Cost containment in healthcare: A complete guide.

Healthcare organizations are under significant pressure to cut costs without reducing the quality of care. Yet healthcare costs are constantly rising — for providers and patients alike.

There are studies that show that a disproportionate part of the cost is on administration, which suggests that a lot of spending is unnecessary or inefficient. So the question is: how do you identify these wasteful expenditures and eliminate them, while also controlling future costs and protecting care quality? The answer lies in a strong cost-containment strategy.

Cost containment is a comprehensive strategy that can help organizations decrease expenses while maintaining or even improving patient care and outcomes. This guide explores cost containment in healthcare, covering methods to economize without compromising on quality patient care.

What is cost containment in healthcare?

Cost containment in healthcare refers to the practices aimed at controlling healthcare costs without compromising the quality of care. Instead of focusing on one-time cost eliminations for short-term savings, this strategy implements organization-wide processes and activities designed for long-term reductions in various expenses across the board.

In short, cost containment methods become an integral part of standard organizational processes. Rather than cutting costs once, the organization continuously finds ways to reduce expenses. This includes regularly reviewing and adjusting service delivery, negotiating better rates with suppliers, or using technology to improve efficiency and productivity. Using cost-containment strategies in healthcare, organizations analyze expenses regularly to uncover opportunities for current and future cost savings.

The ultimate goal is not only to reduce healthcare spend but to do so sustainably.

Why is cost containment important in healthcare?

Understanding the importance of cost containment in healthcare is important. This is especially true when considering the financial landscape of the U.S. healthcare system. Compared to other affluent nations, the U.S. notably spends almost double the amount on healthcare per capita. Despite the growing realization that both patients and providers bear an unsustainable burden, little progress has been made.

Unfortunately, nearly 50% of Americans struggle to afford health insurance premiums, and 25% have delayed or skipped necessary healthcare due to costs. This figure rises to 61% among the uninsured. Even federal health insurance programs like Medicare and Medicaid are at risk, as their budgets cannot accommodate rising prices.

The repercussions of rising healthcare costs are not limited to patients alone—they ripple through the entire healthcare system. From hospital closures to worker strikes to widespread layoffs, the impacts of rising costs are visible in healthcare facilities nationwide.

This means cost containment is not only a fiscal strategy, it is also a critical measure.

It ensures patients maintain access to medical services and that healthcare organizations remain operational. And, it secures the financial health of providers for the long term. In essence, it aims to make healthcare more accessible and equitable while improving the quality of care.

Why are healthcare costs on the rise?

While there are numerous contributors to rising healthcare costs, these three factors have the most significant impact.

Opaque pricing practices.

Opaque pricing practices occur when the costs of healthcare services or products are not clearly shown or explained to patients. This lack of transparency eliminates competitive pricing among healthcare providers, leaving patients without opportunities to save money on certain services.

To compound the issue, labs, anesthesiologists, and other providers typically bill separately from the main facility. Unfortunately, when initial cost estimates are given up front, they usually fail to cover these extra services, leading to more unexpected costs.

Factor in the significant differences between cash prices and insurance prices, and it leaves patients uncertain about the financial consequences of seeking healthcare. Such opacity harms patient care and inflates the cost of medical services.

Payment by quantity instead of quality.

Payment by quantity instead of quality refers to a fee-for-service reimbursement model. In this model, providers receive payment for each procedure or patient visit, depending on the quantity of services provided rather than the quality of care. It encourages providers to perform more procedures, tests, and visits to increase their revenue.

This approach contrasts with value-based care models. Here, payments are tied to care quality, patient satisfaction, and efficiency. The aim is to improve health outcomes while controlling costs.

In contrast, paying by quantity, not quality, gives patients less time with their doctors and allows providers to profit from repeat visits from unhealthy patients.

Rising inflation.

Inflation, affecting everything from groceries to housing, is a concern for everyone, and healthcare has not escaped these rising prices. With medical professionals seeking higher pay for increased workloads, organizations struggle to curb labor costs.

