Transformative cost reduction for a regional health system

Transformative cost reduction for a regional health system

Situation

Faced with a future of reimbursement reductions and declining revenue yields, a large regional health system set an ambitious goal of achieving a 20% reduction on its $500 million cost base for centralized and facility-based support functions, to support and fund a new value-based payment model.

Strategy& helped the leadership team identify up to $120 million in annual savings and $13 million in margin improvement opportunities.

How we helped

Strategy& took a proven yet nontraditional approach capable of producing transformational cost reduction. This approach enables health systems to simultaneously cut costs and grow stronger, align the organization on a systematic and long-term cost reduction effort, and mitigate fears that accompany and often block, sustainable cost savings.

The initial phase of the project entailed following a 3-step process that, within weeks, identifies savings opportunities and prepares hospitals and health systems to capture these savings. The three steps include: cost baselining and hypothesis identification to develop a long list of potential savings opportunities; testing to analyze and validate the savings hypotheses; and developing an integrated implementation plan and timeline for capturing a prioritized list of opportunities.

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Results

In total, $91 million-$121 million in savings opportunities and $10 million-$13 million in margin improvement opportunities were identified. The opportunities were well-balanced across a variety of strategic and operational levers, including shared services and consolidation, process redesign, alternate sourcing, organizational restructuring, and service model and delivery adjustments.

One year later, the health system is on track to capture $26 million in savings. Over 5 years, a one-time investment of $31 million-$38 million will increase operating margins by $101 million-$134 million annually.