Hospitals should focus on productivity gains to reduce costs, report finds
- The healthcare delivery industry could save between $1.2 trillion and $2.3 trillion over the next decade by focusing on productivity gains and not workforce expansion, according to a new McKinsey & Company report.
- From 2001 to 2016, the industry grew 3.3% annually to $1.3 trillion — with 99% of growth fueled by labor costs.
- The report identifies opportunities for healthcare organizations to improve productivity through workplace efficiencies and better care coordination.
Hospitals are looking for ways to cut costs and strengthen financials, and labor and administration costs are a big part of their expenses. In a recent Healthcare Financial Management Association/Navigant survey, 89% of hospital CFOs predicted their organizations' labor budgets would grow, and 18% expected an increase of more than 5%.
A separate Navigant analysis estimated U.S. hospitals could save $25.4 billion annually by streamlining supply chains and eliminating unnecessary costs. That translates to a 17.7% average supply expense reduction per hospital, or about $11 million annually.
To understand why productivity gains have lagged in healthcare, the authors looked at three drivers of industry growth: labor, capital and multifactor productivity (MFP) — such factors as technology changes and innovation that are hard to measure.
The healthcare industry's 3.3% annual growth rate stands out for several reasons. Not only was labor responsible for 99% of that growth, but also more than two-thirds of labor's contribution was due to workforce expansion, the report finds. Meanwhile, capital contributed 14% and MFP actually had a negative contribution of minus 13%.
By contrast, the U.S. economy grew 1.9% yearly to $19.4 trillion from 2001 to 2016. Of that growth, labor contributed 25% and MFP 19%.
Reasons for healthcare's low productivity include suboptimal use of the clinical workforce, according to the report. For example, the authors found physician's schedule density at many organizations was about 80%, compared with 90% to 95% at high-performing practices.
Another factor is complex administrative systems that require interacting with various payers and complying with CMS performance reporting requirements. Hospitals have hired scores of nonclinical worker to deal with tasks that could be automated or digitized, and organizations could also benefit from streamlining performance metric reporting.
Capital's contribution to industry growth has also been low, in part because hospitals target dollars for "underutilized fixed assets" rather than productivity-improving projects, the report finds.
The drag on MFP hinges in part on payment systems that make it hard to realize value from clinical products and technology investments.
"Payment mechanisms typically insulate decision makers (both clinicians and patient) from realizing the impact of their choices on spending, and the absence of detailed product cost and quality information sometimes makes it impossible to meaningfully differentiate based on value," according to the report. "High barriers to entry limit competition, but even when competition is present price decreases may not occur until products lose patent protection."
To improve productivity, providers could revise physician scheduling systems to not limit the types of patients doctors see at certain times and increase use of automatic reminders to reduce the number of patient no-shows, according to the report.
Payers could further automate billing and insurance-related processes and establish a clearinghouse for billing and insurance-related data, the authors say. The report also encourages CMS and other government agencies to adopt "smart" regulations that align with current healthcare delivery needs and can adapt to changes that occur.