Performance Improvement Series AMGA Member Best Practices Strategic Cost Management: Vanderbilt s Transformation Journey David R. Posch, MS, Chief Executive Officer, Vanderbilt Medical Group Webinar, October 2, 2014
In an integrated organization operating under a single tax ID like Vanderbilt Medical Group, changes to one revenue line affect the entire medical center and recent times have been rife with rapid changes. Budget deficits, sequestration, the Affordable Care Act, and the lack of Medicaid and a state exchange in Tennessee have affected reimbursements and income. Meanwhile, aging demographics are resulting in a nearly one percentage point shift from commercial payers to exchanges, year after year. Even though volumes have remained strong, the combination of all of these factors resulted in a total decrease of $200 million to $250 million coming into the organization. Like other medical groups in the region, Vanderbilt needed to reduce its expenses significantly in this case, by 8.5 percent. We The changes in health care are fundamental and really different. (We had to) manage to a stronger value proposition than we ve ever had to do. David R. Posch, MS, Chief Executive Officer, Vanderbilt Medical Group needed to take immediate action, Posch said. Assembling Teams and a Leadership Structure The effort came together quickly: It launched in spring 2013 and was planned for implementation in fiscal year 2014. In addition, Posch said, From a change management perspective and an economic and cultural point of view, we felt we should move quickly. Speed proved fortuitous. Vanderbilt initially pegged necessary reductions at $100 million to $120 million before realizing that this figure would end up being closer to $200 million to $250 million. Given the initiative s magnitude, the first action was to align leadership support. Posch and Dr. John Manning, who oversees the organization s overhead and its academic enterprise, assembled a fulltime team for the initiative and asked others to take members places in their day jobs. Representation was broad, including the strategy office, medical center and academic administration, quality, systems engineering, HR and EEO, finance, IT and informatics, and nursing. We needed to have a group of people who could be 100 percent dedicated to this, Posch said. To help the group focus, Vanderbilt set up a separate office for the team. It gave us the bandwidth to really act with the speed we wanted and be thoughtful throughout the process. 2
AN INTERNAL, CROSS-FUNCTIONAL TEAM Several guiding principles were reinforced for all VUMC leaders to ensure we preserved our culture At VUMC, faculty are leaders in all that we do Mission Our commitment to education, research, and patients is top priority Restructure work in a manner that improves our effectiveness, impact, quality and safety In service to patients, deliver on our Promise and do no harm Guiding Pr es Principles Display enthusiasm, respect and empathy Work for good of the whole, versus ourselves or our own operating units Role Model Trust Communicate effectively and frequently Be honest and transparent Maintain confidentiality Articulate decisions in a manner that displays integrity and fairness Accept ownership and accountability in public dialogue Vanderbilt supported the team with a carefully in the market, and assisted with benchmarking considered leadership structure, realizing, in particularly of overhead functions. Here, McKinsey Posch s words, that we really needed to think helped Vanderbilt look beyond the supply chain differently about how we governed ourselves and for opportunities in larger-overhead areas such made decisions. This involved suspending several as marketing, IT, and HR. Clinical operations of the organization s more traditional governance remained under internal management. That s and decision-making structures in favor of a the core of our business, and we needed to take classic program management office (PMO) 100 percent ownership of whatever we do there, approach and using PMO techniques to define Posch said. responsible parties, accountable parties, and rules for informing and consulting with other parties. Cutting Costs While Maintaining Principles To validate internal numbers and goals, Vanderbilt The initiative s guiding principle was to reach brought in external assistance. McKinsey its goals while preserving Vanderbilt s core Consulting confirmed that the size of the planned capabilities and culture. We were going to reduction was appropriate, given economic trends 3
restructure our work in a manner that would training and presented a stretch goal: If you were improve it, Posch said, and deliver on our promise to try to create your end products with 25 percent not to do any harm, which is a written patient less resources, what would you do? We had to promise at Vanderbilt. make changes that would not diminish quality, Posch said. This involved transparent, honest, and frequent communication about the initiative income Unit leaders also worked with HR to rank statements and the approach, for example individuals based on past performance, through channels that included twice-weekly disciplinary records, and special skills, with years written communications. Although individuals of service as a final default criteria. Meanwhile, confidentiality was stressed and maintained, the the PMO solicited additional ideas to answer this organization as a whole recognized the need to question. Those determined to be low risk would articulate the decisions it was making and show be immediately implemented, with high-risk ideas its commitment to fairness. Role modeling by eliminated and medium-risk ideas adapted with a leadership played a big part in this. We needed mitigation plan to ensure accountability. to show enthusiasm and empathy, Posch said, In a day-long retreat, 100 leaders from across to take ownership and accountability for the the organization met to review the ideas, which process. were posted on a board so that concerns could The process itself was grounded in activity value be visually attached to it. This process gave analysis. The PMO and department managers people who were using or purchasing a unit, worked together to define work units that would such as pharmaceutical services, an opportunity be affected by staffing decisions. Much of this to comment and organized feedback for the followed, but was not bound by, the chart of PMO. According to Posch, a number of ideas accounts. Teams were encouraged to construct were kicked back to submitters because these unit definitions based on actual job functions, and suggestions failed to identify risk and lacked a Vanderbilt ended up with 450 units, which were mitigation plan. You just can t throw FTEs in the subdivided by job code. pot and say we ll figure it out later. The PMO equipped unit leaders with tools to Finally, every proposed change was reviewed by identify all jobs and work by mission, activity, and EEO, affirmative action, and disability services end product, then map the people in the unit to specialists as well as Vanderbilt s legal and risk their actual work products and activities. The PMO management teams, with penalty flags assigned also conducted quick organization-wide Lean to anything that needed to be discussed or 4
