Ryan Kitchell, the chief financial officer of the Indiana University Health hospital system, said there are at least three years to go in the hospital system’s efforts to adapt to the new realities in health care.

In the past two years, IU Health has laid off 935 people, halted the construction of a major bed tower at its Methodist Hospital, and sold off its occupational health clinics and decided to close its Bloomington proton therapy center—all part of an effort to cut out more than $1 billion in costs over five years.

There is more to come, Kitchell said Friday morning at IBJ's Health Care & Benefits Power Breakfast. Still ahead are plans to consolidate Methodist and University hospitals in downtown Indianapolis and develop new models for IU Health hospitals in smaller communities that will feature only ambulatory care.

“We’ve made some big steps and we’re going to make some other ones,” Kitchell said in an interview after the breakfast, which was hosted at the JW Marriott hotel in downtown Indianapolis. (Story continues after video below.)

IU Health is the largest hospital system in Indiana, based on its $5.3 billion in annual revenue. It operates 19 hospitals around the state, employs roughly 1,500 physicians and a total workforce of nearly 27,000 full-time equivalent employees.

In late 2012, IU Health executives went through training in the Lean Six Sigma methods of cutting costs by reducing variation in day-to-day processes. Those efforts, as well as staff reductions and facility consolidations, are meant to cut IU Health’s annual expenses—which were then nearly $5 billion—by as much as 25 percent over the ensuing five years.

“A few years ago, our costs were steadily increasing. They’ve plateaued and now they are declining,” Kitchell said. IU Health’s expenses in 2013 fell by 2 percent.

“We’ve still got a ways to go and some more tough work ahead. But really pleased with the progress we’ve made to date," Kitchell said.

IU Health is still deliberating over the planned consolidation of two of its major hospitals in downtown Indianapolis—Methodist and University—and where the consolidated hospital will be located.

“We have more capacity than we need downtown as care is moving from the inpatient to the outpatient setting,” Kitchell said, noting that Methodist and University sit less than two miles from each other. “By getting to a facility that would be more right-sized for the amount and the type of care that we’re providing, we can lower our costs and pass those costs [savings] on to our patients.”

IU Health officials said this summer that a group of physicians and administrators from IU Health and its partner, the IU School of Medicine, would make recommendations to the IU Health board this fall.

But Kitchell said IU Health is still trying to figure out what the new hospital should focus on, and only then would figure out when the consolidation would occur and where the consolidated hospital should be located. That could be at Methodist's campus, University's campus, or a new site altogether.

“It’s still early,” he said, but added that IU Health “would like to in a very timely basis try to make a decision and move forward with a new adult academic health center.”

In the smaller communities where IU Health has hospitals, it is trying to figure out lower-cost ways to care for patients. In Martinsville, Kitchell said, IU Health plans to invest millions to beef up its outpatient services, but end overnight patient stays.

“It will be an ambulatory site, where we will be doing a lot of outpatient activity, as well as still having all of the assets and benefits of IU Health across the system accessible for the folks in Martinsville and the greater Morgan County area, where you’ve got both Bloomington and our downtown physicians and hospitals within a very short drive there,” Kitchell said.

He described the changes at IU Health Morgan County Hospital as “our first big investment in an ambulatory care model that we will look at across the rest of the state and see where else there are communities where that makes sense to do.”