Healthcare Expense Reduction: A Systematic Approach
The phrase “Healthcare Expense Reduction” can have many different interpretations. It could mean getting the best price, benchmarking to find the best practice, searching for the best value products, services or technologies or reducing your inventory levels to near zero. However, I would suggest that “Healthcare Expense Reduction” if done correctly needs to be all of these things and much more.
In point of fact, from our empirical experience it requires a systematic approach to reducing your healthcare organization’s supply chain expenses to get it right. This concept is analogous to what the insurance industry calls BLANKET COVERAGE, a single unifying policy that covers any and all of your risk or exposure to unforeseen calamities. This BLANKET COVERAGE idea holds true with “Healthcare Expense Reduction”; To get it right you need to cover all of your supply expense categories of purchase – all at one time.
To get you started on this journey, we have listed seven core elements of a successful “Healthcare Expense Reduction” unifying system. We advocate these core elements for you to obtain the highest return-on-your-investment of time, effort and resources in order to attack ALL of your supply expense savings simultaneously.
You will notice that these seven core elements described herein are actually interconnecting programs which you should have in place which cover the total spectrum of your “Healthcare Expense Reduction” efforts as follows:
1. Utilization Management Program
2. Value Analysis Program
3. Contracts Administration Program
4. PriceCheck™ Program
5. Inventory Management Program
6. Linen Management Program
7. Forms Management Program
As this list suggests for your “Healthcare Expense Reduction” to be effective you need to have complementary and synergistic expense reduction programs in each of your supply chain disciplines, not one-time events. This way you can be assured that you have “Plugged all of the leaks” in your supply expenses before they become mile-high gushers or raging rivers.
This isn’t just a theory, but the actual system that we have employed ourselves over the last 23 years to assist hundreds of healthcare organizations in reducing their supply expenses to absolute minimums, and then to keep their expenses under control — going foreword.
Have You Gotten Your Free Copy of “Healthcare Supply Utilization Revolution?”
Healthcare Supply Utilization Revolution
Read this book and in a few weeks save more money than you have in years. Sounds unbelievable? Robert T. Yokl and Robert W. Yokl, healthcare’s leading authorities in Supply Utilization Management, have helped hundreds of hospitals, healthcare systems and integrated delivery networks to saved close to a half billion dollars by employing the same utilization management strategies, tactics and techniques that they will teach you in this book.
There’s More Than One Way to Shave Your Purchase Service Costs
I often talk about a healthcare organization’s purchase service savings opportunities being “equal to or greater than” their supply expense savings prospects, but too often this statement is interpreted to mean the price you are paying for your purchase services only. In fact, we have found that there is more than one way to shave your purchase service cost if you know where to look for them. Here are three additional ways you might want to use to discover them.
Utilization Misalignments
Just because you have the best price for your purchase service contracts doesn’t mean they are cost effective. You also need to eliminate all waste and inefficiencies in their value streams. Just like one of our clients found when they looked at their telecommunication invoices only to find they were being slammed with thousands of dollars of phone charges annually they hadn’t authorized. So don’t stop searching for additional purchase service savings because you think you have best price, when there literally is hundreds of thousands of dollars of new and better in-use savings that are just waiting for you to harvest.
Specification Overkill
When I read a purchase service contract that hasn’t had its specifications revised, improved or amended in a number of years, I can always find small or big savings opportunities because our customers don’t need everything that is included in the contract to perform the service that is described.
For example, how many times does your hospital’s windows need to be cleaned in any given year? Have many times a year does your high and low-tech equipment really need to have preventive maintenance? How many rent-a-guards do you need on each shift? Do you get the idea?
In-Sourcing Opportunities
For many years it becomes such an ingrained habit to outsource a particular service for many years that we overlook the possibility of in-sourcing these services again when the timing and conditions are right to do so. Food service or environmental service outsourcing are good examples of this happening. It’s been my experience that these departments generally aren’t outsourced for lower cost alone. It’s usually quality issues too, that drive the decision to outsource these departments in the first place. Therefore, it’s my suggestion that when any purchase service contract comes up for renewal it should always be considered a MAKE or BUY decision, not just a contract renewal decision. This way you never-ever leave any purchase savings dollars on the table – untouched!
