10,000
10% increase
over 2008
rates
+3% p.a.
+2% p.a.
+1% p.a.
▪ 3.4% higher
9,000
than inflation
over same
time period
8,000
7,000
2008
09
10
11
Source: Publicly reported provider financials (includes CYH, HCA, HMA, LPNT,
THC,UHS); www.usinflationcalculator.com/inflation/current-inflation-rates
12
2013
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Payor mix advantage of larger systems
Larger systems tend to have a better payor mix, with a higher percentage
of commercially insured patients
Payor mix
Non-government insured patient days as a percent of total patient days, n =1757
54
52
▪ Larger systems have done
50
a better job of attracting
commercially-insured
patients
48
▪ A larger proportion of
46
favorable commercial
payments results in
increased operating
margin
44
42
40
38
050
50100
100300
300500
5001000
10001500
1500+
System net revenue ($M)
Source: CMS cost reports; OH analysis, 2009 data
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Cost performance by size
Larger systems have higher margins despite mediocre cost
performance, as they spend less of each dollar of revenue
Cost performance as a percent of net revenue
Administrative and clinical cost as a percent of net revenue1,2
45
Average clinical cost
Average administrative cost
40
35
▪ Overall cost as a
percentage of net revenue
decreases as scale
increases despite poorer
absolute cost performance
30
25
20
15
050
50100
100300
300500
500000
10001500
1500+
System net revenue ($M)
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
Source: CMS cost reports; OH analysis
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Why size is relevant
As a result, larger hospital systems tend to have better margins
Median operating revenue by rating
Median operating margin by rating
USD, Millions
Percent
‘AA’
2,245
‘AA−’
1,141
‘A+’
556
‘A’
470
‘AA’
‘AA−’
‘A−’
‘BBB+’
379
‘BBB+’
‘BBB−’
198
Source: Fitch report on non-profit hospitals, 2011; Kaufman & Hall
3.1
‘A’
413
300
4.7
‘A+’
‘A−’
‘BBB’
4.1
‘BBB’
‘BBB−’
2.5
2.7
2.0
1.1
1.3
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Drivers of performance
Governance and strategy are the two most important factors for assessing
a hospital’s continued success
Drivers of performance
▪
1 Governance
▪
▪
2 Strategy
High quality management team
– Stable and experienced
– Record of predictable and
strong performance
Competent and experienced board
of directors
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
Observed performance
3 Profitability
4
Liquidity and
leverage
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Cost vs NR/AA
Meanwhile NR/AA has been flat and actually declined in over the past few
NR/AA
Op Ex
years
Financials per AA
CAGR1
2008–13
$ per AA
12,000
11,000
0%
2%
10,000
9,000
8,000
2008
09
10
11
12
2013
1 Compound annual growth rate.
Source: Publicly reported provider financials (includes CYH, HCA, HMA, LPNT,
THC,UHS); www.usinflationcalculator.com/inflation/current-inflation-rates
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Providers are responding in a variety of ways – five are
particularly common
Focus of case study
1
Enacting broad-ranging cost control programs, including lean operations,
back-office cost control & clinical transformation (“Medicare margin” efforts)
2
Engaging in a frenetic wave of transactions (M&A) across the for-profit, notfor-profit, and outpatient-focused spectrum
3
Continuing to invest heavily in services & specialists with differential
reimbursement & margin (leading to “tragedy of the commons” in places)
4
Continuing to move towards greater physician alignment through structural
options (employment and “employment-like” in strong CPOM1 states)
5
Considering innovative incentive relationships (e.g., ACO-like or “Clinical
Integration”), but cautious of appropriate strategic & business model rationale
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High degree of experimentation with a variety of new reimbursement
and risk-sharing models…
Risk sharing
“Provider-led”
integrated network
Gain sharing
Full risk
“Payor-led”
integrated network
ACO
Patient centered
medical home
Incentive
payment
Exclusively upside opportunity
Both upside and downside risk
Select examples
Episodes of care
Pay for value
“Basic P4P”
Description
▪
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
▪
Provider system builds a health-plan, leveraging brand name
to drive volume to provider system
▪
An organization of health care providers accountable for
quality, cost, and overall care; share cost savings if
performance metrics are met
▪ Covers all aspects of preadmission, inpatient, and follow-up
care, including postoperative complications within a set time
period for procedures, e.g., hip replacement
▪ Team of physicians and extenders, coordinated by a PCP,
coordinate provide high levels of coordinated care; typically
tied to P4P contract
▪
Payment bonus tied to efficiency metrics (e.g., reduction in ER
visits, imaging)
▪
Payment upside based on performance metrics linked to value
creation (e.g. BCSMA Alternative Quality Contract / AQC)
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Failure typically comes about in one of three areas of a transformation….
