Western Australian Health System and Hospital Cost Containment

StrategiesA Preliminary Perspective on Possible Options

Prepared By:John Gregg, Principal

Navigate Consulting

December 12th, 2013

Prepared for the Western Australian Department of Health

The objective of this presentation is to discuss available strategiesfor policymakers and administrators to contain healthcare costs

Discuss the components of costs as well as the factors that drive cost growth

– Spend areas vs. drivers

Differentiate between cost at the system level vs. cost at the hospital level

Discuss cost containment strategies at the system level

– Illustrate some system cost containment strategies

Discuss cost containment strategies for hospitals

– Illustrate some hospital cost containment strategies

Answer questions you might have

Health systems all over the globe pursue three essential objectivesand have to grapple with the trade-offs inherent to these

Typical Challenges

Accessibility and quality challenges are lessacute in developed countries than cost

Regionally governments are facing a majordemand and supply imbalance. For examplein Indonesia

– In 2015, 195K beds are expected to beneeded while 45K beds are currentlyavailable

– In 2015, the gap in physicians is expected tobe 27K while the gap in nurses is expectedto be 60K

Governments are rushing to fill the supply-demand gap by building hospitals at afrenzied pace with the risks of having costs explode

IncreaseQuality

ImproveAccessibility

Health Systems Objectives

ReduceCosts

Typical Challenges

Cost is of particular interest as it underlies most of the discussionsaround the future of healthcare

Health System Costs

Hospitals Costs

Hospitalizations

28%27%

22%

Comparing spend areas between 1992 and 2012, it is clear that expenditure in all areas increasing

Home Care

7%

Physician

5%

MedicalProducts

Administration

11%

Drugs

5%

Other Prof.Services

6%7%

13%14%

7%

Mental HealthServices

10%

7%

10%

1992 2012

31%

Similar trends can be observed in most developed anddeveloping countries

Evolution of Healthcare Expenditures (% of GDP)

9

8

7

6

10

11

12

13

14

15

16

17

5

4

3

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

% of GDP

USA

Canada

OECD

Korea

Australia

Greece

Source: OECD 2010, WHO GHO 2010, Navigate analysis

Out of the many factors driving cost growths, adoption ofnew medical technologies is by far the largest

12

PriceInflation

Technology

10

3-10

11-22

11-18

38-62

Ageing Insurance IncomeGrowthAdmin

Expenses

Source: “The impact of technological change on health care cost spending”, Smith, Heffler and Freeland, 2010, “An iconoclastic view of health cost containment”, Navigate Analysis

Defensive

Cost Drivers

Costs is a measure ofconsumption areas in the systemat a certain point in time

Cost drivers measureconsumption evolution over time

and is about identifying the factorsthat shift relative weights of eachconsumption area (e.g. drugsmoving from 6% to 10%)

Out of the many drivers of growth,adoption of new medicaltechnologies is the largestrepresenting (according to differentstudies) between 38 and 62% ofyear on year growth

Cost Drivers

Hence, to contain costs at the system level, it is imperative forpolicymakers to control technology as well as hospital spending

ControlTechnologySpending

Highest Growth Factor Highest Spending Category

ControlHospitalSpending

Given the faster rates of technology adoption, typical costcontainment policies will fail to slow healthcare costs growth

Reduce Costsnot Growth

Promote evidence basedmedicine Pay for performance

Limit access to elective services Increase public governance

Establish well designedco- payments

Encourageconsolidation

NON-EXHAUSTIVE

And given the underlying industry “disconnects”, policymakersshould not expect the system to proactively contain its costs

There are no, or little, incentives for providers in the system to contain or reduce costs as

– patients are to a large extent shielded from the financial implications of their “consumption”

– providers get in general paid more when providing additional services

– payors have limited ability to assess quality and pertinence of services

Disconnect between Needs andServices

Disconnect betweenConsumption and Payment

To contain growth, policies aimed at improving new technology usage effectiveness are critical

Control Overall Spending

Challenges and Approaches

However given the volume, pace andbreadth of technological change, it is adaunting task

There’s clearly a case for regionalcollaboration to manage healthcaretechnology adoption through:

