Margin Shortfall Requires Improved Cost Management

Some people may wonder why it is important to make our margin target. Let me briefly explain. Our margin is how we fund and continue to reinvest in our clinical enterprise and support all of the missions of Stanford Medicine. Health care is an expensive industry, especially given the complexity of the care we deliver and the expensive location in which we deliver it. It is important that we continue to have appropriate margins to fund the future of Stanford Medicine, especially at a time when health care is going through such significant changes in terms of consolidation, and the shifting nature of reimbursement from volume to value.

The next obvious question is why did we miss our margin targets? There are two key reasons:

1. The shifting payer mix from commercial to governmental. This shift means that the overall revenue we make goes down because governmental payer reimbursement is not as high as commercial payers. And this shift is projected to continue for years to come due to demographic shifts in our area along with the programmatic changes that are taking place at the federal and state level.
2.  Our cost structure increased dramatically in the last year. This is due to increased salary costs to keep pace with the labor market, a significant increase in the number of people working at Stanford and increased costs of supplies.

We have done a lot in the last year to decrease our cost of supplies, identifying and implementing $50 million in savings through driving better contracts, reducing the number of suppliers and the variation of types of supplies. Those savings will continue to have a positive impact for us in the coming year, and we will continue to be aggressive about identifying and implementing savings opportunities in our supply costs for all types of goods and services.

The other cost driver we need to control is the continued addition of people. Too often we have addressed our problems by automatically assuming that we need more staffing. We must address first how we work, and how we remove the wastes from the system that consume our people’s time unnecessarily. We have to find ways to make the system work smarter, rather than compensating for a wasteful system by adding people.

We have an opportunity by targeting our focus on our cost structure to position Stanford for success for a very long time, and to be able to make changes in a smart way. It will take all of us, looking for ways big and small to make the system smarter, to reduce waste and to focus our resources on creating value for patients through the use of our Stanford Operating System. In this way, we are creating a sustainable change, and an environment that is driven by our values and not scarcity.

I have great confidence in our ability to take on this challenge. We have the best people in health care at Stanford, and this is our opportunity to provide a model of excellence in all dimensions of health care delivery.