Because of the already high cost of healthcare in the US and changing reimbursement programs across all payer types, understanding and controlling the unit costs of services is now a major focus for healthcare systems across the country. Healthcare organizations are constantly looking for ways to optimize the cost of services without impairing quality or access, particularly when it comes to technology. This is because most healthcare providers subsist on very lean one-to-three percent operating margins and preserving even those margins against inherent wage and supply cost inflation makes a healthy cost conscience no longer optional.
To counter these trends, the University of Pittsburgh Medical Center (UPMC) is using TBM to rein in costs of a sprawling IT infrastructure that supports 40 academic, community, and specialty hospitals, more than 600 doctors’ offices and outpatient sites, and a portfolio of health insurance companies with more than 3.5 million covered lives. They’ve recently expanded overseas into Ireland, as well, following more than twenty years in Italy where UPMC operates a specialty hospital and other clinics.
“Studies have estimated that almost 30 percent of the cost to deliver care is administrative overhead,” said Paul Matthews, Director of Finance for UPMC Information Services. “Lowering that comes from bringing transparency into costs, enforcing controls, and making better decisions around how we deploy our administrative resources to make sure that it’s always in the most cost-efficient manner, that it’s always delivering value to our ultimate customers, which is our patients. As we lower the cost to deliver technology and other shared services, we lower the cost to deliver care, even if its indirectly.”
As we lower the cost to deliver technology and other shared services, we lower the cost to deliver care.
Director of Finance, UPMC Information Services
Because the constantly rising cost of healthcare is unsustainable in the long run, UPMC’s overarching mission is to be intentional with the actions required to reduce cost without impairing the quality of care or access to it. Based on the numbers, they are succeeding. Since adopting TBM three years ago, the IT team has managed to keep its budget flat even though, in the past 12 months, the company has expanded with the acquisition of seven new hospitals and enrollment of more than 200,000 new customers across its health insurance portfolio.
“We are a growing organization that continues to thrive at one, two, three percent margins,” said Dean Owrey, CFO for UPMC Enterprises and UPMC Information Services. “The cost of IT one year ago was virtually the same as it is today—in spite of all of that massive change in the complexion of this organization. It’s essential that we have a healthy cost conscience, and that we run the business of technology inside our organization like we would if it was our only source of economic survival.
“One year ago, for the first six months, our operating costs were $215 million. Today, for the same six months, they are $217 million. That is a less than one percent increase year-over-year. Yet, we have to pay our people more this year than we paid them last year. In many cases, we have to pay our vendors more this year than we’ve paid them last year. We are supporting a larger network than we have ever supported.”
The other factor severely limiting healthcare providers’ ability to wring more margin out of the services they provide is the industry’s move away from a cost-plus reimbursement model, and the rapid emergence of the patient as the customer. In years past, a hospital system like UPMC could rely on certain payers to cover the increased cost of providing care year-over-year. That is no longer the case. The entire industry is being transformed from a volume-based to value-based business model and expected to provide equal or better service at a more affordable price.
What this means is healthcare providers today must manage the financial health of their operations with a keen focus on cost drivers. They must understand the unit cost of delivering services to identify performance and cost variability, to isolate key drivers of cost, and manage them wisely since they can no longer pass along price increases with impunity or certainty.
“Having spent much of my career working with clients across different sectors, many organizations understood the components of their cost structure in ways healthcare organizations haven’t,” said Owrey. “They clearly understood the cost of manufacturing a product because they had a clear line of sight into what a customer would pay for the product.”
“But many also had a more advanced understanding of the business activities supporting their business, including the cost of running technology, finance, and the supply chain and procurement functions. That wasn’t really the case in healthcare. We’re not like the banking industry or the retail industry where they’ve been hyper-sensitive to unit costs. Ours is just beginning to become sensitive to unit costing, because in the transition from a volume-based to value-based business model, ultimately the patient and insurer will care to know what the cost is.”
IT optimization: the beating heart of cost savings
UPMC has relied on TBM to help manage this transition for the last three years. But it’s only been in the last 12 months that any report generated on the cost or value of IT must be populated with consumption data from the TBM management system. The metrics UPMC track include application cost per user, storage cost per terabyte, server cost per CPU and/or RAM, and labor cost per application.
Making these costs transparent means IT finance can flip the conversations they have with the business from “IT is too expensive,” to “how their consumption of technology is driving those costs.” This level of cost transparency raises awareness of IT’s capacity restrictions catalyzing trade-off conversations to prioritize business demand. Also, it allows IT to show everyone what run-the-business spending versus change-the-business spending actually looks like.
