Healthbizinsight

July Issue 2018

STRATEGY

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A Zero-based Lens

Our experience indicates a revenue-enhancement approach removes bottlenecks and yields the highest returns

A report by: Bain & Company & NATHEALTH

Joy Chakraborty

On the costs front, hospitals can take a radical zero-based approach that is focussed on their major cost centres. That approach requires hospitals to distinguish between strategic and nonstrategic costs and to refocus resources for growth


To improve margins and reduce costs, companies need to adopt a zero-based operations transformation approach. The traditional approach to margin enhancement and cost cutting is typically short-term and unsustainable. It often cuts muscle and there is little stewardship on clinical quality and customer experience. Suboptimal team staffi ng, weak process and accountability are other frequent issues (see Figure 5).

Naturally, improving revenues is the top priority. What short-term actions are needed to improve the top line and margins of a private healthcare provider? Our experience indicates a revenue-enhancement approach that combines value-based pricing, optimised contracting, service mix optimisation and removal of capacity bottlenecks yields the highest returns.
On the pricing front, healthcare providers have options for improving their revenues (see Figure 6). Providers incur signifi cant costs on accreditation, quality upgradation and maintenance, recruiting and building clinical teams. That cost is often designated to standard consumables and diagnostic tests, which angers their patients. Providers could instead take a different approach by focussing on delivering differential value to patients through an ability to handle greater complexity and superior outcomes, then charging differentially for those procedures and specialties.
On the costs front, hospitals can take a radical zerobased approach that is focussed on their major cost centres. That approach requires hospitals to distinguish between strategic and nonstrategic costs and to refocus resources for growth. Strategic costs help sell more products at higher prices and link with strategic priorities and "must-win" capabilities. They truly enhance the bottom line and build the business.
All other costs (especially SG&A) are nonstrategic and should be eliminated unless their value can be proved by asking: What would we lose without this spending? Providers have shaved off substantial costs in the following areas:
• Front-end manpower cost optimisation focusses on the costs associated with staff members (nurses, doctors, residents and so on) who work directly with patients. In our experience, front-end facing


staff spends no more than 20% to 25% of their time on patient care and a signifi cant portion of their time on documentation, resolving cross-functional complexity and performing other nonvalue-added processes. In such situations, reducing documentation and process load or automating parts of the job can allow them to focus on the patient and helps energise the staff while eliminating costs.
• Materials cost optimisation harnesses our experience in healthcare to help hospitals buy better (supply tactics) and spend better (demand tactics).
• Overhead optimisation is one of the biggest tools for improving the cost structure. It is important for hospitals to buy better and spend better. Too often, we see hospital groups that are not ambitious enough on these fronts. Their approach is too incremental and focusses on bigger discounts on
high-value items from the same suppliers. A segmented approach to physician preference items and nonphysician preference items, with early and fact-based engagement with the physician community, can lead to signifi cant savings.
A good cost transformation strategy focusses on the need, profi le and behavioural patterns of customers. This customer-centric approach formulates an integrated roadmap that includes change management as well as zero-based cost accounting.
We believe a well-structured operations transformation programme can create 8% to 15% top-line growth, a 7% to 22% reduction in manpower costs, a 12% to 20% reduction in materials spending and a 20% to 30% reduction in other spending, to achieve an EBITDA growth in the range of 15 to 20 percentage points per year (see Figure 7).


Instances: Case studies

A multispecialty hospital with several primary clinic satellites faced fi nancial and patient advocacy challenges. In addition, the hospital's fi nancial defi cit was increasing due to high manpower costs, overstaffi ng of medical personnel, low legacy pricing and underutilisation of key medical facilities. For this hospital, we managed to achieve a 6% upside on EBIT within the fi rst 12 months. Over the next fi ve years, we expect to reduce the defi cit by 30% to 40%. The hospital has seen a more than 20% increase in its Net Promoter Score® (NPS®).
Another not-for-profi t healthcare and senior care provider with which we worked was under margin pressure due to public funding cuts. The provider achieved a 5% savings on spending across eight opportunities in six months. A private hospital chain that had been facing customer loyalty, advocacy, pricing and clinical issues showed a 25% to 30% increase inpatient NPS after working with us. Referral traffi c almost doubled, and revenue increased by 8% over baseline growth using strategic pricing.
In addition, another healthcare provider with multiple hospitals and pathology centres identifi ed an 11% uptick in EBITDA through shared services.

Change management and Results Delivery®

Behaviour change is often the biggest challenge during and after an operations transformation programme. Any management executive embarking on an operations transformation initiative in a provider setting is advised to focus on change management to realise its value. Using a data-based, objective approach identifies delivery risk areas early and measures and mitigates
the risk by allowing early intervention. Early alignment on a bold vision ensures leadership commitment. Additionally, creating clear sponsorship across the organisation, co-creating solutions with the team and ensuring appropriate incentives helps make change stick.