As more and more supply chain managers take on the responsibility of sourcing, bidding and negotiating their healthcare organizations’ purchase service contracts, just remember that your purchase service contract price is just-the-tip of the iceberg! Your greatest purchase service savings are actually to be found below the waterline. This can represent as much as 26% in aggregate purchase service savings annually for your healthcare organization in the first round of value justifying your purchase service contracts. Don’t you think this is a much better way to shave your purchase services cost, than just attacking your price alone?
Do You Have a Reliable Saving Ideas Pipeline?
I know that most value analysis teams get off to a flying start with a lot of good ideas to save money, and then they “hit a wall” after a few months because they don’t have a pipeline of new saving ideas to fall back on to fuel their savings fire. To help you avoid this savings stumbling block to your VA program, here’s a pipeline of savings ideas from my new book, “The Healthcare Value Analysis Bible: Your Ultimate Saving Resource*” which is scheduled for publication in April 2010.
Large Dollar Expenditures - Products, Services or Technologies with an annual value of $25,000 or more.
Vendor Recommendations – Review brochures, catalogs, samples from vendors to cull new savings ideas.
Magazine Articles On Savings Opportunities - Call article authors to find out exactly how they did it. They will be happy to help you out without a fee.
New or Changes in Regulations - Most new or proposed changes in regulations costs can be reduced through Value Analysis.
New Clinical and Administrative Employees – Interview new employees for savings ideas they have been exposed to at other healthcare organizations.
Benchmarking – What are other healthcare organizations doing to save money?
Any Disposable Product – Can you return to a reusable product?
Any Type of Custom Kit or Tray – Contents of kits and trays should be fully investigated for their value!
New Technology – In addition to the cost of the new technology there is always add-on cost of labor and supplies that must be value justified.
High Utilization – Any Product, Service or Technology that has a high utilization cost is a candidate for study.
Product Recalls – Value Analysis Team(s) should be empowered to investigate why the product was recalled and the corrective action required to bring into conformity.
Bundled Products – Products like IV Starter Kits, Admission Kits, etc., need to be value justified.
Old Technology – Old technologies tend to be wasteful and costly and should be evaluated for appropriateness.
If you have any additional savings pipeline ideas, I would love to hear from you (bobpres@strategicva.com), since there is still time for me to add them to my new book. Naturally, if your idea is used in the book I would give you attribution for your idea. I’m looking forward to hearing from you.
___________
* “The Healthcare Value Analysis Bible: The Ultimate Savings Resource” will retail for $29.95, plus $5.98 for shipping and handling (pricing subject to change in the future). If you would like to pre-order this A-Z blueprint for establishing, refining or re-energized your supply value analysis program we are now offering a 10% discount on the retail price of the book, if you pre-order by February 26, 2010. You can e-mail your order (with your name, title, organization, phone number, e-mail address, and shipping and billing address) to bobpres@strategicva.com. You will then be the first to receive this important breakthrough must-read book no later than May 2010.
We’ve Come a Long Way from the Basement in Hospital Supply Chain Management
I remember at my first three jobs a the hospitals I was employed as a materials manager my windowless office was located in the basement, ether next to the storeroom, or near the receiving dock or half-way between both of these locations. Come to think about it, my salary was pretty much matched my location in the pecking order at these hospitals too. Yet, I was happy, productive and enthusiastic about my job, but I still had to work two jobs for many years just to keep a roof over my family’s head and bread on the table for my wife and kids.
I’m sure many of you can relate to these musings since you have found yourself in the same circumstances as you have moved forward in your own supply chain career. But the times are changing FAST in supply chain management. Many of us have moved from the basement to the rarefied upper-level floors of our healthcare organizations where we too have a window to gaze out when we get a few minutes to do so. Better yet, our salaries are now competitive with any industry I can think of and the perks (incentives, bonuses, health club membership, flextime, etc.) being offered are getting better every year.
