Taking On the Cost Drivers

Karen Minich-Pourshadi, for HealthLeaders Magazine , June 9, 2010
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In terms of clinical technology, he suggests that hospitals do a cost-benefit analysis to see whether they genuinely need the latest technology. "We tend to get caught up in the idea that the technology is the strategy, but it's not. If it could be a competitive advantage then those results should be measurable and looked at," he says.

James F. Doyle, senior vice president and chief financial officer of the 330-staffed-bed Elmhurst (IL) Memorial Healthcare, agrees. Seven to eight years ago, he says, imaging was taking off, and with so many improvements coming out frequently it was unlikely that a facility would utilize the imaging technology until it was functionally obsolete. "Doing that wasn't a winning strategy, so you looked at leasing sources," he says. However, while having the latest technology is attractive, leases are often much more expensive for facilities than purchasing.

"For a large medical group it can be a critical source of income, so you have to weigh that in. Still, you have to be careful in your planning and look at the demand before you get into a fixed lease arrangement," he cautions.

Cost Driver: Supply chain
On average, supply chain expenditures comprise between 20% and 50% of the total cost of care budget. It's safe to say that during the past decade, many healthcare providers became somewhat careless in their spending. From basic medical and office supplies to capital equipment, many facilities overlooked opportunities to reduce costs. The culture didn't advocate economizing, accepted a lackadaisical attitude toward renegotiating vendor contracts, and tolerated poor utilization of supplies and pricing transparency.

Clarke explains that supply channels often tie up much-needed capital and can be a huge financial noose on the budget. In 2008, it became evident to some hospitals that having fully stocked supply closets with products that sit for extended periods of time was wasteful and inefficient, and they began tracking supply usage more closely.

They also began comparison shopping. But pricing transparency is perhaps one of the most challenging and costly impediments to taking supply chain costs down.

Physicians may make purchase recommendations without understanding the financial impact. Further, the nondisclosure agreement (or gag clause) hospitals generally agree to with vendors on the physician's behalf make pricing unavailable and thus nearly impossible to gauge a product's effectiveness versus cost.

Steering toward solutions
Finding the wasteful pockets in your supply chain is relatively easy once healthcare providers accept that plugging them has a great deal to do with cultural change as well as contracts.

Effective storage
Lean and Six Sigma are heralded by many as the swiftest way to gain ground on your supply chain expenses. The 250-bed Seattle Children's Hospital uses a modified version of the Toyota Lean Process Improvement called Continuous Performance Improvement and saved space and supply costs when it built a new facility.

The team analyzed supply usage data for each service to determine the exact size of the supply closet based on the historical supply data—thereby eliminating the need for large supply closets. Not only did this save on supplies, but the extra space was used for revenue-producing exam rooms.

GPOs great and small
A 2009 study funded by the Health Industry Group Purchasing Association surveyed 28 healthcare systems representing 429 hospitals and estimates that the healthcare industry saved $36 billion on price using group purchasing organizations and another $2 billion in human resource savings.

"We buy our pharmacy on GPO; it's critical for us," says Evergreen Hospital Medical Center's Yamada. For the most part, the hospital uses GPOs the way many providers use them—for bulk pharmacy purchases.

Using an established GPO is just one avenue. Some hospitals are creating their own GPO-type agreements with vendors and finding the savings are even better because they cut out the middle man. Smaller, nonaffiliated hospitals in the same geographic area are collaborating to purchase supplies and save money.

Review contracts
It's simple but effective. Every supplier contract should be reviewed annually and, when possible, benchmarked. "You have to look at where the biggest costs are and decide whether you are really getting the best price," says Yamada. "You can move to a new vendor and save $400,000 a year on one supply—it's worth it."

At Lee Memorial Hospital, implementing systemwide product standardization yielded huge cost savings, says Wiest. A supply management team reviewed and assessed equipment and selected items that proved the best value in terms of quality and cost. For instance, the team's analysis of products showed savings ranging from $3.4 million in orthopedic implants to $15,820 in baby powder. Once the team had reviewed all items, standardization saved over $5 million.

The main impediment for complete standardization is a lack of price transparency for physician purchase recommendations. Getting past the transparency issues requires improved communication with physicians to get consensus as well as to educate the physician on the financial ramifications of their recommendations. However, while three in four hospitals employ value analysis committees, less than half of the facilities include physicians on the panel, according to a 2009 survey conducted by Materials Management in Health Care and the Association for Healthcare Resource & Materials Management.

Once Appalachian Regional Healthcare System completed an organizationwide deployment of a preconfigured enterprise software package, the hospital enhanced its human resources capabilities and improved integration between its financial and supply chain processes. In doing so, it automated its supply chain, financial, and patient billing processes and connected them with chargeable patient supplies. All of this helped Appalachian more accurately capture supply usage and report patient charges, says Prescott.

"We were writing off supply chain inventory costs of several hundred thousands of dollars at the end of the fiscal year, and the year prior it was several hundred thousand dollars also. With the new system and processes in place, we went from several hundred thousands of dollars down to improving charge capture at the end of the first fiscal quarter to $80,000 to $100,000," he notes. "We just weren't billing for a lot of charges and a lot weren't being collected, and now that we have this technology it allows us to keep track of everything—where we were bleeding now we can look to start growing."

Overall, our experts agree that healthcare providers who are seeking innovative solutions to deal with cost drivers in their labor, technology, and supply chain need to begin by examining their culture. Cultures that support and encourage a cost-saving approach to their operations tend to find savings more readily and will be able to sustain a more thrifty approach in the years to come. Moreover, healthcare providers that have a willingness to work with other neighboring facilities are finding some of the largest, long-term budgetary savings.

Karen Minich-Pourshadi is senior finance editor for HealthLeaders Media. She may be contacted at kminich-pourshadi@healthleadersmedia.com.
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