Internal goal alignment: a practical orthopedic example in action

When healthcare organizations discuss cost reduction strategies, there are several themes that typically emerge. Clinical engagement is a common one, as is establishing governance processes. But a key success factor, which may be overlooked, is internal goal alignment.

Oftentimes providers try to invoke a value-analysis process without aligned goals. One part of the organization may be rallied around revenue or retaining physicians, while another part tries to reduce costs. For instance, when the supply chain is given a savings target but lacks the authority to make product decisions that could lead to significant savings, it becomes extremely challenging to meet cost reduction goals. This can lead to internal conflict and a less-than-optimal outcome. But it remains a somewhat common practice.

Assigning targets to departments and/or service line administrators and medical directors sets the supply chain up to support savings achievements. With internal goal alignment, clinical engagement becomes more impactful. Governance strategies can then support organizational performance. Working with hundreds of organizations of all sizes across the country, gives Vizient unique insight into processes that result in sustainable success. See Figure 1 for a strategy that’s effective across organizations and can be applied to multiple service lines.

Figure 1. Roadmap for aligning organizational goals

Allocating goals to achieve financial targets

While this strategy can be applied across a healthcare organization, it can be particularly impactful in categories with physician preference items, such as orthopedics. The orthopedic surgery department has budget responsibility where professional services are performed. Their budgets typically include salaries, discretionary spending, supplies and professional services. The high-cost implants that orthopedic surgeons use are within the budget of the surgery department. However, it shouldn’t be the sole responsibility of the surgery department to try to lower these costs.

Collaborating with orthopedic surgeons to design a strategy that reduces variation, maintains or improves quality, and lowers costs can be complex, but it's ultimately more effective. Internal goal alignment and shared accountability advances the organization toward collaboratively achieving objectives.

Let’s look at a practical example of internal goal alignment in action

Figure 2 is an example of a typical hospital budget for the departments of surgery and orthopedics. In this example, salaries, supply and service costs influence a $2 billion hospital operating expense budget. Let’s say the organization needs to reduce its costs by 2% for the hospital to meet its goal of $40 million, and individual budget targets were applied to both departments, shown in red. The orthopedics department may struggle to meet its budget goals due to conflicting priorities, such as generating revenue from physician productivity, funding travel for training and education and managing departmental expenses like services and office supplies.

An alternative approach illustrated in Figure 3 is a similar profit and loss (P&L) report. Because the surgery department incurs many expenses, the organization's goals enable the orthopedic surgery department to achieve cost savings by helping the surgery department reduce its expenses.

The orthopedic surgery department, whose budget is mostly spent on salaries, has been given a $2.2 million budget gap to assist the organization in meeting its overall goal. Looking at the department’s P&L at first glance might leave them in a quandary when determining how to meet their financial goal. The department's most extensive general ledger account is salaries, but reducing physician labor would have a downstream impact on revenue and patient volume targets, which, while not depicted in the example are part of its overall budget.

To bridge the budget gap, physicians in the orthopedics department can assist the surgery department in surpassing their target. Involving its physicians and administrators in a proactive cost-saving effort, they can take a collaborative approach to achieving the hospital's financial goals while maintaining quality. Credit would be given to both the department of orthopedics and the department of surgery, but financially only counted once.

This would encourage the orthopedic department to work with its surgery department and supply chain colleagues on cost reduction opportunities. At the same time, a strong supply chain team would bring forth a variety of opportunities to the orthopedic department. This allows physicians to evaluate which initiatives they want to pursue—balancing factors like the savings opportunities and the difficulty of the change required. An organization’s willingness to let an initiative go if the physicians don’t want to pursue it, but being ready with an alternative, is also a key differentiator for success.

While finance overstates the budget gaps at the department level, the value of any initiative would be counted once but credited twice to achieve the organization's financial objectives. Reporting on procedure and service profitability metrics in parallel to cost saving measures helps ensure holistic success as well.