Business
results
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 to launch
▪ Stuck in diagnostics – leaders
unable to align on what to do,
where to start
▪ Managers not held accountable
for performance
▪ Employees resistant
People involved
Time
10s
100s
1,000s
1-3 years
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…and stems largely from non-technical factors
70% of change programs fail …
30
% of
efforts
failing to 70
achieve
target
impact
… mainly because organizational health gets
in the way
Other obstacles
14
Inadequate resources
or budget
14
Management behavior
does not support change
33
Organizational
Health factors
Employee resistance
to change
39
Source: Scott Keller and Colin Price, Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage. 2011
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An organizations performance and health are equally important to
sustain and build long term success
Performance
Health
What an enterprise
delivers to
stakeholders in
clinical, financial, and
operational results
How an organization
aligns itself, executes
with excellence, and
renews itself to
sustainably achieve
performance
aspirations
SOURCE: McKinsey & Company, Objective Health
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Sustainable operational improvement requires focus on 3 interrelated
components of change
3 components are mutually reinforcing and
overlapping, which leads to sustained
improvements in performance
Management systems
Operating
system
Improves the end-to-end
configuration of material and
staff to eliminate waste and
bring value to the patient
Operating system
Mindsets, Behaviors, and
Capabilities
Management
systems
Installs performance reporting
system for management of the
operating system and daily
performance discussions
Mindsets,
Behaviors,
and
Capabilities
Changes way people think,
feel, and conduct themselves
in the workplace, both
individually and collectively
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MANAGEMENT INFRASTRUCTURE
A rigorous performance management system needs to be
adopted to ensure the improvements identified will stick
Lever
Best practices
▪ Business directions and strategic goals need to be translated into topClear targets &
a
accountability
Right
b performance
tracking
Effective
c review
meetings
Reward &
d
recognition
▪
▪
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
▪ 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
▪ 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
▪ Encourage open recognition of good performance
▪ Conduct coaching and two-way feedback discussions regularly
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MINDSETS AND BEHAVIORS
The McKinsey influence model is a proven tool for managing change
within an organization
1
▪ Senior leader/
▪
▪
senior team
Symbolic acts
Influence leaders
Role modeling
“I see my leaders,
colleagues, and staff
behaving differently”
3
▪ Refreshing the
▪
▪
talent pool
Technical and
relational skills
Field and forum
SOURCE: McKinsey & Company
2
Skills required for
change
“I have the skills and
opportunities to
behave in the new
way”
“I choose
to change my
mindset and
behavior if …”
Understanding
& commitment
“I know what is
expected of me – I
agree with it,
and it is
meaningful”
▪ Change story
▪ On-going, two-way
▪
communications
Language and
rituals
▪
▪
▪
▪
Structure
Systems
Processes
Incentives
4
Reinforcement mechanisms
“Barriers are being removed
and I’m being rewarded for
making the changes I am
being asked to make”
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Empirical research has proven that organizational performance and health
are mutually reinforcing drivers
Organization level
Department level
Average Total Return to Shareholders
by health quartile (9 year average)
Org Health1
TRS over time
Correlation of Organizational Health and
performance gap at a public healthcare
system
High
R2 = 0.50
16
Middle quartiles
Bottom quartile
9
3x
Performance
26
Top quartile
Low
Weak
Strong
Health
3X greater TRS – ~$1.2B in value for the
average company in our dataset
The healthiest organizations and business units tend to financially
and operationally outperform less healthy organizations
1 As defined by Organizational Health Index score; n = 272
SOURCE: McKinsey Organization Practice / OHI Solution
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Contents
▪
Why is strategic cost management important?
