6 takeaways from HFMA’s Cost Effectiveness of Health Summit: Why health spending must become more cost-effective

• HFMA’s first Cost Effectiveness of Health Summit highlighted the urgency of improving how healthcare dollars are spent.
• Healthcare finance leaders should take the initiative to optimize spending or risk having solutions imposed on them.
• Alternative payment models will be crucial to establishing a more cost-effective healthcare system.

For stakeholders across healthcare, the cost effectiveness of health increasingly is becoming a topic that can’t be ignored.

“It’s a term you’ll hear more and more about in the coming years,” said HFMA President and CEO Joseph J. Fifer, FHFMA, CPA.

For HFMA, in fact, cost effectiveness of health is “so important that you might consider it our new ‘just cause.’ It’s based on a societal challenge I believe we all have in the world of healthcare,” Fifer said.

The focus should not be specifically on reducing costs or bending the cost curve, Fifer said. Instead, HFMA defines cost effectiveness of health as “minimizing the costs associated with delivering optimal health outcomes.” Achieving that balance will transform the industry to the benefit of all stakeholders.

“Should we in healthcare finance lead that charge? I sure like that solution versus those from outside of healthcare creating the solution for us,” Fifer said.

At HFMA’s inaugural Cost Effectiveness of Health Summit on May 6-7, attendees heard from leading industry experts about both the need and the opportunities for the industry to achieve a more sustainable model. Here are six big takeaways from the event, which was sponsored by EY, Strata and Vizient.

1. Data highlight the inefficiencies in U.S. healthcare

Per capita, the U.S. spends nearly twice as much on health as comparable countries: $10,637 to $5,527, according to 2018 data analyzed by the Kaiser Family Foundation. Inpatient and outpatient care amount to $6,624 in the U.S. and $2,718 in comparable countries. Administrative costs are $937 in the U.S. and $201 elsewhere.

“An argument could be made that we can afford to spend more on healthcare,” Fifer said, reflecting on the data during opening remarks at the summit. “But can we?”

As an example of the opportunity cost of excessive healthcare spending, Fifer cited the long-running policy debates about the country’s infrastructure.

“Without getting into politics or opining on the merits of various proposals,” Fifer said, “could it be that we’re falling behind [on] investment in infrastructure because we spend so much money on healthcare? Regardless, there’s a clear frustration about the amount we spend on healthcare, and like it or not, that’s just not going away.”

2. Wider implementation of alternative payment models is vital to support cost-effective approaches

Some gaps in U.S. healthcare stem from the fee-for-service payment system. In response to a poll question on the biggest opportunity to improve the cost effectiveness of health, more than half of summit attendees cited Changing the payment system to reward healthy behaviors from among four options.

Of national health expenditures, 90% are on healthcare and 9% are on behavioral and societal factors. That allocation is disproportionate as indicated by epidemiological analyses that have found 60% of health hinges on social, behavioral and environmental factors.

“In the long run, can we afford to overlook what might be the single biggest cost driver?” Fifer said. “Alternatively, we can construct payment models in which stakeholders truly share the risk and responsibility of managing to social determinants and aligning incentives accordingly.”

Only 30% of providers are involved in risk-based payment models, according to a summit presentation by leaders with EY, including 5% in capitated models. But organizations should be preparing for those shares to rise.

“As we think about the momentum from COVID around telehealth, around hospital-at-home, around general population management, all of those trends really start to push us toward value-based care in a way that is likely going to be more than [the] incremental that we’ve seen in the past,” said Blair Bellamy, partner, health consulting with EY.

3. The COVID-19 pandemic and broader trends are making cost effectiveness even more vital

S&P Global Ratings kept a negative credit outlook for the not-for-profit hospital sector heading into 2021. That decision stemmed in part from ongoing pressure on margins and cash flow.

“Really the focus is on the operations. That’s the biggest risk that we see over the next couple of years,” Suzie Desai, senior director with S&P, said during a summit presentation. “The balance sheets are fine.”

As the pandemic subsides, a renewed emphasis on costs can be expected in the outlook for the sector and for individual organizations as the government and employers seek to rein in spending.

“That longer-term focus is going to be on lowering the cost curve,” Desai said. “And so we look to providers to continue to talk to us about what their strategies are, and especially as the Medicare population continues to grow.”

4. Cost reduction efforts should be placed in a strategic context

Cost reduction programs may falter if internal stakeholders aren’t presented with the big picture, said Ryan Self, vice president, advisory services with Strata.

For example, hospitals should view cost reduction not as a destination but as a path.

“In a large-scale cost reduction program, there is a target that will be derived,” Self said. “But getting to a specific financial result does not mean we’ve climbed the mountain. That’s the starting point of a journey, and hopefully a process in which you’ve now infused a culture of continuous improvement.”

Organizations also should understand that cost reduction is a means to achieving a larger vision — i.e., the why. If internal stakeholders get a sense that “this feels like a financially motivated process, there isn’t that momentum of, ‘We’re doing this for a greater cause,’” Self said.

By starting with why, “You rally everyone around it. And it also helps to make sure that any reduction targets or any decision-making during the cost reduction program are driven by an ultimate goal. There are very different strategies — and the rationale for cost reduction is very different — depending on where you as an organization are trying to play in five to 10 years.”

5. Hospitals must consider cost effectiveness as they pivot toward an ambulatory-centric model

Nationally, 83% of procedures are performed in outpatient settings, with cases steadily shifting in high-margin services lines, according to a presentation by leaders with Vizient and Sg2.

New entrants to the industry are accelerating this trend by providing alternatives to some high-cost hospital services, said Mike Strilesky, principal with Sg2. Health systems should be thinking about how to respond.

“Payers and, increasingly, independent-physician entrepreneurial models are driving care to lower-cost sites proactively,” Strilesky said. “They’re monetizing those strategies in a pretty remarkable way. And what’s left is health systems that are relying on a largely heavy fixed-cost structure and an HOPD model to drive that outpatient business model. As that converts to a freestanding rate, increasingly there are going to be some threats there.”

Disrupters are appealing to consumers with ambulatory strategies that emphasize convenience, access and lower prices, Strilesky added. If hospitals don’t likewise meet those demands, the finances of their ambulatory strategies could prove difficult to sustain.

Instead of being based on “justifying a downstream referral pattern to an inpatient facility to drive the higher-acuity care,” he said, “these [hubs] need to start moving into business models that can be profitable, and convenient and accessible for the patients and the consumers that you’re trying to attract.”

6. Short-term and long-term strategies must be incorporated

To improve operations in a way that enhances long-term cost effectiveness, hospitals should understand the concept of duality of growth, said Ahmed Marmoush, manager, digital consulting with EY.

That means “taking care of the business of today while innovating to build the health system of tomorrow,” Marmoush explained.

The current model is “largely reactive” and “focused very much on the supply side and providing sick care delivered in high-cost settings.” There are ample opportunities to address costs, including by reducing unwarranted variation in care.

Such steps “can have a sustained impact on your bottom line and free up some of the cash you need to make the investments in tomorrow,” Marmoush said.

At the same time, executives should be striving to define how value is created for their organizations today and how they expect that to change in an evolving model that will be increasingly centered on patients in their homes and communities instead of anchored to traditional healthcare settings. Then consider “what investments you need to be able to make in order to enable this value.

“This is the sort of thing that you need to start now, because it takes time.”