At the same time, the cost of medical supplies, prescription drugs, and other healthcare needs is rising. This trend continues to strain organizational budgets. These costs are influenced by many factors. They include supply chain disruptions, more demand for medical products, and the arrival of new and more expensive technologies and drugs.

As a result, healthcare organizations face a challenge. They must balance the need to provide high-quality care with the need to control spending and stay financially viable.

This ongoing trend of rising costs places a significant burden on healthcare organizations’ budgets. In turn, they are seeking innovative solutions for cost containment. Strategies such as adopting more efficient operational models, leveraging technology to streamline processes, and negotiating more favorable terms with suppliers have become essential. Despite this, healthcare costs are continuing to rise, highlighting the need for systemic changes.

How to implement a cost-containment strategy in healthcare.

Effective cost-containment strategies require an ongoing, organizational-wide approach. They go beyond broad spending cuts to find specific, long-term savings.

Get a clear understanding of organizational expenditure.

A thorough analysis of an organization’s spending must be conducted to start a cost-reduction strategy. This first step is crucial. It requires a comprehensive review of all spending within the organization, from clinical supplies to administrative costs. This level of analysis will create an understanding of where funds are being allocated.

The next step is to compile a detailed breakdown of fund allocation. This involves sorting expenses into categories. These include personnel wages, utility bills, technology investments, and patient care supplies, among others. Categorization will offer clarity on spending patterns and highlight potential areas for savings.

With this overview, organizations can identify high-cost areas. These areas may benefit from renegotiating supplier contracts, adopting more efficient technologies, or optimizing processes to reduce waste. This detailed expense mapping is the foundation for developing targeted strategies to cut costs without compromising the quality of patient services.

Through these insights, organizations can make informed decisions that contribute to long-term financial health and sustainability.

Use AP automation to trim costs.

Automated solutions are an invaluable part of cost containment in healthcare. Automated accounts payable software helps organizations reduce manual errors. They can also provide deep insights into expenses and identify wasteful or inefficient spending.

When combined with an intake process, AP can ensure multi-stakeholder review and sign-off before purchases are made. This pre-approval can reduce or eliminate unwanted or unnecessary spending, reduce prices paid for goods and services, and actually reduce administrative overhead.

The right AP automation system can also help stave off fraud. The healthcare system is the target of many bad actors, and payment or vendor fraud has been an increasing problem for the past several years.

This technology improves financial oversight and supports strategic decision-making, allowing healthcare providers to use resources more effectively and sustainably.

Leverage robust tools for data-driven decision-making.

Modern tools can also help automate and simplify accounts payable workflows. They should offer advanced analytics and data management capabilities to further refine spending. These data-driven insights allow organizations to make informed budget decisions. They can also drive operational efficiency and cost-effectiveness without sacrificing quality of care.

Analyze labor costs and productivity.

Labor represents a significant expense for most healthcare organizations. Yet, efforts to reduce labor costs can be counterproductive.

Reducing the number of staff or their working hours typically results in heavier workloads and can lead to a need for higher wages or staff burnout.

As a result, organizations find themselves understaffed or reliant on contract labor to meet patient demand. This can further drive up labor costs.

A more effective approach looks at productivity levels and finds ways to maximize performance without placing undue burdens on staff. For instance, updating or investing in new technology can help streamline workflows and reduce manual labor. Likewise, staff training and development programs can better equip employees to handle challenges and deliver quality patient care.

Who should be involved in the cost-containment process?

Comprehensive cost containment requires an organization-wide approach. It calls for buy-in and involvement of stakeholders throughout the facility. No single department has all the right answers. But, together, they can develop an understanding of expenses and highlight realistic ways to cut healthcare costs.

While finance teams and executives play a significant role, front-line staff are essential to the process. They offer first-hand insights into wasteful spending. But, more importantly, they are chiefly in charge of implementing cost-containment measures in their daily operations.

Collaborating with front-line staff also results in greater commitment, as they can promote engagement and participation among their peers.

