The Key to ACO and Value-based Purchasing Success: Lowering Cost Structure

Lowering cost structure has not been a requirement for healthcare providers—until now. Today, with the growth of ACOs and value-based purchasing, CEOs of health systems and large physician groups are increasingly focusing on understanding cost structure in every clinical area of their organization. This understanding is becoming a requirement for survival and future success.

A focus on improving cost structure involves improving both financial and clinical outcomes—and the emphasis on both is core to success. The more that providers optimize for the best possible outcomes in a given cost structure, the more they will be well-positioned to survive and thrive in a value-based future.

Fee-for-Service Payment Models Often Produce Higher-Cost Structures

In the fee-for-service reimbursement model, providers had little incentive to focus on cost structure, because reimbursement was based on procedures, not efficiency. Now, the healthcare industry is seeing a shift to a fundamentally different business model. And CMS is leading the charge with significant cuts in Medicare and Medicaid reimbursement, with commercial payers following suit. Many providers will negative margins without fundamental changes to to the way they operate.

To survive financially, health systems must become adept at systematically bending their cost curve.

The Need for a Granular Understanding of Cost Structure

Before a health system can lower its cost structure, it must first understand that cost structure at a detailed level. Today, most health systems have only high-level visibility to their cost structure. They often must rely on total costs then spread those costs across many procedures to estimate an average view of per unit costs.

This method is imprecise. The problem with relying on such averages is that they don’t highlight variation in the cost of delivering each procedure. Identifying this variation is foundational to reducing actual costs.

Pinpointing where that variation exists, determining the causes behind it, and then intervening to reduce that variation is how an organization improves. This improvement usually involves reducing one of three categories of waste:

  • Ordering waste: Variation in what care is ordered
  • Workflow waste: Variation in how care is delivered
  • Defect waste: Preventable complications resulting from care delivery—termed defects in Sigma/Lean terminology—that can harm or injure patients (e.g., hospital-acquired infections)

Doing so requires a highly granular understanding of a health system’s cost structure.

Enterprise Data Warehouse: The Key to Improving Cost Structure

It is nearly impossible to come to a granular understanding of a health system’s detailed cost structure without first bringing financial, clinical, patient satisfaction, and other data together into an enterprise data warehouse (EDW) platform and then performing analytics on that data using that platform.

With an agile, flexible EDW platform in place, health systems can analyze costs across many clinical domains—cardiovascular, women and children’s, pediatrics, primary care, surgery, and more—to pinpoint where to improve their cost structure. They can do the same from a horizontal perspective, looking at the workflow processes of every clinical support service used to deliver the care that has been ordered.

ACO and Value-based purchasing


A health system will likely need to address hundreds of vertical and horizontal processes—each of which requires standardization of best practices to eliminate waste and variation. This kind of effort cannot scale without an EDW platform infrastructure.

The EDW offers granular data about each encounter, each day, each step in the care process. It enables health systems to view by provider, by facility, by day, or by other dimensions exactly what occurred. Then systems can develop hypotheses as to what treatment algorithms and order sets should be changed in order to optimize and standardize care delivered.

The EDW then measures the financial effects of this kind of standardization. Each order set or treatment algorithm change may contribute hundreds of thousands to millions in annual savings, which at one level may seem insignificant. However, when this process is repeated systematically over dozens of horizontal and vertical processes, the cumulative effect can be substantial and transformative.

A Note about ACOs

Many good software solutions exist today to serve the needs of ACOs. These solutions often streamline the process of regulatory reporting, as well as providing useful operational metrics to the ACO. However, without automated access to the full breadth of clinical, financial, and administrative data through an EDW platform, health systems and physician groups will be limited in their ability to accomplish the foundational work of bending their cost structures.

Learn key things to look for in an analytics solution or see the five critical information systems needed to drive ACOs.

Have you begun to look at lowering your cost structure? What methods do you use to determine cost structure?

Loading next article...