To prove my point, I was just reading the results of ARMM’s Compensation Survey for 2009 which found that the average salary for MMs in 2009 was $87,650. The report also noted that 33% of the MMs surveyed are receiving bonuses, 58% have formal incentive programs and 9% are receiving other incentive benefits such as tuition reimbursement, child care and parental leave. Not bad for a profession that was considered basement dwellers just a few decades ago.
We have come a long way from the basement as attested by the results of the AHRMM survey I just referred too. But here are a few statistics from this same report you might not be aware of that tips the scale in favor of high income producers: MMs that had the highest salaries and held the most prestigious jobs in our industry had the highest educational levels (MA or MS), were Fellows in AHRMM, and had 50 or more staff reporting to them. This isn’t a coincidence!
As this data suggests, if you want to have the highest salary, best perks and to permanently move out of the basement like these trailblazers have done, you will need to go back to school, get CPM certified, become an AHRMM Fellow and get hired by one of the largest healthcare organization in your region.
Don’t get me wrong! I’m not saying this should be the goal for everyone reading this blog, but if you have aspirations for a bigger and better salary, more perks and additional responsibility this is the roadmap you should be following to meet this objective. As Sherlock Holmes would say to his friend Dr. Watson, “It’s as elementary as 1, 2, 3”.
Building a Supply Chain Business Case for Change!
I have found that the best way to get your supply savings ideas (especially those big creative ones) approved by your senior management, customers and stakeholders is to make a formal written business case for change. Why? Because too much is left unsaid, misunderstood or lacking in logic when you try to verbalize your savings ideas on complicated issues that need to be internalized before they are put into practice.
I have followed this same advice in my own career where I have proposed big business changing savings ideas at every healthcare organization I have worked in my supply chain management employment. For instance, I have proposed (in writing) a new supply value analysis program at every healthcare organization that I have worked and NEVER once have my proposals been turned down by senior management, customers or stakeholders.
I once decentralized the centralized buying function that had been in place for 46 years at my multi-hospital system and then replaced it with a GPO model based on a written business case for change that saved my healthcare corporation millions of dollars — almost on day one.
I proposed in writing, and eventually received approval from my board of directors, to move forward with a group purchasing program for their 27 long-term care facilities where I was Vice President of Support Services. This reinvented the way they had done business for decades.
I’m sure you get the idea! Developing a written business case for change in order to introduce, test the waters and then to gain approval on your big and even little supply savings ideas is a powerful instrument for the changes you believe are mission critical to your healthcare organization.
Here’s how it works! This business changing and decision-making instrument begins with a written document that would give the background of the problem or opportunity and description of what you want to accomplish. It would describe how it benefits your organization, how it fits into your organization strategic plan, the risk and rewards, the resources required, the responsibilities and the timing and the operational and financial considerations.
Your business case for change doesn’t need to be elaborate, but it does need to be thorough, concise and well thought out. Most importantly, it needs to be your tool of choice that you employ when you want to “change the way we do things around here”.
Actionable Hospital Supply Metrics Will Make Change Happen!
We all deal with metrics everyday (statistics that measure or quantify our data), but is this information ACTIONABLE? For example, most hospitals use the metric supply cost/net revenues to compare their hospital’s supply chain performance to their peers to see how their hospital fits into a regional or national norm, but what does this information really mean?
Let’s say this exercise shows that your hospital is on the high side of this metric. Does this information allow you to make decisions or take action to reduce your supply cost? The answer is no! This metric is only directional. Meaning, it only shows if your hospital is going in the RIGHT or WRONG direction on your supply expenses. However, it doesn’t tell you why or how you can change the direction you are going if results are unfavorable.
That’s why you also need to have ACTIONABLE metrics that will help you make informed decisions and take immediate action to correct the defects in your supply chain. For instance, we just had a quarterly review with one of our Supply Dashboard clients where we talked about how his lab reagent metric (total reagent cost/Billable Lab Tests –CMI adjusted) has been going up. He then told us that he picked up this fact on his supply chain radar screen too. After some research, he found that he had a few reagents that he was buying that weren’t under contract that was causing this anomaly, which he said has now been fixed.
