The 4 biggest mistakes in your cost reduction initiative

America spent close to $3 trillion on healthcare in 2014, according to the Center for Medicare and Medicaid Services.

It's estimated that over a quarter of that – $765 billion – was lost due to inefficiency, redundancy, errors and overutilization.

Hospitals and healthcare groups have recently turned to cost reduction initiatives to recoup losses and prevent more unnecessary waste. These cost reductions focus on getting to a better bottom line, but if you aren't avoiding the four biggest mistakes, you may be putting your cost reduction initiative at risk.

1. You are focusing on the wrong spend areas.

When the issue of cost reduction is presented, Executives primarily look at their biggest expenditures. In hospitals and healthcare systems, this lies in the form of labor. Personnel costs represented 54.2 percent of hospital operating costs in 2012, according to Fitch Ratings.

Unfortunately, the implementation of labor cost reduction can cause widespread negativity throughout hospitals. In addition to adverse effects from laying employees off, labor cost reduction may lead to a drop of employee morale. This resulting underperformance often manifests itself in job insecurity, low productivity and, in some cases, a decline in patient satisfaction.

As a result, hospitals must revisit the hiring process to replace positions, which ultimately results in even greater expenses. By focusing on purchased services, supply costs, utilization and elimination of waste hospitals can avoid reducing labor costs.

2. You aren't involving the entire hospital.

Cost reduction initiatives too often begin and end in the Chief Financial Officer's office. Unless cost reduction efforts are seen as a hospital-wide endeavor, they won't produce significant savings. Costs are incurred everywhere in a hospital, in every department and office. Luckily, savings can occur everywhere, too.

Involving staff from across the entire hospital can help CFOs and other financial personnel to better understand hospital costs and potential opportunities for savings. Everyone from the purchasing department to physicians to parking attendants should be invited to participate in cost savings initiatives through an employee suggestion system. Involving the people who work at your facility every day will help identify where efficiency can be improved and waste can be eliminated. Ideas from staff at all levels can also help to improve overall quality and safety of your facility.

3. Assuming you can't negotiate recently signed contracts.

Contract negotiation can seem like a deadlock, especially when many contracts have recently been signed or renewed. You may feel bound to existing terms when expiration dates are several years away, but this is not an assumption you can afford to make.

All contracts, whether signed yesterday or the day your hospital opened, should be reviewed for savings opportunities. Cost reduction goes beyond traditional re-negotiation periods, and can come in the form of contract extensions, price reductions, changes in volume, expired products or errors in billing or term. Many errors or changes can be negotiated as credits, which save your hospital money over time.

A reliable system should also be put in place to notify you of upcoming contract re-negotiation deadlines, so you can stay ahead of expiring terms and avoid the trap of automatic resigning.

4. Containing your reductions inside your hospital.

Cost reduction initiatives often seem like a single-facility job, but focusing only on your own territory can lead to missed savings. Extending beyond your own borders can take a variety of forms that lead to new savings opportunities.

First, building bridges with other hospital executives can lead to better understanding of cost variability, and can help ensure your contracts are on target. Also, benchmark pricing can also be found through external research, and can vastly improve your negotiating power. Finally, external consultants can bring a fresh perspective to your operations, and can help identify areas for savings that may have been previously overlooked.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

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