Utilization Management: The Devil Is In the Details

Robert T. Yokl, President/CEO, SVAH Solutions

The major contributor to cost is in your in-use (or consumption) cost!

If you think you have nailed down all of your supply chain expenses with your GPO and local contracts and now you think you can lay back and enjoy the view from your window, you have forgotten that price only represents a very small percentage of the Total Lifecycle Cost of the commodities you buy in the real world of supply chain management. The major contributor to your Total Lifecycle Cost is in your in-use (or consumption) cost!

The Law of Diminishing Returns

Worse yet, the more time and energy you and your staff spend chasing after price savings, the higher your labor cost will be to achieve the same or lower return on investment as prior periods. In the end, it becomes cost prohibitive to continue to chase after this small return on your investment. On the other hand, if you and your staff invest the same time and energy to manage and control your in-use cost, you can save 7% to 15% on your total supply budget by removing waste and inefficiencies from your supply streams.

The Devil Is In the Details

If you start to track, trend and analyze your purchases over their useful life, as our clients do using our UtilizationDashboard™, you will discover unfavorable patterns that need to be investigated. For instance, (1) office supplies that are 3x the cost (not price) of those of your peers, (2) trash bags, the in-use cost of which has increased 27% over the last three quarters, or (3) I.V. catheter usage that has been trending high for one year. To ignore these symptoms of waste and inefficiency would be dangerous to your healthcare organization’s financial health.

Price Will Become Irrelevant

In the new value-based care economy we all live and work in, the price of a product, service or technology will become irrelevant! What will be relevant, vital and mission critical will be the obtaining and sustaining of low cost/high quality outcomes for all of your healthcare organization’s cases, procedures, tests, etc., since the healthcare business is quickly moving towards a fixed price model for all services. This goal can only be accomplished by removing all waste and inefficiencies from your supply streams, since you could have the best prices in your region, but the highest in-use cost which would cancel out your outstanding pricing.

We just ran into this situation the other day, where a hospital we were working with had excellent prices for almost everything they were buying, but then we uncovered more than $1.9 million in excess in-use costs that cancelled out this hospital’s market advantage in their region. Don’t let this happen to you!

Total Lifecycle Cost Management

It isn’t unusual for supply chain professionals to be fixated on price savings, since this has been our world for 100 years. However, now as our profession is growing and maturing, we must take on the responsibility of Total Lifecycle Cost Management. This means there is a continuum of responsibilities that we have at a product’s beginning, middle and end of life that can mean the difference between your healthcare organization maintaining its profitability in these challenging times.