More than ever, cutbacks and cost savings are top-of-mind priorities for health care organizations, as hospital revenue and margins continue to decline, Medicare reductions loom, case mix worsens, and increased competition and consolidations become a daily reality. Yet the need for new and often costly IT initiatives such as electronic health record implementations has not abated. The challenge to meet organizational needs for ICD-10, meaningful use, accountable care and clinical integration often is both costly and urgent.
Staying on target without compromising performance requires a careful approach to cost containment that will rely on assessing and refining existing performance measurement tools and, in many cases, initiating new ones.
The major IT cost drivers are related to labor, hardware and software vendors and purchased services. Typically, 70% of the IT operating expenses go to keeping things running and 30% to new initiatives, with the costs allocated to either operating or capital expense. In the past, the most common way to reduce IT costs was cutting back on new initiatives. With a docket full of mandatory IT-enabled projects such as ICD-10, clinical integration and EHR implementations and/or upgrades, however, cutting back is no longer an option.
An IT performance management strategy can contain costs by optimizing the IT environment and enabling a more efficient allocation of staff and resources to the high-priority initiatives that are necessary for survival.
Easier said than done. But a framework approach to produce savings in both capital and operating expense can help prioritize and assess options, and can be performed for both short- and long-term solutions. There are many examples of short-term cutting back just to get through a tough year. Typical examples in the labor camp are freezing pay increases for sustaining initiatives and hiring freezes for new initiatives. For capital expenses, common measures are deferring scheduled replacement of PCs and servers, and deferment of new initiatives.
Such approaches may have been effective in the past, when hard times could be counted on to be short lived, but now providers can expect that many of the underlying cost issues, such as Medicare cut backs, will linger for years to come. Another challenge with this approach is that many of today's major projects, like ICD-10 and meaningful use, cannot be deferred.
Furthermore, in tough times, IT staff look to the CIO for direction and can rapidly lose engagement when travel and training or supplies are cut to the bone and layoffs loom. Asking staff to work longer days to fill the gap may be effective for the very short term, but it is risky in the long term. Staff may begin to look at other employers and organizations risk losing their best people.
How long can you get by without pay increases or staff increases or without any training? The critical problem with these solutions is simply that they cannot be sustained long enough to get an organization through the current crisis which can be expected to last for years.
A far better solution is to develop the longer view. Rather than hope that next year will be better, CIOs can set in motion a series of actions designed to lower costs permanently without reducing the quality of service or damaging the work environment. In the category of labor, that can include cross-training staff to lower sustaining/maintenance operating expenses, or focusing staff on fewer concurrent projects to reduce interruptions for new initiatives.
For a longer-term approach to managing vendor operating expenses, CIOs can begin to renegotiate contracts and offer key vendors longer term contracts in exchange for locking in long-term discounts. Capital expenses for new initiatives can be improved over the long term by hiring or designating a contract negotiator. CIOs will also need to continue to take a broader, more strategic view of the cost problem and look beyond the IT budget for potential savings, deliberately targeting actions that reduce the organization's overall expenses even if they increase the IT department's costs.
Regardless of long- or short-term actions, CIOs will need to establish both cost and quality performance metrics to ensure that their actions are making progress toward their goals. In some cases, existing metrics may be adapted to meet the organization's cost containment strategy. In others, new metrics must be established. It may be necessary to establish one set of metrics to focus IT staff on cost containment and another set to communicate IT's contribution to executive leadership. Measures like first call resolution rate and total number of problem reports may help IT staff improve their operations, but they do not relate well to the concerns of executives who are more interested in seeing the return on their IT investment or a net reduction in overall organizational cost.
Although cost containment is usually regarded as an onerous and unwelcome task, there can be benefits that go beyond the bottom line. CIOs taking the longer view can even seize today's financial constraints as an opportunity to create a breakthrough change in their operation, such as moving whole services to the cloud. For others who may not yet be part of the executive team, a focus on permanently changing their cost curve through performance improvement instead of just kicking the can down the road with short-term solutions can represent an opportunity to earn a seat at the executive table.