▪
Case study: 500 bed health network
McKinsey & Company
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McKinsey approach
Diagnose performance
and culture
Develop strategy and
specific initiatives
Operationalize the
strategy
Performance & culture
3
2
4
Where
To focus?
How to
play?
5
Impact
1
Feasibility
Develop a clear
picture of the
situation today,
both internally and
externally (e.g.
reform, regional
trends) on
performance
Diagnose and
develop
momentum
opportunities,
market portfolio
changes and
organizational
readiness
Identify initiatives
needed to
capture
opportunities
Prioritize
initiatives that
drive the most
value and
develop
overall value
proposition
Create an
actionable plan
and identify
organizational
enablers to
support it
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In the near-term, CLIENT should choose a few priority practices for focus
that have high potential impact and make sense for strategic goal
Highest potential practices
Degree of ‘fit’ for CLIENT
Potential impact
High-potential practices for
focus in next 6-9 months
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

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
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





Role Clarity
Operational management
Process-based capabilities
Financial management
Supportive Leadership
Strategic clarity
Top-down innovation
Knowledge sharing
Talent acquisition
Talent development
Personal Ownership
Risk management
Employee involvement
Performance contracts
Authoritative leadership
Internally competitive
Consultative leadership
Challenging leadership
Source: CLIENT OHI Survey, overall (n=88)
Drives
Fixes
broken
broken
outcome? practice?
Aligns
with
archetype?
“Top 10” value
desired by
employees?
“Top 10”
interview
theme?
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In order to fulfill the mission and vision of the organization, the client
focused on execution in six primary areas
Green
Yellow
Red
= Leading the competition
= Falling behind our competition
= Outlier in the market
Strategies
Initiatives for success
Redefine
enterprise
operating model
Realign executive and
clinical structure
Develop talent across
the enterprise
Align governance
(PAC, MEC, SL &
PIC)
Realign approach to
physician structure
Lead in clinical
excellence
Support performance
improvement with
robust measurement
Coordinate care
across the enterprise
Enhance research
and education
Reduce clinical
variation w/ evidence
based approach
Lead in patient
experience
Expand patient &
family experience
beyond our walls
Engage patients
through technology
including telemedicine
Expand convenience
and choice through
network reach
Improve
operational
efficiency
Enhance throughput &
capacity
Improve labor
productivity
Define, align and
integrate data
Infrastructure
Optimize revenue
cycle and supply
chain
Extend network
reach
Define geographic
portals to support
service line growth
Explore partnerships
and affiliations
Realign approach to
physician recruitment
& development
Revisit marketing
approach
Shift to fee-forvalue
Evaluate bundled
payment models for
the market
Transition into
population health
Cultivate development
to offset declining
reimbursement
SOURCE: Source
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CLIENT FOCUS
Client focused on more than just lean principles, taking on physician
preference and behavior related initiatives
Largest
national
system
▪
Reducing clinical variability through evidencebased care pathways and order sets
National
systems
▪
Improving utilization of physician preference
supplies by adopting evidence-based practices
▪
Applying Lean principles to improve patient flow
in the ED, OR, and inpatient floors
▪
In early stages of identifying opportunities to
improve patient throughput
Mediumsized
regional
system
Small local
system
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The operational excellence assessment has identified $43M $70M in savings opportunities to date
Opportunity areas
Potential impact (annual)1
$ Millions
Description
▪
Span of Control
Hospital Labor
Productivity
Throughput
and Capacity
Clinical Variation
Practice Benchmarking
Revenue Cycle
management
CLIENT DATA
No savings
▪
14.9 - 13.3
▪
12.4 - 23.2
▪
▪
4.4 - 8.8
▪
▪
5.5 - 15.0
▪
3.8 - 6.7
▪
Purchasing
and Supplies
1.2 - 3.1
Total
42.7 - 70.1
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
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Framework for improving Operational Efficiency
Improve Operational Efficiency to
drive value proposition
Exec Sponsor: Chris
Hospital Labor
Productivity
Executive Sponsor –
Chris & Dr. Rick
Business Lead – Jamie
Throughput & Capacity
Executive Sponsor –
Jason & Dr. Mike
Business Lead – Ron
Practice Benchmarking
Executive Sponsor –Dr.
