Your hospital costs aren’t as fixed as you think: Uncovering hidden savings

With the costs of pharmaceuticals ever on the rise, recent cuts to the 340B Drug Discount program, and a disturbing lack of transparency into the fairness of contracts between provider and payer and provider and vendor, there are many items taking a chunk out of health system margins.

As if that isn’t pressure enough, Kaiser Health News reports that 2,573 out of 3,241 (80%!) hospitals will face penalties in FY2018 due to missed readmissions targets. It seems that patients and providers are expected to bear an increasingly large burden of the cost of care in our system. It would be easy for hospital leaders to become disheartened or burned out with these seemingly insurmountable obstacles. At times, it seems as if a large portion of costs are fixed, or at least cannot be reasonably controlled. However, as you will discover, there is still blood in this turnip.

You already know that medication costs, diagnostic tests, and surgical procedures are some of the biggest pieces of the pie in terms of cost, but there are other areas of expense—and opportunities for savings—that you and your leadership team may not have even considered.

“In 2016, the United States spent nearly twice as much as 10 high-income countries on medical care and performed less well on many population health outcomes,” according to an article published in March 2018 in the Journal of the American Medical Association (JAMA). “Contrary to some explanations for high spending, social spending and health care utilization in the United States did not differ substantially from other high-income nations. Prices of labor and goods, including pharmaceuticals and devices, and administrative costs appeared to be the main drivers of the differences in spending.”

Understanding Costs
Whether it’s built in house, or more commonly, an off-the-shelf product, most US health systems have invested in the necessary cost accounting/decision support technology to support cost containment goals. However, software acquisition is just the beginning.

During implementation, the software must be properly configured to reflect your health system’s operations. To arrive at the true drivers of your overhead costs, several methodologies are utilized, including analyzing financials, interviewing managers, observing units, and reviewing fixed asset reports. Essentially, questions are asked that result in a deeper understanding of the cause-and-effect relationship between costs incurred and activities performed. During this process, it is essential to find out the cost of each activity, as well as which activities are not value-added.

Technology investment alone will not result in ROI and can be analogous to ‘retail therapy’ when not paired with meaningful strategies aimed at decreasing costs. Therefore, post-implementation is where the real work (and real value) occurs. A well-designed and well-configured software may transition you from collecting data to analyzing information, and good reporting capabilities will even graduate you to deriving insights from this information. However, no form of software analytics—whether historic, predictive, or prescriptive—is capable of the seismic shift from insights to action. That is an exercise for flesh-and-blood human beings, and is dependent upon our applied levels of expertise, change management efficacy, and creativity. Once you understand what is driving your overhead costs, these costs can be further broken down by utilization and price, and addressed accordingly. During cost reduction initiatives, updated costs should be compared to previous periods to measure for effectiveness. This is an iterative process that should be revisited at least yearly.

Hidden Opportunities
According to the JAMA study, “Administrative costs of care (activities relating to planning, regulating, and managing health systems and services) accounted for 8% [of healthcare spend] in the US vs. a range of 1% to 3% in the other countries,” including the United Kingdom, Canada, Germany, Australia, Japan, Sweden, France, the Netherlands, Switzerland, and Denmark. “For pharmaceutical costs, spending per capita was $1443 in the US vs. a range of $466 to $939 in other countries.”

In a hospital or health system, there is a strategic focus on labor productivity and cost management; however there are three other areas in which large expenditures can be found (See Figure 1):

Patient Costs—This is the area where you expect to be hit hard. It includes pharmaceuticals and diagnostic tests, but also medical equipment and supplies, lab supplies, dialysis services, and other materials associated with patient care, from gurneys to gloves, from CT machines to cotton swabs.

Administrative Costs—These are the costs that keep the back-end operations running smoothly, including telecommunication, bank fees, merchant fees, insurance, IT, and even office supplies.

Support Costs—This includes laundry and cleaning services, regulated medical waste, the cost of food and food services, and maintenance of durable medical equipment.

These types of cost are largely considered fixed. However, with targeted expertise and analytics, there is an opportunity for improved pricing without sacrificing quality or service levels. To reduce these costs and improve your margins, you must look for savings in one of its three forms:

• Avoid spending on a particular product or service altogether
• Use less of a product or service
• Acquire a product or service at a lower price

It’s especially important in healthcare to remember that savings is not about looking for the lowest cost—it’s about cost versus value, and making sure that you can achieve savings while still meeting or exceeding your service requirements and maintaining quality care delivery. Cutting corners to save on costs in healthcare is a dangerous game, when patient outcomes and quality of life are on the line.

Figure 1: Healthcare Spend Opportunities


“The health systems come to us because they face a combination of diminishing reimbursements from insurers, increases in supply and pharmaceutical costs, and increased labor costs,” says Becky Kalinowski, PhD, Senior Principal Consultant at Expense Reduction Analysts. “They ask if we can lower supply costs to offset these increases. Other times, clinics and physician groups acquire a new group or location, and ask our help to integrate the facilities and develop the best costs portfolio for a merged formulary.”

Kalinowski recalls some healthcare clients whose savings opportunities stand out to her. “We reduced one health center’s expenses by over $500,000 a year. That allowed them to open a new location to better service their underserved population. We also helped one physician’s group realize six-digit savings, which offset capital expenses needed for their new electronic health record,” she says.

Sometimes, Kalinowski says, savings can come from the most unexpected of places. “We worked with one clinic that was spending $30,000 a year on lollipops and stickers, ordering these supplies through their medical distributor. We suggested purchasing these through Costco and they saved $20,000 per year,” she recalls. “Often, we discover through line item detailed evaluation that sites may be purchasing office or janitorial supplies through their medical distributor, and we re-align their purchases with the correct supplier to minimize costs. By generating a baseline, we can show execs exactly where their money is being spent by location, category, and supplier. This leads to many eye-opening experiences.”

Taking Control of Overhead Costs
Many hospital CFOs and other leadership often feel helpless about these types of overhead costs. You’re already so busy focusing on the patient care side of things; you’re understandably not an expert in getting the best deal from a food service vendor, and all these costs are necessary and fixed, anyway, so what could you possibly do about it?

Knowledge, of course, is power, and knowing how much of your budget these costs are eating up is half the battle. Once you know, you can become empowered to act, and look for opportunities for savings.

“Prices of labor and goods, including pharmaceuticals, and administrative costs appeared to be the major drivers of the difference in overall cost between the United States and other high-income countries,” JAMA researchers concluded. “Efforts targeting utilization alone are unlikely to reduce the growth in health care spending in the United States; a more concerted effort to reduce prices and administrative costs is likely needed.”

One way to work towards improvement in this area without overextending yourself is to look to outside consultants and experts to show you where you can save. When you do, you’ll find that these costs are more variable than you think. Often, such experts have direct relationships with food vendors, maintenance service providers, and so on. Their job is to focus on relationship building with these vendors, speaking with them on a weekly or even daily basis to negotiate the best price vs. value option. Such consultants will have a more granular view of these types of ancillary services, as well as the time to develop a depth and breadth of understanding in these areas that hospital leaders don’t have.

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