amended due to potential harm to patients or plans, separation pay, and ongoing payments for workforce principles. 20-24 weeks of outplacement assistance took place September 2013. We knew we needed to Results So Far take our actions as early as possible in the fiscal Swift strategic planning and timely year to get savings results later in the year, Posch implementation resulted in a positive year-end for said. Vanderbilt s fiscal year 2013. In the area of nonlabor reductions, an immediate Vanderbilt ended up identifying $120 million savings of $34 million and an additional $34 (1,500 FTEs) in labor reductions. Many of the million deferred to fiscal year 2014 came from activities to implement these reductions HR the supply chain specifically standardization of REDUCTION EFFORT, THOUGH STRENUOUS, WAS SUCCESSFUL Reduction effort, though strenuous, was successful Gap to Target Planned, Unmet Target Stretch Target ($ Million) 250 50 200 50 22.8 150 58 1.2 1 24 14 100 200 69 50 34 34 0 Non-Labor September Reduction October Reduction December Reduction January Reduction 5 Feb June Commitments Gap FY 2015 Savings Target
personal preference items, retail pharmacy, and, said that the efforts had pushed Vanderbilt to with the assistance of Deloitte, revenue cycle sustainable benchmarks and that future efforts improvement. will focus on ongoing work to improve the organization, such as cutting back on the cross- Overall, the initiative resulted in $180 million subsidization between Vanderbilt s academic and identified and implemented changes, with the clinical centers. bulk of implementation in fiscal year 2013 and the full run rate effect felt in 2014. The initiative also added new organizational capabilities to Vanderbilt among them, the idea We were able to manage the income statement of a PMO and PMO techniques that accomplish so we could make a little over $50 million and not large-scale change quickly without violating go into the red, Posch said. And we came into stakeholder wishes. this year with $70 million more of work to do. He From the Audience Q: Has this process adversely affected market position with payers and patients? A: Posch said that payers have been publically lauding what Vanderbilt has done and citing it as an example of what is possible in healthcare organizations. Meanwhile, patient satisfaction scores, measured through PRC quarterly rollups of data, had a non-stat dip but returned to where they were: Fives (the highest ranking) across the board from 75 percent to 80 percent of patients. Vanderbilt also conducts spot surveys of patient preference against major competitors. The organization remains the overall highest ranked, and some services rankings have even strengthened over time. Q: With leaders responsible for reduction ideas, how were they able to make recommendations for reducing leadership roles? A: Posch explained that the process was highly participatory, with the people who were affected including a fair number of higher-level middle managers all given the opportunity to go back into service. Those who chose to do so were given outplacement packages. As for job cuts, we openly talked about it, Posch said, and the people who were affected were not surprised at all. They knew we made the right decisions when all was said and done. 6
Q: Did the span of control and number of management layers change? A: As Vanderbilt reduced layers of management, which ranged from one to a couple according to Posch, authority levels were improved and the span of responsibility was increased. The organization also invested significant time in creating dashboards for oversight of performance and committed resources to management development and training. Q: Did Vanderbilt eliminate the governance elements that had been put on hold, or did some come back? A: Group meetings were sustained, with some governance structures being converted into consultative groups. The main changes were in the rules of decision-making. Now, as Vanderbilt stands up various programs, decision rights are clarified at the beginning with executives who are being given these rights. Q: How many Vanderbilt employees lost their jobs and was there any negative press? A: Approximately 500 people were laid off. The majority of the 1,500 total FTE positions that Vanderbilt eliminated were cut through early retirement, attrition, and manpower control. Posch said that Vanderbilt did experience some negative press because some of the impacted people were vocal about the situation and, with Vanderbilt s being the biggest employer in Tennessee after the state itself, the press was closely following what was going on. Because of our choice to be transparent, the press was picking up on this and running with it. They tried to put a spin on it sometimes that something was nefarious, and we had to counteract that. In such a situation, you need to have communication specialists, Posch said, and be careful not to let others define you. Q: How is staff morale holding up? A: It s difficult, Posch said. Right at the peak of the restructuring, Vanderbilt conducted a community survey, which generated over 60 percent participation. It asked questions like: Do you believe in the direction Vanderbilt is going? Do you understand what senior leaders are trying to do? Some survey results said that employees trusted their front-line manager but questioned cuts from upper management. While we were transparent, we talked more about economics than about our core mission, Posch said. Now we re trying to connect these dots a bit better. Now in the recovery phase, it s about us engaging a lot more with front-line managers and employees about what we re doing and why we re doing it. 7
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