The end goal is to integrate cost containment into the company’s culture, which cannot be achieved without the dedication and involvement of the staff.

What are some barriers to an effective cost-containment strategy?

Resistance to change is always a challenge. But, the biggest barrier to strong cost-containment measures is a lack of tools and processes. These are needed to provide clear data and deep insights into healthcare spending.

However, even healthcare organizations with analytics tools often find it challenging to use them effectively. A recent survey revealed that 43.9% of practices considered their use of cost data to be only moderately effective, with a mere 7% viewing it as highly effective.

This underscores that quality is just as crucial in data analysis and management tools as it is in healthcare itself. For these tools to drive positive outcomes, they must be user-friendly and intuitive.

It’s clear that automation is critical in this context, as it reduces manual workloads, rather than increasing it, encouraging widespread buy-in and adoption.

Effective healthcare cost-containment strategies.

Managing and reducing healthcare costs without compromising the quality of patient care is a difficult challenge. Fortunately, strategies for effective cost containment in healthcare help organizations navigate these challenges. These approaches find a balance between financial stability and maintaining high standards of care delivery.

Bundling payments.

Bundled payment models incentivize providers to offer high-quality care at a fixed price for multiple services. Rather than billing for each individual procedure, test, or visit, bundled payments provide a lump-sum bill for the entire cost of treatment. This encourages efficiency and coordination among providers, leading to cost savings and improved patient outcomes.

This model aligns providers’ interests with patients’ needs, promoting an integrated, transparent, and patient-centered approach to healthcare.

Telemedicine services.

Telehealth is transforming the healthcare system. It offers substantial cost savings by reducing the need for in-person appointments, particularly for routine check-ups and follow-up visits.

By embracing telemedicine, providers can cut operational expenses while improving access to quality care for patients. In turn, patients are more likely to seek medical care early on, avoiding costly emergency services when conditions worsen.

This shift not only benefits patient health but also contributes to a more efficient and cost-effective healthcare system.

Payment integrity.

Payment integrity is the set of practices that ensure healthcare billing and payments are accurate, proper, and verifiable. It involves making sure payments made to healthcare providers are for services that were actually provided, are medically necessary, and are billed at the correct rates.

Payment integrity aims to prevent overpayments, underpayments, fraud, and abuse in healthcare. This reduces unnecessary costs and improves operational efficiency.

Maintaining payment integrity reduces the high costs of medical billing mistakes, which amount to nearly $935 million in losses weekly. Coding errors alone are responsible for 63% of these billing mistakes, and these are often due to simple typos. Eliminating these mistakes can contribute to lowering healthcare costs.

Using advanced automated tools is essential in this process. These tools leverage technology to streamline the billing process, ensuring accuracy and minimizing the risk of financial loss. By automating the detection of billing irregularities, healthcare organizations can focus more on delivering quality care while maintaining financial integrity.

Combat rising healthcare costs with Airbase.

Healthcare cost containment is a complex process but it’s essential to curb the rising costs of healthcare and ensure positive patient outcomes. By understanding the cost drivers and targeted strategies to mitigate them, healthcare organizations can improve efficiency, reduce waste, and ensure that high-quality care is accessible and affordable.

Airbase helps combat rising healthcare costs in several ways, including:

Elimination of manual tasks: Manual P2P processes like data entry, securing approvals, and reconciliation are not only labor-intensive but prone to errors. Airbase automates these tasks, reducing labor costs and minimizing the risk of potentially costly human error. This also frees up employees to focus on more strategic tasks. Plus, automated workflows ensure invoices and expenses are processed promptly, reducing the risk of late payment fees.

Enhanced visibility and control: Airbase gives real-time visibility into spending across an organization, so healthcare organizations can track expenses, monitor budgets, and identify cost-saving opportunities and wasted spend. With granular insights into spending patterns, decision-makers can optimize spending for greater efficiency.

Risk management: Airbase mitigates rising fraud risks with advanced security measures, including two-factor authentication for any changes to vendor information.

Ready to make cost containment a priority? Request an Airbase demo today.