Joe & Dr. John
Business Lead – Rob
Span of Control
Executive Sponsor –
Mike & Dr. Rick
Business Lead – Casey
Purchasing & Supplies
Executive Sponsor – Dr.
Ian & Dr. Fred
Business Lead – Michael
& Herb
Clinical Variation
Executive Sponsor – Dr.
Mike
Business Lead – Rob
Revenue Cycle
Management
Executive Sponsor –
Jamie
Business Lead – Tina
Data Management and
Governance
Executive Sponsor –
Peter & Dr. Joe
Business Lead – Tina
Deliverables:
• Set clear objectives and measurement
• Set timelines for completion
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A team charter should be refined to ensure that there is a clear
picture on goals, responsibilities and timelines
Mission statement and scope
Priority actions
Mission: Reducing clinical variation across all providers to improve
clinical quality and reduce cost
Scope: All credentialed physicians
Team leader and members
Role
▪
Reduce variation in high cost supplies across OR and
cath lab
▪
Update preference cards
▪
Improve current blood trans-fusion management to reduce
unnecessary utilization
Deliverables and key dates
Assigned
Executive champion:
Chris
Accountable leader
Dr. Mike
Responsible individuals
TBD
TBD
TBD
Consult
TBD
Inform
TBD
Target outcomes and metrics
Deliverable
Due date
Metric
Target/baseline
2013 expected capture by
service line
Jan 13
Supply cost per case by
DRG
Depends on
DRG
Lab/imaging/blood per
case DRG
Depends on
DRG
Average length of stay by
DRG
GMLOS
Total estimated $
impact at maturity
Resources required
Notes
▪
▪
▪
▪
Service line Executive directors
Clinical analyst team
Capitol required: N/A
$4.4-8.8MM
Each Medical director to sign off on amount of variation to be
removed in fiscal 2013
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Exercise: Where are our greatest challenges… (CLIENT RESPONSES)
▪ Personnel (having the right leaders)
▪ Equal accountability
▪ Access to leadership
▪ Physician role clarity
▪ “We vs. They” mentality
▪ Sense of entitlement
▪
▪
▪
▪
▪
1
Role
modeling
▪
▪
▪
▪
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
SOURCE: Moffitt progress review workshop
3
Skills required
for change
2
Understanding
& commitment
▪
4
▪
▪
Reinforcement
mechanisms
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
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Exercise: What can be done to improve… (CLIENT RESPONSES)
▪ 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
1
Role
modeling
▪ Ranking of skills
▪ Time management/productivity
– Spending and using time
▪
effectively (e.g., re-evaluating the
necessity of meetings)
Institutional prioritization
SOURCE: Moffitt progress review workshop
3
Skills required
for change
2
Understanding
& commitment
4
Reinforcement
mechanisms
▪ Formalization of data review process
▪ Developing accountability
– Strive for excellence, instead of
settling for mediocrity
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|
Client situation
▪
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
McKinsey approach
▪
▪
– 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)
SOURCE: McKinsey
▪
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 ongoing analysis
Implementation plan to capture
full 10-15% savings within 2
years of launch
–
2012ACFO37
Client impact
▪
▪
▪
Refine overarching ‘org design’
(e.g., overall structure, crosscutting 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
McKinsey & Company
Financial Planning & Target
Setting
Case study – Transformation effort led to significant effectiveness and efficiency gains
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Next steps
▪
Question or comments?
– Please contact:
▫ [email protected]
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