By Robert W. Yokl, Sr. VP, Supply Chain & Value Analysis — SVAH Solutions
Since hospitals have been asked to temporarily shut down primary revenue sources of their operations, such as major elective surgeries, they will need to reduce costs to the lowest possible levels while regaining their bottom lines. Here are just a few ways that I would recommend this be accomplished:
1. Set Up a Fast Track Value Analysis Savings Team(s): Most healthcare organizations’ value analysis programs run on a committee model, whereby most of the work is done by value analysis managers and supporting supply chain staff. We suggest that this cost reduction initiative switch to the team model where every team member is assigned a project and the VA manager and supply chain team will support them through their projects. This will greatly expand the number of projects for each team. You could have 12-15 members on a team, and if you have multiple teams (i.e., General Medical VA, Surgery VA, Support Services VA, etc.), you could have 30-50 projects going at once! The more projects you have going, the more you will save.
2. Stop All New Product Requests During Your Savings Initiative: Our studies have found that new product requests can add as much as 1% to 3% to your annual supply budget. If you put new product requests on hold (until your bottom line is in order), you can restart them later when the timing is right. You can then move the resources and staff that normally work on these new product requests to your cost management value analysis teams.
3. Spin Up Everything: If you are going to engage in an organization-wide savings program, you don’t want to leave any sacred cow untouched. You should have initiatives to go after everything from capital to supplies to purchased services. Capital may be the biggest sacred cow, as you already have a process in place and committees that vet these requests every year. However, that does not mean that they should not be vetted again for cost avoidance purposes by your value analysis team. This can be done quickly and efficiently by having team members look to see if there are any lower cost alternatives or have a bid sent out. Sixty to eighty percent of the time you won’t find anything, but given the large dollar value of capital spends, it’s worth finding savings in the other 20% to 40%.
4. Fuel Up the Savings Pipeline to Over 120% of Your Savings Goal: Any cost savings initiative is only as good as what you are investigating and put on the agenda of your value analysis/cost savings team to work on. Go in knowing that the 80/20 rule applies. When looking at 100% of the projected savings, know that 20% of those savings may not stick for various reasons. The key to these major initiatives is to have over 120% of your savings dollars identified up front so that you can first feel confident that you will meet your goal. Second, you will offset the dry holes that you may come across due to customer, contractual, or operational issues.
5. Benchmark the Utilization of Your Supplies and Purchased Services to Best Practice Low Levels: The best way to avoid dry holes is to cue up savings opportunities that you know will show the most realistic savings possible for your teams to work on. The best tool I have utilized over my 27+ years in the healthcare supply chain is to benchmark all of your supply and purchased service categories to see where you stand. You can do this by comparing historically or you can benchmark with low, mid, or high ranges of a cohort if you have access to cohort utilization benchmark data. By benchmarking, you will be able to establish savings ranges for each of these categories. By knowing the savings range, you will be able to manage these projects much better because you will know whether the VA team or project manager has done their job to wring the towel dry on savings for that category.
6. Get Your Spend/Utilization Data in Order Now: There will be an initial challenge that we will face with utilizing data from March 2020 to the end of the pandemic. This is because it is not realistic to utilize that spend data. This data is highly distorted due to a higher focus on PPE and little or no focus on surgical or procedural products that are normally used. I would recommend that you use data prior to March 2020 as your baseline end and trend back to March 2019 to use as a base period for your annual comparisons. You can then go back and look at your data during that period or look back to the prior year’s data if you are looking for annual, quarterly, or monthly trend data to use. There is still good data to use to reduce costs, but you must have it all in order and ready to use.
7. Look Inside Your Existing Contracts: You might look at a major category of high dollar purchases and find that your contract does not expire for another two or three years. If you are only looking to reduce costs on price, then of course you would need to move on. However, you can look inside those contracts for lower cost alternatives at any given time that can reduce your costs dramatically. Ninety-nine percent of my recommendations to clients are contract-friendly recommendations because as an outsider, I cannot possibly recommend a client change contracts or anything to that effect. Although, I do recommend adjustments to areas of waste that need fixing and value mismatches that occur in just about every major and minor contract category.
8. Don’t Underestimate the Power of Setting Savings Goals for All to Know: I worked with an organization that wanted to reduce their non-salary operating costs to keep their bottom line healthy while in a major building program. Their supply chain leader put in place a savings goal of 40 million dollars over a one-year period for this initiative. If this leader had just formed their VA teams and told everyone to go save as much money as they could, do you think they would have met that goal when prior to this there was no goal in place? The answer is no. Supply chain leaders need to set goals for their teams that are realistic, achievable, and most importantly, trackable through your savings initiative.
9. Savings is Savings Whether Short or Long-Term Savings: VA/Supply chain teams will inevitably find both short and long-term savings. We typically want more short-term savings that can hit your bottom line immediately. I would like to defer to one of my boss’s (Robert T. Yokl, CEO, SVAH Solutions) mantras when we find long-term savings for our clients while we are predominantly trying to save in the short term: “Hey that hospital needs savings next year, too!” This should be your view as well.
10. Don’t Depend on Price – Look at Total Cost: For the most part, hospitals and health systems had been ratcheting down their costs and engaging in price savings initiatives with their group purchasing organizations on an ongoing basis. This is not to say to not continue with this engagement, but the fact is that many organizations were on the downward savings trend on these types of initiatives. They were already achieving the lion’s share of savings before the virus hit. Now, most manufacturers of products (except for standard PPE and other hospital staples such as IV sets and solutions) have had their sales/revenues dramatically reduced with the surgical/procedural curtailment as well. I predict they will be sheepish with their offerings of new price savings further than they have already given to date for at least the next year. Look to savings beyond price which can save you as much as 7% to 15% more than you are saving now.
11. Give Supply/VA Teams the Tools to Save: You had some sort of savings program on an ongoing basis prior to the coronavirus pandemic. Take stock of what you have in-house as far as tools to streamline and speed up savings opportunities for your organization. Remember, if you want your team to save on utilization beyond price opportunities, you need to give them tools to help them find, track, and save as fast as possible. If they must start from scratch, that will cost you valuable dollars, and most importantly, time that you don’t have. Buy, borrow, or create systems/tools and implement them as fast as you can for your supply/value chain teams.
7% to 15% of Utilization Savings from Supply Budget Prior to Covid-19 is Still On the Table
It goes without mention that hospitals will undeniably need to have their full revenue sources back online and operating at 100% which will certainly aid in their cashflow. Unfortunately, that will not be enough because they have lost so much from March to the end of this pandemic. Interestingly, before the Covid-19 pandemic hit, we estimated that the majority of hospitals and health systems had a savings opportunity of 7% to 15% of total budget in additional savings from supply and purchased service utilization (savings beyond price). Most organizations did not have formal utilization management and reduction programs in place which leaves a big opportunity to use utilization overruns, waste, inefficient use and value mismatches as a means to a healthier bottom line.
The best part about being in the supply/value chain world is that every dollar we save goes right to the bottom line as opposed to new revenues which have to trickle through the operations of the organization. We have a huge opportunity to wring the towel dry in the non-salary areas of our operations in order to make our hospitals’ bottom lines healthy. We can help protect employees’ jobs, bonuses, and even future raises. Clinicians have bore the brunt of the Covid-19 challenge to date, but it will be supply/value chain who will return your bottom lines to where they once were, or even better!