– Collaboration to assess new healthcaretechnologies

– Distribution of some responsibilitiesaround specific areas (i.e. role of medicalcenters of excellence)

– Developing standardized approachesfor technology assessment

Thorough TechnologyAssessment

Encourage IT Adoption

Detailed Cost BenefitAnalysis

Challenges & Approaches

Deploying state Electronic Health Records (EHR) platforms is atremendous opportunity to improve quality and contain costs

Hospitals(e.g. MoH Hospitals,

Private Hospitals) Pharmacies Nursing Homes Patients

Private GPs Insurers Others

DataEMRCharttrackingDischargesummaries

DataEMRClinicalNotesFlowSheets

DataElectronicprescrip-tionPaymentdata

DataMedicalrecordsFamilymedicalhistory

DataMedicationinformationConsentsLiving wills

DataE-claimsHealthInsurancedata

DataPersonalHealthRecords

DataMedication,Radiologyand otherdata

Clinics(e.g. MoH Clinics,

Private Clinics)

National EHRPlatform

Benefits

Many players served (e.g.

physicians access a patient fullmedical history)

Rich datasets enable technologyeffectiveness analysis to enhancequality and improve outcomes

Major driver for cost saving

Benefits

Such policies should be complemented by policies to decreasehospitalizations

ControlHospitalSpending

ContainCosts

EnhancePopulation

Health

IncreaseCitizen

Satisfaction

Reduce spending due to:

– Lower incidence of diseases

– Better management ofchronic diseases

– Reduce hospital stays

Improve overall populationhealth by preventing diseaseand education population abouthealthy lifestyles

Improve management ofdiseases and quality of life

Improve overall citizensatisfaction with healthcaresystem by reducing pressureon hospitals, reducing ALOSand encouraging home carewhen appropriate

National Prevention Strategy

Day Surgery and HomeCare

Disease Management for ChronicPatients

For example a targeted weight loss program in New South Walespresented substantial savings in direct diabetes costs alone

Australia has some of the highestproportion ofdiabetes in theworld

Diabetes treatmentcosts areexpected to risesignificantly asobese peoplehealth consume upto 70% moreservices

High

10,000

$700

$7,000,000

10.0%

1,000

51%

510

$1000

$10,000,000

$3,000,000

Introduction of a targeted (weight loss) program

# of participants

cost of program per participant

total cost of program

success rate (% participants losing 15lb+)

# of successful participants

reduction in diabetes risk due to weight loss

reduction in # of diabetics

direct diabetic treatment cost per year

savings in diabetes costs

net savings in direct diabetes costs

Disease Management Benefits - Example

Health System Costs

Hospitals Costs

Hospitals are labor intensive and have high-fixed cost ashighlighted by labor being the largest cost component

Source: “Costing of Inpatient Services at a Public Hospital in NSW” “Bending the Curve: Hospital Cost Cutting Efforts Begin to Pay Off”, MHA, Navigate

70%Labor

21%Patient Care

Hospital Cost Distribution (Australia)Utilities and Capex

9%

To contain hospital costs, 4 strategies stand out as they balance costwith quality and accessibility as well as reduce the impact of labor

Improve ClinicalStaff Efficiency

Outsource non-core functions

Excel inOperations

Adopt IT

Challenges

GManpower shortage driving increase in clinical staff salaries highlights need for effective utilization

Low-value add activities consume professional time with limited benefits to patients

Traditional operating model based on self-sufficiency leads to wide range of in-house support functions

In-house services operate sub optimally relative to outsource entities with greater scale economics

Focus on clinical service delivery tend to blind hospital managers from the importance of operationalexcellence both in supporting clinical services and the overall hospital administration

Many hospitals function at suboptimal capacity across many functions (e.g. bed management, OR,outpatient services) due to limited expertise, low capabilities or rigidities in the system (e.g. working hours)

Adoption of IT is still limited in many hospitals to administrative (mainly financial) systems, though potentialapplications are far more broad

The manual administrative and clinical processes not only are costlier and more error prone, they usuallyare a major cause of unmotivated staff (especially clinical ones)

Improving clinical staff efficiency is crucial and should focus onimproving MD productivity and enriching nursing tasks

