How Health Systems Can Cut Costs, Drive Revenue, and Ensure Sustainability

Updated on August 8, 2022

By Sean O’Connor, CCO, DexCare

Many health systems are facing financial uncertainty amid historic inflation compounded by pandemic-driven staffing and supply costs, and they’re looking for ways to drive revenue and cut spending. Meanwhile, the healthcare industry as a whole continues to face major workforce challenges, further exacerbating the poor financial status of health systems. Systems need a strategy to address these issues in both the short and long term, and solutions that improve efficiency, reduce costs, and enable providers to practice at the top of their licenses are more critical than ever before.

The current state of health systems

Every health system today is trying to recover from the economic burden of COVID-19. During the pandemic, the volume of high-value procedures – those that generate critical revenue – dropped significantly. While the number of these procedures is rebounding, it is still far below pre-pandemic levels, so health systems are generating less revenue overall than they used to.

Workforce challenges continue to be a major threat to healthcare as well. Nearly all providers are struggling with burnout, and many have left their roles. At the same time that health systems are struggling with understaffing, inflation is increasing labor costs, so systems are seeing decreased operating margins. Healthcare has always been a low-margin business, and this issue has become even more apparent as health systems fight to recover financially from the pandemic while also facing new economic challenges.

According to a recent report from the Academy IQ Research Center, many CFOs of leading health systems feel that financial security is their overarching priority for the rest of 2022 and 2023. This year, 75% of health system CFOs said they are planning to decrease their operating budgets, compared to just 27% in 2021. Despite this, many plan to continue investing in innovations such as cybersecurity, cloud, and digital front door technology. There is a major opportunity for health systems to form new partnerships with vendors that will help drive value while also preparing them for the digitally-enabled future of healthcare. 

Strategies for managing costs

According to leading health system CFOs, several key factors drive budget and investment decisions, including the need to optimize existing resources, the desire to leverage technology, and the goal of being scalable across systems. The right technology has the ability to help health systems achieve these goals, even in today’s challenging landscape. Labor and operational efficiency are two areas that hold the greatest potential for health systems to make improvements and better manage costs – and health system leaders shouldn’t underestimate the immense value digital solutions can provide.

Optimizing labor 

Despite the workforce shortages plaguing healthcare, labor costs for health systems remain high and continue to increase due to inflation. According to The Academy 2022 CFO Survey, 75% of CFOs ranked labor as the top area to reduce spending.

There are several strategies that health systems can implement to cut down on workforce spend and increase return on investment (ROI) when it comes to staffing. First, health systems should restructure care teams to optimize the function of all roles, enabling providers to practice at the top of their licenses. To do so, health systems can hire and train new types of roles, such as LPNs and virtual RNs, and utilize multidisciplinary care teams to deliver the right care in the right settings.

Health systems can also cut down on workforce spend by innovating with care models. For example, health systems can adopt more hybrid roles to expand the types of care delivery that they are able to offer, such as remote patient monitoring (RPM). Such developments can improve efficiency and reduce the burden on care teams, allowing health systems to scale solutions and ultimately improve outcomes.

Optimizing operations 

When it comes to operations, automation and AI are critical tools that can help health systems reduce costs and improve efficiency. While many leading systems have already adopted some form of AI, they have yet to maximize the potential of this technology. In fact, more than half of healthcare organizations do not believe that they have achieved improvements in efficiency after implementing AI tools. In order to realize the full benefits of automation, health systems first need to choose the right vendor partners and encourage widespread adoption of the technology. Health systems also need to track performance metrics accurately, completely, and on an ongoing basis so that they can measure ROI and fully understand the value of the technology.

How health systems can diversify revenue

It is critical that health systems implement changes to save on costs in the short term, but to create sustainability and mitigate vulnerabilities in the long term, they must also diversify their revenue. One way that health systems can achieve this is by expanding into the venture capital and in-house innovation space. Some leading health systems, including Mass General Brigham, Providence, and Kaiser, have established investment arms that are associated with the health systems but are organizationally distinct and have separate leadership structures.

The purpose of these internal accelerators is to make investments that will bring in revenue separately from the hospital’s direct services. Providence Ventures, for example, primarily invests in innovative healthcare companies that aim to improve quality and convenience of care and ultimately health outcomes. Health system VC arms tend to invest in underrepresented areas that are particularly ripe for development, such as digital health and mental health – areas that are likely to produce significant revenue in the coming years. The success that these investment arms have seen is encouraging, and more major health systems are now creating in-house venture capital and innovation teams. 

Health systems can also expand care paths and service lines to drive more revenue. For example, some have begun to expand into post-acute, ambulatory, and other types of care outside of the traditional hospital setting. Many health systems are also trying to shift towards value-based and risk-based models, which tend to be more stable than the typical fee-for-service model. While the majority of health system revenue remains tied to fee-for-service, diversifying models can help health systems increase revenue and become more sustainable in the long run.

What health systems should look for in partners

As health systems face budget constraints and attempt to manage today’s market pressures, many are rethinking vendor partnership strategies. Health system executives may feel more caution and scrutiny when making investment decisions, and many deals are taking longer to close due to prolonged evaluation. For fear of uncertainty about the economy in the coming months and years, health system executives may also be hesitant to commit to long-term contracts.

Health systems can reap the most benefit from partnering with vendors who have clear, concise messaging on the benefits of their technology and the expected outcomes for the system. Specifically, health systems should look for clear evidence of ROI with cost savings as well as validated user experiences with the technology, such as customer testimonials. Lastly, health systems should seek out vendors who offer flexible financing options and partnership terms, including both short- and long-term investments. By communicating clearly and openly about their needs, health systems can create trust with potential tech partners and build a relationship that will result in the greatest benefit for the system and its patients.

With the current financial state of the healthcare industry, health system executives are experiencing two opposing forces: the need to cut costs and the desire to grow. Many want to continue investing but must balance cost pressures. Fortunately, investing in the right technology can help health systems save on costs, optimize resource allocation, and increase patient acquisition – all of which drive revenue. The key is partnering with the right vendors that will deliver optimal ROI. Now is the time for health systems to form partnerships and invest in technologies that generate future-proofed success.

Sean O’Connor is Co-Founder and Chief Commercialization Officer of DexCare. He is an experienced entrepreneur and executive with a demonstrated history of building high performing technology companies in the health care industry. Prior to joining Providence as an Entrepreneur-in-Residence to commercialize the DexCare platform, Sean served as Chief Revenue Officer at C-SATS, a healthcare technology platform that was acquired by Johnson & Johnson in 2019.  Prior to C-SATS, Sean held a variety of senior roles at Intuitive Surgical helping develop Intuitive into a Fortune 500 company. 

The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.