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Could You Save $3 Million By Putting Your Budget on a Diet?

Karen Minich-Pourshadi, for HealthLeaders Media, April 19, 2010

Budgeting is a lot like dieting—no one likes to do either, but most of us know there is value in taking action when we've gone astray. What makes dieting hard is know what to cut and what not to cut and the same is true when it comes to lasering in on where the fat is coming from in your own hospital budget.

Think of your budget a bit like the food groups, labor is the protein; while it has some fat, ultimately you need it for your body's overall health. Then there's technology, which are your carbohydrates—they fuel other initiatives and give the organization a quick boost of energy. Not unlike how carbs are in our own bodies, if you get too many you just get fat. Fruits and vegetables are your supplies—you really can't live without them, but they are costly at the store, so you need to pick and chose which ones you really need.

Then there's the dairy—who doesn't love cheese and ice cream—these are your non-tech capital projects. Your organization needs them, but not too much or too often. Lastly are your oils, fats, and sweets—these are your special purchases, conferences, travel budgets, etc.—they have their purpose, but they should be used sparingly and monitored rigorously.

Unfortunately, like our own diets, we often get fat on the areas that we think are keeping us fit and sometimes the areas we thought were making us fat, like labor costs, aren't necessarily the ones that should be trimmed. Last year, 215-bed Floyd Memorial Hospital in New Albany, IN, went on a diet. They implemented a non-salary cost reduction and clinical quality value analysis initiative that helped it save nearly $3 million in 18 months. Now that's a great budgetary weight loss plan—slow and methodical.

Along with their teams, Ted Miller, CFO and vice president at Floyd Memorial, and Dee Donatelli, Vice President at VHA Inc., an Irving, TX-based cooperative that works with 1,400 not-for-profit hospitals and 24,000+ non-acute care facilities, reviewed best practices and examples from other organizations, and utilized their existing technology tools and gathered analytics to identify the additional $3 million in cost-savings.

"When we began doing financial forecasting one of the things that drove it was benchmarking. You start to look at where your opportunities are in labor and supplies," says Miller. "We worked with VHA to do a global spend analysis to see if there was an opportunity to launch clinical quality analysis and reduce supply expenses."

Rather than slice staff to reduce labor costs, Miller and Donatelli looked at process improvement and supply chain. Donatelli says the CQVA was designed to establish a process that works with the hospital's culture to teach staff how to shave costs in the supply chain operations process without affecting quality. They also look at benchmarking and productivity measures to bring down labor costs.

"Every place I've ever been says they do a value analysis. My challenge to get them to realize who's responsible for supply chain management—it's everybody's job," says Donatelli. "You have to engage the staff at all levels, because ideas can come from anyone from the physician to the housekeepers. Hospitals are still very wasteful."

It's staff and stuff that make up the cost for a hospitals, so Donatelli says if your staff becomes better stewards of your stuff then you won't have to cut staff to keep costs down. At Floyd Memorial the process engaged physicians to align their goals with the hospital's—an area that many experts believe will be the key to the successful implementation of any alternative payment structures, such as bundled payments. Floyd Memorial also focused at the executive level on identifying opportunities to improve the hospital's position in a very competitive market (consider that exercise for the occasional overindulgence) to ensure success.

"We used a Thomson [Reuters] system in order to do labor productivity monitoring on both the organizational and departmental levels and used a tool to compare by department how productive we are against our peers," added Miller. "In terms of savings, we have reduced our expenses, but we have also reset them—so there may be some areas you want more resources or key service lines we want to focus on and this helps us put our resources are where we want them to be."

Donatelli says that the goal is to get the hospital to use the most economical process and then work with the doctors to ensure they are being good stewards in standardizing. VHA encourages hospitals to focus on their cost centers and then take them all and group them onto about six teams (e.g., ambulatory surgery and various labs may be under perioperative). "By doing this we can calculate exactly how much the team spends on the total supply pie," she says.

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