“By leveraging the TBM framework, we’ve finally been able to share our application data with our customers who are doctors, nurses, and other executives at UPMC who do not reside within our IT organization,” said Shireen Thomas, staff associate to the CIO. “And that is so powerful because it enables us to make business-driven decisions in partnership with our customers about the applications and what really would make sense to rationalize and retire. Before, it was just an IT conversation.”
Because conversations are changing, so are the results. Over the past 12 months, UPMC IT has retired more than 70 applications—taking over $7M of annual maintenance costs out of the budget. In a low-margin business like healthcare, this number is actually much greater than it first appears.
“If you divide seven million by a two percent margin, the economic equivalency of that is a couple hundred millions of dollars of new revenue,” said Owrey. “Five years ago, we would not have been able to tell anyone how many applications we retired because our data gathering in the general ledger would not have allowed us that level of insight. We could have guessed at it, but we wouldn’t have been able to put a name to the individual application and the associated maintenance that we had paid for it.”
Infrastructure is similarly tracked and reported. UPMC IT collects infrastructure cost-for-performance data on their server and storage environments by tracking network, data center, security, and storage costs to develop a TCO of computing costs, which is then tied to applications running on-premises.
This level of insight and ease of reporting enables IT’s infrastructure managers to quickly illustrate the cost of computing for finance and business operations leaders. In a recent cost productivity forum with its finance leaders, for example, UPMC’s CTO used storage insights to illustrate the dramatic efficiencies achieved in storage costs due to compression software. This made it possible for all parties to have a mutual understanding of the business solution proposed and fruitful discussion of the trade-offs involved.
PPM and TBM: The sum is greater than its parts
Prior to the TBM model and management system, UPMC attempted to do TBM using a combination of management techniques and tools, including project and portfolio management (PPM) software. While effective at tracking hours and managing projects, this did not give them the cost transparency they needed to align IT’s activity with the business demand from which consumption and cost originate, and because it didn’t tie into the cost pools from the trusted source of financial information, the general ledger. UPMC notes that it believes it is the only non-profit healthcare organization that annually subjects itself to the rigors of the Sarbanes-Oxley regulations, receiving an auditor’s opinion on the effectiveness of its internal control over financial reporting.
“Back in the fall of 2015, when we decided to make an investment in the TBM management system, we were already practicing much of what you call TBM,” said Matthews. “In planning for an era when we knew there would be increased demand on information technologies amidst those sustained economic pressures we’ve spoken about, we were motivated to launch the PPM initiative. And we did it two-and-a-half years before we got involved with the TBM Council. But we had to implement the TBM system because we needed to take custody of our capital demand cycles, leverage our time management opportunities, and then get deep insights into the application portfolio that we were running.”
Today, UPMC is able to tie the costs of new projects to the general ledger and then map those costs up through the TBM model to the business units and end users requesting them, and then marry that data to existing consumption numbers by those BUs. This enables IT to prioritize their resources so they are working on the right products at the right time instead of just taking orders on a first-come, first served basis.
The tie between PPM and TBM fuels and facilitates our ongoing governance around the allocation of IT resources and the consumption of IT.
CIO, UPMC Cancer Centers
“The tie between PPM and TBM is actually what fuels and facilitates our ongoing governance around the allocation of IT resources and the consumption of IT,” said Scot Stevens, CIO of UPMC’s cancer centers. “We do that across both new projects as well as ongoing support and assets so we can categorize and sort on where most of the costs are going. I can compare similar-type applications with the support footprint for another or new application and ask, ‘How much is it costing us versus this application?’ So including the PPM data set as part of your TBM strategy is absolutely essential.”
Success breeds success
With all of the success they’ve been having in other areas, the next step for UPMC is to apply TBM to their vendor management model to uncover similar, across-the-board insights into their vendor landscape, tying together cost, consumption and performance health of third-party applications, to strengthen its vendor management.
Like most major organizations, they are also in the process of migrating certain applications, storage, and infrastructure to the cloud. TBM is proving invaluable in understanding the difference between running these things in the cloud compared to on-premises or co-location data centers.
“What we found is, the recurring effort of IT people to constantly address and embody a cost-conscience, cost-containment set of principles kept revealing our shortcomings,” said Owrey. “We didn’t have the right financial management practices to do this in a very nimble, timely, responsive way. And we kept getting exposed because we had no efficient, defensible transparent way to associate the costs of technology—even as our industry became more technology and data dependent. We had no way to associate the cost of that back to the myriad applications and the services we were rendering across our growing organization. And we said, ‘Enough is enough. We’ve got to stop trying to swim against this current. We’ve got to put a tool in place.'”