The converging forces of decreased payment and changing payment models are causing providers to focus intensively on reducing the cost of care delivery. To overcome the pressures of squeezing margins, health systems need to identify and normalize the cost variations of care delivery within service lines. Doing so is a critical catalyst to improving quality, efficiency, and bottom-line performance.

Unfortunately, providers can still spend considerable time manually collecting and aggregating service-line-specific data without gaining short- and long-term improvements. Data in hand are not enough. Both hospitals and physicians need to agree on which performance metrics to use, and appropriate analysis of the relevant data is required to accurately depict service-line operations, including the true cost of supplies. The data also need to be packaged correctly so physicians can easily interpret the data and change practice patterns as needed.

The experiences of several healthcare organizations that have used best-practice, data-driven analysis to improve service line management and margin point to two key success factors: establishing expectations up-front and getting physicians to understand and accept that the opportunity for improved margin depends on the variable costs that they control. These lessons provide valuable insight for organizations seeking their own road map for using data to determine and manage service-line margin.

Establishing Metrics

A key starting point for appropriate analysis is agreeing upon relevant metrics--measures that indicate whether a service line is within acceptable range. Striking the right balance among financial, clinical, and operational metrics to gain consensus is important. From a financial viewpoint, metrics can include cost per case, supply cost per case, or overall margin.

When evaluating supply-cost metrics and setting expected expenses, hospitals should examine patient and case mixes in the right context. A high ratio of surgical patients with implants, for example, would be expected to generate significant supply expense, but supply costs should not be higher than expected simply for a large number of medical patients.

Although a healthy bottom line is crucial for the organization, physicians focus on initiatives that also benefit patient care and clinical outcomes. Focusing the analysis first on clinical aspects encourages physician input and support that are crucial to overall service -line improvement. Clinical improvements should be linked with financial improvements where possible. Physicians need to see how containing costs can also help patients.

For example, cost-reduction initiatives across a service line should consider physician concerns about efficiency of processes. The same data that show savings opportunities also can show areas of improvement for turnaround times and highlight obstacles to optimal operating room (OR) usage. Clinicians may benefit from seeing their volumes per service line, the number of cases and turnaround times in the OR, outcomes relating to mortality and infection rates, and relative performance in patient-safety indicators.

One health system's heart and vascular cost-reduction program received a jump-start when the system reinvested a portion of savings to purchase new equipment for its cardiovascular center. By creating shared incentives to meet both financial and clinical goals, the system drove physician support to reduce...