The Seven-Percent Savings Solution

ftsSavingsleftWhy do we continue to pursue 1%, 2% or 3% savings solutions (i.e., price), when a 7% savings solution (i.e., utilization) is just as easily obtainable? For instance, I know of healthcare organizations that have spent months to achieve a 3% savings on their cardiac rhythm management products, when a 7% to 15% savings was realizable in the same amount of time by also attacking their pacemaker and defibrillator utilization.

Look at it this way—If you are already looking into price savings for any commodity group, why wouldn’t you utilize the same data to measure your utilization? This is analogous to changing your oil, but not replacing your oil filter at the same time. You are already under the hood of your car, so why not take a few more minutes and get the job done right.

Since 79% of all new savings are in utilization, not price, it just makes good common sense to have a much more rational two-step process for any or all products, services or technologies that you are investigating for possible savings opportunities. The first step is to validate at what percentile you are with your prices. If you are at the 95th percentile, forget chasing any more price concessions here, since you would just be spinning your wheels. A much more productive and profitable use of your time (step 2) is to investigate the utilization of the product, service or technology under investigation.

For instance, if you find that you are at the 95th percentile on price on your dressing kits, jump to step 2– utilization study. This would be conducted by calculating your cost per patient day (CMI adjusted) of your dressing kits and then benchmarking them against a peer hospital. If you find that you have a substantially higher cost per patient day than your peers, you will then want to observe how your customers are utilizing these dressing kits, since there is a 98.6% chance they are misusing or misapplying them, or you have a value mismatch in this commodity group.

To summarize, price savings are still achievable on many commodities that you are buying today. However, if you are already at the 95th percentile on your pricing on these commodities, you can better utilize your limited time and resources by perusing utilization savings, instead of price. That’s where your real, tangible and robust savings are hidden!