Improve PhysicianUtilization

Enrich NursingTasks

Limit Overtime

Reduce ContractLabor

Improve patient visit ratioImprove scheduling

Task out administrativeactivities to lower skilledstaff

Improve shift schedulingStep-up recruitment andretention efforts especiallyfor nurses

Align hiring plans withexpected service volumesTake into considerationpeaks and troughs

1

2

3

4

Our State hospitals are increasingly outsourcing non-clinicalfunctions and, when done properly, are witnessingsignificant benefits

Security

ICTFacilities

Management

Cleaning Services

Suggested Areas for

Outsourcing

WasteManagement

Potential Benefits

ReduceCosts

ImproveCoverage /Availability

ImproveEfficiency

ImproveQuality

Always retain governance ofoutsourced functions

including planning andmanagement

Revenue Cycle

Outsourcing is not about carving-out non-core functions but ratherselecting long-term partners that will continue to add value

Key Outsourcing Activities

and negativeincentives

performance reporting

Commercial criteriashould include immediatesavings as well as clearlong-term savings andimprovement in service

Govern Vendors

Closely monitorvendorsperformance

Report anydeviations fromservice levels

Identify penalties /rewards based oncontractualagreements

Procure Services

Request offers from topvendors (e.g. top three)

Assess offers based ontechnical and commercialcriteria

Technical criteria shouldincludecomprehensiveness ofscope coverage,dedicated resources,service levels as well as

DefineGovernance

Structure

Define interactionmodel with vendorpost-procurement

Retain planning andmanagement ofoutsourced functions

Clearly delineateresponsibilitiesbetween vendor

Assess MarketMaturity

Identify vendorspresent in the marketwith the capabilities tooffer the servicesrequired

Assess vendorscapabilities (e.g. RFIs,RFPs) and rank them

Identify Functionsto Outsource

Assess non-corefunctions that can beoutsourced

Documentrequirements in termsof scope of activitiesand deliverablesrequired

Define service levels,tiers as well as positive

State hospitals have at their disposal several levers for operationalexcellence that should be used to contain costs

Operational Excellence

Optimize Occupancy Rates– Improve bed utilization– Optimize scheduling– Optimize ADT processes

Optimize OR utilization– Optimize usage time– Optimize scheduling– Improve logistics (e.g.

clean/dirty pathways)– Diversify OR types

Decrease ALOS– Promote Evidence Based

Medicine– Manage Physicians

Performance

Optimize Supply Chain– Reduce supplies variability– Standardize suppliers– Forecast demand and

analyze spend

SavingsPotential%

20-25% 15-20% 5-10% 8-12% 10-20%

EaseofImplementation

3 3 1 1 2

For our hospitals, non-medical items and medical supplies presentthe biggest opportunity for savings

10,837

18,223

28,530

41,493

57,089

Non-Medical

MedicalSupplies

MedicalEquipment

Pharmaceutical Implants

Typical WA Hospital Operating CostsProcurement Addressable Spend categories

Cost per Bed in $AUS

21 - 38%

44 - 70%Labor

Utilities andCapex

100%

9-18%

Patient Care

Average of AUS 6 Mn inPurchasing Savings for a

300 Bed Hospital

Source: Navigate review of Royal Perth Hospital cost inputs

There are several levers to capture these cost reductions andshould be selectively applied by our 6 metropolitan hospitals

Note: Savings ranges assume standalone implementation

Initiative

Clean Up ItemMaster

Description

Develop a clean item masterEstablish common taxonomyReduce/standardize products

SavingsImpact

High

TimeRequired

2 to 3months

SpendAnalytics

Increase spend transparencyTrack usage and tie supplies to medical proceduresReduce storage costs and inventory obsolescenceAnalyze product life cycle view (“total cost of ownership”)

High 2- 3months

Sourcing andContractingEfficiency

SupplierRelationshipManagement

Develop specific sourcing strategy for product categoriesImplement processes for product selection, standardizationand utilizationEstablish contract and procurement controls

Increase of the no of potential suppliers considered for bidsSwitch to cost-advantaged suppliersRestructure and reduce supply baseRe-negotiate contracts