That’s what ACTIONABLE metrics can do for you (enable you to make informed decisions and take immediate action) vs. generic metrics that ONLY tell you that you are going off course. For this reason, if you want to make positive change happen at your healthcare organization you will need to establish ACTIONABLE metrics at the ground level to greatly enhance your supply chain decisions. Otherwise, you will be nibbling around the edges of your supply chain expense savings when a windfall of savings is just waiting for you to take action.
Why You Need Supply Project Charters to Save Even More!
A Supply Project Charter is a statement of the scope, objectives and participants in a project. It provides a preliminary delineation of roles and responsibilities, outlines the project objectives, identifies the main stakeholders, and defines the authority of the project manager. Source: Wikipedia.com
It took me some time to fully realize that a good project charter is one of the key success factors for any and all savings and quality projects (Six Sigma, LEAN Management, Value Analysis, etc.). The reason I now feel this way is that you need a beginning, middle and end to all projects. Therefore, if you don’t have a good project charter you don’t have a rock-solid foundation for the beginning of your projects, thus, risking going off track even before your project gets started!
At minimum you will need the following 13 essential elements to be included in your project charter: Project Title, Project Type, Focus Area, Department, Facility, Project Start Date, Project Number, Champion, Project Leader, Product or Process Owner, Statement of Problem or Opportunity, Project Completion Date, and Financial and Quality Goals & Objectives (e.g., savings, improved revenues, reduced defects, etc.).
Now that you have these essential elements listed in your project charters you can refer back to them to insure that your projects stays on track, on budget and on time. We have found that the timely on going (monthly) review of this data to be critical to the success of any project. In fact, to manage and control all of their projects, we encourage our clients to establish Balanced Scorecards based on the information in their project charters.
A recent survey by ISixSigma Magazine found that 81% of the most successful Master Black Belts ALWAYS utilize a project charter to get a fast running start on their projects. The survey stated further that project charters were the second most commonly used tool by Black Belts, next to process mapping as part of their improvement work.
How can you dispute these statistics? If you want to save even more money and improve your quality the answer is to start to employ PROJECT CHARTERS on all of your supply chain initiatives. You will then have a beginning, middle and end to all of your projects.
Metrics Matter: Choosing the Right Ones
If you want to see beyond the clutter, fog and noise that saturates our day-to-day business decisions the best way I know to do so is with metrics. Specifically, a metric is a set of measurements that quantify results thereby telling us more about our supply chain operations. This insightful information will then enable you to make your big and little decisions with confidence, congruity and speed.
One caveat! The difficulty in using metrics is that you need to choose the RIGHT ones to get the RIGHT results. I find the ideal methodology to do so is Activity-Based Costing: Linking a product or service to an activity or cost driver to uncover significant actionable information.
For instance, if you wanted to have a meaningful metric to analyze your office supply total in-use cost you would use full-time equivalents (FTEs) divided by your office supply spend to arrive at this measurement. You can then benchmark this metric against your peers to determine whether your total in-use cost for office supplies is within acceptable limits. This is a much more scientific method than guessing!
Why FTEs? Because people drive the cost up or down on office supplies, consequently there is a direct relationship between your office supplies spend and the number of people your healthcare organization employs on a full or part time basis.
Get the idea? Anytime you want to measure something you need to first indentify your COST DRIVER for the product or service you are measuring. You then divide your cost driver by your supply spend or labor cost to arrive at your metric. This methodology can become much more complicated than my example of office supplies when a number of variables are involved, but this is the basics on how you would choose the RIGHT metric to keep you from going off track.
I know that this topic boarders on being academic, but it really has real world applications in supply chain management. If you master the basics of this concept, it can make your job easier, more productive and will allow you to become a saving machine. That’s why metrics matter!
Hospital Supply Chain Utilization Revolution
Healthcare Supply Utilization
Revolution
Become a Savings Magnet
Read this book and in a few weeks save more
money than you have in years. Sounds unbelievable? Robert T. Yokl
and Robert W. Yokl, healthcare’s leading authorities in Supply
Utilization Management, have helped hundreds of hospitals,
healthcare systems and integrated delivery networks to saved close
to a half billion dollars by employing the same utilization
management strategies, tactics and techniques that they will teach
you in this book. Click Here for the Special Report
Supply Savings Comic – Supply Benchmarking
NEW SUPPLY SAVINGS COMIC!
