Incremental savings have their place — but if your healthcare organization is serious about achieving breakthrough, triple-digit savings, you need a structured cost management system.
No healthcare organization can continue doing things the same way and expect different results. To thrive in today’s complex healthcare supply chain environment, leaders must move beyond surface-level efforts and commit to building a plan for savings. Minor cost reductions won’t deliver the savings you need.
Don’t Settle for Small Gains
You can’t afford to settle for small annual gains that barely keep your organization’s head above water. If you’re passively waiting for change to work in your favor, think again — disruptions are almost constantly entering the healthcare supply chain.
Rethinking Where Profits Will Come From
Many healthcare organizations place their bets on new products or services to drive profitability — but the data tells a different story. The majority of new product and service launches fail. There’s a smarter path forward: strategic cost savings.
Consider this: It takes nearly $25 in revenue to generate $1 in profit — yet every $1 saved in costs has the equal $1 impact on your bottom line. That’s why industry leaders are shifting their focus toward innovative cost reduction strategies as a sustainable source of profit growth.
Understand the Law of Diminishing Returns
To be effective in cost reduction, you must recognize the Law of Diminishing Returns. The more effort you put into a single cost-savings approach — like price negotiations — the less effective it becomes over time (i.e. GPO price savings are not what they used to be).
SVAH’s research shows that healthcare organizations focusing only on price typically achieve 1%–3% in new annual savings. In contrast, forward-thinking organizations that focus on clinical supply utilization management are achieving 7%–10% in annual savings.
The takeaway? It’s time to refocus your efforts on innovative savings strategies and start addressing your invisible or hidden costs. Price savings are still important — but they should only represent one third of your total cost management strategy.
A System for Breakthrough Savings
The most successful companies don’t wait for savings ideas to materialize. They have systems in place that constantly generate and manage cost-saving innovations. Your healthcare organization needs the same structured approach built around these principles:
1. Set Ambitious Goals: Bold, measurable goals create urgency. For example, set a target to grow your organization’s profit margin by 4% in two years — an aggressive benchmark that will push your leadership team to think creatively and act decisively.
2. Keep Teams Small: Smaller teams are more agile, productive, and innovation focused. They are especially effective due to faster decision making, stronger communication, greater accountability, and increased trust. Larger groups tend to slow down progress and resist change.
3. Foster a Culture of Constructive Discontent: Great companies are never satisfied. Like GE, they constantly ask, “How can we do this better, faster, and more efficiently?” You must adopt this mindset across your healthcare organization.
4. Encourage Diversity of Thought: Homogeneous teams won’t bring bold ideas to the table. Build cross-functional, diverse teams — like a good salad, the mix of perspectives is what makes it great.
5. Leverage Creative Friction: Consensus is fine for daily operations, but breakthrough thinking requires creative tension. One way to spark innovation is by ensuring that project managers have no ownership stake in the projects they’re analyzing. This helps to remove bias and opens the door to fresh thinking.
Measure for Improvement
Making informed savings decisions starts with measurement. Without reliable data, your savings efforts are often misdirected. To identify the best opportunities with the highest ROI, develop a mindset of continuous benchmarking before deploying value analysis teams. Healthcare supply chain and value analysis leaders today simply can’t afford to waste time and resources on low-impact initiatives.
Tear Down the Walls That Block Innovation
Corporate silos and outdated thinking are some of the biggest barriers to innovation. Change won’t happen unless your organization is willing to break down internal walls, challenge the status quo, and make room for new thinking. Without this, no innovation initiative — no matter how well-designed — will gain traction.
Preparing Your Own Plan for Savings
If you want savings innovation to become part of your healthcare organization’s DNA, you need to lay the groundwork:
1. Create a Case for Change: Don’t wait for a crisis. Build a compelling case that explains why change is needed now, and secure executive buy-in before launching your initiative.
2. Develop a Clear Vision: Senior management needs a clear picture of where you’re headed. Paint a realistic, data-backed vision — like showing what your savings could look like 18 months from now after your team has turned over every stone.
3. Build a Foundation of Teamwork: Cost savings is everyone’s responsibility, not just Supply Chain’s. Form cross-functional teams that distribute ownership and accelerate progress.
4. Equip Your Teams to Lead Change: Don’t send your value analysis/supply chain teams to lead change without first being trained. Provide the tools and training your project managers need to lead change effectively. Otherwise, you risk losing momentum.
Savings Innovation Is Not a One-Time Event
Building a plan for savings isn’t something you do once — it’s a continuous discipline. With a structured system in place, your healthcare organization can unlock substantial, repeatable savings across salary and non-salary expenses.
There is always more to save — if you have the right systems in place and the commitment to find it.
Article by:
Danielle Miller, Healthcare Data Specialist, SVAH Solutions, and Managing Editor of Healthcare Value Analysis and Utilization Management Magazine
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