5 Common Pitfalls to Avoid When Creating a Cost-Reduction Strategy

Updated on January 12, 2023
a stethoscope on a wad of US dollar bills, depicting the concepts of the health care industry or the health care costs

Healthcare operating costs are on the rise. Hospital expenses are expected to increase by almost $135 billion in 2022, according to research from the American Hospital Association and Kaufman Hall. If you’re in a healthcare leadership role, you’re likely feeling the pinch and looking for ways to reduce your organization’s spending. A comprehensive cost-reduction strategy can go a long way, but it requires careful planning — otherwise, you could do more harm than good. 

A good cost reduction strategy should not…

1. Eliminate the essentials.

Payroll might take the largest bite out of your operational budget, but reducing staff could create more challenges. Labor shortages are going strong and healthcare employment is still below pre-pandemic levels. According to the U.S. Bureau of Labor Statistics, the number of workers in this sector is 1.1% lower than it was in February 2020. 

You may not be able to reduce essential staff, and you probably don’t want to. Doing so could lead to patient satisfaction issues, like increased wait times and delays in communication. Behind the scenes, letting go of staff might also cause administrative inefficiencies. This is all to say that cutting the essentials isn’t part of an effective cost-reduction strategy. That extends to critical supplies and equipment your organization needs to run effectively.

Transitioning some employees to remote work or implementing digital healthcare options could help reduce costs. You might also consider outsourcing operational tasks to contract workers or virtual medical assistants. This can include marketing, HR, and accounting duties. Another option is to review your existing vendors and partnerships for services like building maintenance and food service. 

2. Stop investing in your staff.

Employee retention goes hand in hand with operational costs. According to data from the Society for Human Resource Management, the average cost per new hire is almost $4,700. Investing in your current staff could translate to thousands of dollars in savings, especially given the healthcare labor shortage. The question then comes down to how. The Healthcare Financial Management Association recommends the following tips for reducing employee turnover:

  • Frequently review and realign your compensation and benefits packages: Staying competitive in today’s job market means keeping up with wage growth.
  • Identify and address management issues: Flaws in your management system could lead to employee burnout. Look for workflow inefficiencies and pay attention to employee feedback.
  • Develop new career pathways: Having room to grow might be the thing that retains some employees. Encourage your team to think big picture, which may involve internal mentorship opportunities.  
  • Allow for flexible work arrangements when necessary: Some roles have to be carried out on-premises, but is there room for remote work anywhere? Get a feel for what your employees need to be productive and happy.

3. Rely solely on your accounting department.

The term “cost reduction” is financial, but that doesn’t mean the responsibility is only on your accounting department — or any single department, for that matter. No one team can see all the opportunities to optimize spending. When creating your cost-reduction strategy, bring all your teams together to pick their brains. They’re the ones who are in the trenches, after all. Draw on their operational experience by asking things like: 

  • What financial inefficiencies do you notice in your department?
  • On the other end of the spectrum, what seems to be working? Would it translate to other departments?
  • What resources do you need to work better? 

This can help you better understand your financial pain points. It’s difficult to fix something if you aren’t sure what’s broken. To that end, reviewing spending on a per-department basis is wise. It can give you an idea of the return you’re getting on certain expenses. For example, you may find that the marketing team is spending a lot on social media ads that aren’t generating many new leads. Or perhaps your HR department is underspending, trying to handle recruitment fully in-house. The big question to ask is if they’re spending their budgets wisely.

4. Neglect patient collections.

Another common misstep is failing to bring in more revenue. Improving your in-house collections rate can help bump up your organization’s cash flow. Roughly 44% of American adults are struggling to pay for healthcare, according to a recent survey by West Health and Gallup. If unpaid balances are affecting your bottom line, consider these potential solutions:

  • Review your current collections strategy and look for inefficiencies.
  • Consider investing in automated patient collections software.
  • Update your patient portal and allow for simple online payments.
  • Offer payment plans to make healthcare more affordable for patients.

5. Forget to hold your organization accountable.

Your cost-reduction strategy won’t do you much good if your organization doesn’t follow through. Putting someone in charge can add extra accountability. Their responsibilities might include:

  • Creating short- and long-term cost-reduction goals
  • Coming up with action items and delegating them to the appropriate teams
  • Regularly meeting with different departments to measure progress and troubleshoot problems
  • Communicating which efforts are working and which ones aren’t

Remember that your cost-reduction strategy isn’t set in stone. It may shift as your organization grows or faces new challenges. What matters is having a point person who can adapt as necessary. 

Joseph is a Content Marketing Analyst at LendingTree where he works to empower people to make their best financial decisions. He earned his B.A. from Penn State University.