Stretch Goals Can Lead to Breakthrough Thinking!
A goal by definition is an objective we want to reach, but a “stretch goal” is quite different as defined by Jack welsh, the former CEO of General Electric. He says that stretch goals “are essentially stimulating the staff to create goals that, given the current situation and what is known today, appear beyond their reach or otherwise unattainable. This is getting the employees and or managers to conceive of things that are at a magnitude beyond their wildest expectations or beliefs”
As Jack Welsh suggests in his quote, it’s in our human nature to select safe, comfortable and reachable goals. Why should you or your team stick their necks out when management is only asking the bare minimum goals from you? I see this “small thinking” attitude all the time.
I recently asked a material manager at a 238-bed community hospital what his savings goal was for next year and he told me that his senior management had set a goal for him of $50,000. By my estimate this material manager should meet this goal in less than three months — not one year. That’s not a “stretch goal”; it’s a puny, undersized, and no brainer. If I was this material manager I would at least triple my senior management’s goal to $150,000, just to keep me from falling asleep at the wheel.
If you want to have BREAKTHROUGH savings, then you need to bring about breakthrough THINKING for yourself, your staff and your value analysis teams. The best way I know to do so is for you to set “stretch goals” for every level of your supply chain operations vs. letting your senior management set them for you. Then brainstorm with your supply chain team to discover how you will meet your oversized goals.
As an illustration, one of our supply chain clients established a “stretch goal” for their department of $11 million for this fiscal year, although they didn’t know how they would make these savings happen when they committed to this goal. That’s when their supply chain team honed in on their utilization misalignments with our assistance and found $15 million dollars in new potential savings. If they would have settled for a so-so savings goal instead of establishing a stretch goal, they wouldn’t have found these big savings opportunities! With breakthrough THINKING, they are now on target to achieve breakthrough SAVINGS – not meager results!
So remember, when you are setting your supply chain savings and operational goals for 2010, don’t take the road most travel by establishing safe, easy and undersized goals. Stretch yourself, your staff and value analysis team(s) by instituting oversized goals that will lead to breakthrough thinking and gigantic results.
Never Underestimate the Power of Measurement
It’s relatively easy to identify that you have a hospital supply chain challenge (higher cost, lower quality or poor service levels), but it’s quite another thing to uncover the root cause of why this situation is happening.
Instead of pointing fingers, becoming defensive or accepting the uninformed opinions of others, a much better way is to trust a statistical methodology such as Supply Six Sigma® to identify and address the real source of the problem.
For example, I just read about a hospital that realized that their cardiothoracic unit (CTU) cost per discharge for supplies was $66.11, which they identified as too high. But they didn’t RUSH to judgment on why this was happening. They instead formed a team to define, measure, analyze and improve this situation with the goal of reducing these costs by 50%.
Once this cross-functional team was formed it developed a high-level process map of their CTU discharge process to understand the current system and then gathered baseline performance statistics for analysis. Based on their statistical studies the team found after counting the supplies that were discarded on 52 discharges that on average 67 unused items were discarded, ranging in price from pennies to more than $1.00 per unit.
They also found that medications that were stocked in the CTU’s lock box and which should never have been discarded unused were being discarded. It was estimated based on these statistics that were compiled by the team that this wasteful practice of discarding unused supplies and drugs was costing their hospital $55,185 annually.
The team’s observation and investigation found that there was no uniformity or consistency on how the CTU staff pulled and restocked supplies, confirming that this was the root cause of this excessive cost. The team and CTU staff decided to institute a supply cart system for all CTU patient supplies that would be restocked daily and any unused supplies discarded. It was calculated that after buying seven additional carts, that the ROI on this project was 163 percent!