Medium

Medium

4-6months

4-6months

PerformanceManagement

Improved coordination between supply chain & clinical teamsImprove procure to pay processAutomate systems and establish inter-linkages betweenhospital departments

High3-4

months

A proper diagnostic across all spend areas should be done tounderstand sourcing levers and identify savings opportunities

Medical Supplies SKU Proliferation

Medical Supplies: High fragmentation due to numerousrequisitioners and limited product selection controls

Pharmaceuticals: Minimal use of lower costalternatives within a highly complex drug portfolio

Branded w/Genericalternate availGeneric w/Branded

alternate avail

Therapeutic AreaSKU Tree

Implants: Strong loyalty to high-price suppliers and high-end device functionality

OthersSupplier 8Supplier 7Supplier 6Supplier 5Supplier 4Supplier 3Supplier 2Supplier 1

Supplier Utilization Pricing Structure for FunctionallyEquivalent Devices

Current price

Supplier 1

Current price

Supplier 2

For each spend area, developed category summarieshighlighting key sourcing levers and savings opportunities

Pharmaceuticals by Patent Type

Branded only purchased

Branded only purchased

Generic onlypurchased

Ease

of Im

ple

me

nta

tio

n1

High

Savings can be captured rapidly by segmenting the high priorityareas by distinct savings capture approaches

$0 $1 $2 $3 $4 $5 $6 $7 $8

Travel

HR

Prof Svcs

Implants

Building Ops

ITChem/ReagentsMarketing

Equip

Utilities

Med Svcs

Med Supplies Pharma

HighLowPotential Savings Opportunity ($M)

Low

1) Ease of Implementation factors include strong senior support, alignment across functions, ability to modify specifications, minimal disruption to operations and limited political sensitivity

Note: Size of bubble is proportional to category spendSource: Navigate Analysis of RPH as part of this project

Sourcing Opportunity Size and Ease of Implementation

Office Supplies

Savings CaptureApproach

StrategicSourcing

Rapid Sourcing

Launch broad strategicsourcing efforts to capturethe maximum opportunityacross supply and demandlevers

Leverage current marketconditions to increasecompetitive pressure incentrally-driven categoriesand tail of department/functional spend

SpendManagement(influences multiple

categories)

Design basic spendmanagement processes,policies, and tools to quicklyestablish control andvisibility

Strategic SourcingRapid SourcingFuture Waves

WA Example

Description

Health IT benefits include reduction in costs and also significantimprovements in overall quality with a reduction in errors

Health IT Benefits

Source: Navigate Analysis

Clinical

Benefits

Financial Operational

1

23

Enables clinical decision supportProvides real time access to historical data onthe patient thus reducing redundant tests

Educates patient on health trends throughvarious channels such as portalsReduce medical errors such as adverse drugevents

Increases nurse productivity bymonitoring utilization and automatingclinical workflows

Eliminates human error, thusincreasing process efficiencyReduces denial rates for claims

Eliminates cost of overhead associatedwith managing paper medical records

Reduces manpower requirements byautomating several clinical and operationalworksteps

Provides socio economic benefits (e.g.reduces cost of care, greater access tohealthcare) within 4-10 years of theinvestment

… and freeing up skilled resources to take care of the patients

Our survey among hospital administrators across Australia highlighted the many clinical and administrative benefitsof patient medical records

BetterAdherence toBest Practices

Faster Accessto Patient

HistoryFaster Search

forDocumentation

BetterTreatment

and Medication

BetterDiagnostic

EHR Benefits

Clinical Administrative

Source: “Best Practice Review of Shared Health Record Sites in Australia 2013, Navigate Consulting

Clinical and Administrative Benefits Overview

ReducedDuplication of

Tests

In summary, containing healthcare costs at the system andprovider level is challenging given the underlying dynamics…

Healthcare costs are increasing and cost growth is speeding up

Traditional cost containments strategies can cut costs but won't slow cost growth

Costs can be contained at the hospital levels by

– Improve clinical staff efficiency

– Outsourcing of non-core functions

– Excel in operations- Adopt IT

…however policymakers and administrators can use a set of leversto achieve this without compromising quality and accessibility