Over the past two decades, U.S. hospitals and health systems have pursued mergers, acquisitions and strategic alliances at a frenzied pace. The logic underpinning these efforts is that expansion enables organizations to generate scale and reduce operating costs while delivering higher quality care. However, many transactions fail to fulfill these benefits, according to a recent report from PwC's strategy&.
To evaluate how hospital systems benefit from scale effects, researchers at PwC's strategy& analyzed data from CMS regarding patient encounters and the cost structures of 5,661 individual facilities and 526 healthcare systems nationwide, including for-profit and nonprofit organizations, as well as both teaching and non-teaching hospitals. The results showed that larger, individual hospitals have a lower cost per encounter than smaller hospitals, but for healthcare systems comprised of multiple facilities, the data indicated no relationship between size and cost. Ultimately, more expansive systems are not yet able to convert their scale into operating efficiencies.
Given these findings, researchers and analysts at PwC's strategy& believe management teams should focus on five key areas to capture scale and reduce costs across the entire system.
1. Revamp the operating model. Healthcare systems should first focus on redesigning the operating model to enhance accountability and control at the system level instead of at the level of individual facilities. "The objective is to strike the right balance of centralized control over most transactional operations, such as reporting, while accommodating local nuances in areas where it truly matters, such as pre-procedure education," the authors wrote.
These efforts will require long-term buy-in from system and facility leaders. Additionally, the governance structure should provide incentives at the system and facility levels to encourage collaboration and performance improvement as a systemwide endeavor, as opposed to within any one hospital, according to the report.
2. Standardize clinical processes. Standardized care protocols can generate cost savings and improve quality by positioning the system to provide equally high-quality care at any of its facilities. However, developing and implementing those protocols is a delicate process.
Imposing new standards and protocols in a top-down manner will likely lead to resistance and dissatisfaction among the clinical staff. On the other hand, engaging physicians as change leaders and encouraging them to collaborate on the design and implementation of new care models and protocols will garner much higher buy-in, create higher morale within the organization and yield more positive outcomes, according to the report.
3. Eliminate redundant service lines. Consolidation among hospitals and health systems often produces significant redundancies in service lines, staff, equipment and other assets, according to the report. Combining these assets effectively and eliminating those in surplus is important for reducing waste and improving operating efficiency. This requires careful analysis of service line supply and demand, in terms of both market- and disease-specific activities. It also requires assessing service line profitability across facilities and the impact of competitive threats and patient preferences, according to the report.
4. Track performance at the system level. As health systems expand, it becomes increasingly important to evaluate performance at the system level, not merely at the independent facility level. Health systems "should change their evaluation process and create new balanced scorecards that focus more on company-wide metrics — including productivity, utilization, and access — and the contribution of facilities to those goals," wrote the authors of the report.
5. Remember to address culture. An organization's culture can be either a significant obstacle that blocks change or a valuable tool that drives it. The leadership's approach to change will determine how the culture interacts with it. For the best results, management should understand how deeply engrained behaviors and beliefs can be leveraged to support the change. Leaders should find ways to translate strategic initiatives into specific, tangible changes in day-to-day behavior, communicate directly and simply about the change and engage clinical staff, according to the report.