This is what an organized, methodical and step-by-step statistical approach to your supply chain challenges is all about: No short cuts, no guessing, no opinion just accurate and precise measurements to uncover the root cause of the problem being addressed and then implementing the right solution for sustainable and measurable results.
Why are Hospitals Buying So Many Different Products?
We would all like to think we know all the answers to the supply chain puzzle, but I can tell you from experience that until we developed our Value Analytics™ methodology 10 years ago, I found that I didn’t know what I thought I knew… I was just guessing.
For instance, did you know that healthcare organizations hardly ever buy the same products even if they belong to the same GPO or are divisions of the same healthcare system? In fact, our Value Analytics™ studies have revealed that the highest product match we have ever found between comparable hospitals with like operating characteristics is 18%. To bring this point home, one of our clients who owns five hospitals is buying five different surgical clippers. Isn’t that any eye opener?
This “Aha” made me realize that hospitals aren’t buying their products mainly to provide a primary function (what it is supposed to do) for their customers, but most buying decisions are based on a product’s aesthetic functions or features. There is no other reason, in my opinions, for this phenomenon to be happening.
Here’s an illustration of what I’m talking about using a surgical clipper as an example: its primary function is to REMOVE HAIR and there are no secondary functions (meaning in addition to removing hair it does something else) that I can recognize.
All surgical clippers remove hair therefore what makes them different? The answer is aesthetic functions or features that are nice to have functions, but in many situations are not needed. The only aesthetic functions that I can identify with clippers are its size, shape, color, ease of use, closeness of shave, fixed head or pivotal head. So why isn’t everyone buying the same clipper that provides the ALL the right functions at the lowest total cost?
With few exceptions, EVERY hospital in the country can, in my estimation, can standardize on 80% of the lowest cost functionally reliable products in each category of purchase that they are buying today. The reason that hospitals aren’t doing so is that they are buying too many unnecessary, redundant and glitzy AESTHETIC functions that are holding back billions of dollars of savings for their healthcare organizations.
So the next time you are buying a new product make sure that the aesthetic functions or features that you are purchasing are absolutely, positively required, before you needlessly spend your limited dollars on nice to have characteristics, but attributes that are not needed in order to meet the primary function of the product. It’s just that simple!
Why Not Incentivize to Save with Value Analysis?
I have been fighting this battle for 22 years now to get healthcare organizations to incentivize their value analysis teams to save EVEN more money. Nonetheless, I seem to be loosing this battle, but not the war!
It has been proven beyond any doubt with our own clients that if you incentivize your value analysis teams to save MORE by giving them rewards and recognition you will increase your savings yield by as much 300+ percent. However, in the 22 years we have been working with healthcare organizations in the value analysis arena only one in eight of our clients has opted to do so.
The question is why? After thinking about this question for some time now, it seems to me that there is a “cultural Bias” in healthcare organizations against incentivizing any of their teams (LEAN, Six Sigma, value analysis, quality improvement, etc.). They believe that team members are already getting paid a salary to do this work so why should we give these individuals any extra incentive to do what they are already being paid for?
What is missing from this decision “not to incentivize teams” for their new, harder, different and time sensitive work (that they are assigned to do beyond their normally assigned duties) is that this work is a HUGE distraction from what these hospital employees think they are getting paid for. The result: Most staff members only give 40% of their time, energy and effort when assigned to teamwork – not 100%!
Change the paradigm! If you want to change this pattern of behavior in teamwork, you will need to change the perception of this work as burdensome by emphasizing that it is important, mission critical and essential to the financial health of your hospital. This is accomplished by incentivizing all of your hospital’s teams, including your value analysis teams, with rewards and recognition when they reach predetermined goals and milestones.
Believe it or not, by doing so you will quickly discover that your staff members will line up to become members of your value analysis teams (and all other teams), not avoid them. Better yet, it won’t cost your hospital a whole lot of money (about 3% to 5% of the savings) or time to establish and manage a team rewards and recognition program.
You will be repaid for your efforts with new and better savings that will generate as much at a 35:1 ROI on your investment. Doesn’t this sound like something your hospital and thousands of healthcare organizations around the country should have been doing for years? If not, why not…
