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The US is drowning in an estimated $2 trillion dollars of healthcare related costs each year. The largest share of costs (over half) comes from services provided in hospitals and clinics around the country, and these institutions naturally face a large part of the blame. It's easy and indeed fashionable nowadays to tell hospitals that they have to cut costs. While this reduces the burden for insurance companies and ultimately folks like you and I, it's not that simple for hospitals.


Cutting Costs Is Not Enough

In a recent New York Times article, Reed Abelson reports on some hospitals' efforts to reduce the enormous costs associated with healthcare delivery in the US.

…The effort is part of a much broader ambition by UCLA Health System to reduce its costs by 30 percent, or hundreds of millions of dollars, over the next five years, according to Dr. David T. Feinberg, the system’s president.

Hospitals such as the UCLA Health System should be lauded for their ambitious efforts to reduce costs. Yet, while lowering costs is a worthy goal, it alone is not enough. In a pay-for-service scenario, reducing costs connected to revenue-generating interventions will, obviously, reduce revenues. That's a big deal for hospitals that are already strapped for cash

Imagine running a business and setting the goal to slash your revenues by 30%!


New Payment Innovation Models Are Needed

One area of hope for a model that is fair to more players in the healthcare ecosystem (and is therefore more sustainable in the long run) lies with payment innovation – finding the right balance between cutting costs, generating revenues, and affecting reimbursement contracts with payers. The good news is payers are getting into the game. Health insurance companies are showing signs of being willing to share the pain, realizing it's in their best interest to do so.

An example from Michigan provided in the NY Times article shows how collaboration between hospitals and payers can lead to win-win situations for all involved:

Blue Cross financed an effort to have Michigan’s major hospitals compare results in areas like bariatric or general surgery so that they could reduce infection rates and surgical complications. The insurer never sees data that identifies individual hospitals, and the hospitals meet regularly to discuss how they can learn from one another to improve care…By collaborating with Michigan hospitals to share best practices, Blue Cross estimated it achieved savings of $233 million over three years.

These types of efforts are leading to encouraging levels of collaboration between payers and providers. That’s a big step in the right direction.


3 Critical Steps to Payment Innovation

At many health systems around the country, a single-minded focus on cost-cutting and efficiency, without adequately improving actual care experiences and outcomes has been counter-productive to patients and payers alike. At these institutions, “payment innovation” is merely a euphemism for trying to negotiate better rates from payers. In our work with healthcare systems over the past few years, it has become apparent to us that the path to true payment innovation involves three crucial steps. These are:

  1. Start by designing your care delivery model and patient experience in ways that reduce costs and attract more patients, especially in high-ROI areas where big needs overlap with high costs.

  2. Use your improved patient outcomes and reduced costs to demonstrate value to insurers, so they are incentivized to partner with you.

  3. Leverage your improved partnership with payers to co-create new payment models that help unlock new revenue potential from higher volumes and new service lines.

Prioritized this way, hospital CEOs can be assured that their care delivery innovations can lead directly to sustainable payment innovations.

Image courtesy of KOMUnews