Jeni Williams

How can finance collaborate with clinicians to reduce labor expenses and supply chain costs? Several hospitals share their strategies for success.


At a Glance

Strategies for involving clinicians in efforts to reduce labor and supply chain expenses include:

  • Working with nurse managers to develop an operations or productivity report that is truly useful
  • Establishing biweekly reporting of labor utilization per unit
  • Adding clinicians to your materials management and finance teams
  • Helping physicians understand the cost profiles of the products they are using and their impact on cost of care
  • Being patient while securing buy-in

It's Friday night in the emergency department (ED) of Our Lady of Mercy Hospital, and a diminishing number of nurses are struggling to keep up with a steady onslaught of patients. A limited number of hospital beds are available, and if units throughout the hospital don't cooperate in freeing up beds and sharing staff to help deal with the backlog, the ED will have to hire expensive agency nurses for assistance, turn away patients (a decision that would result in lost revenue), or both.

The setting is fictional: It's part of a game, "Friday Night at the ER," that Bristol Hospital in Bristol, Conn., recently arranged for its leadership team and board members to play to highlight the challenges that hospitals face when departments work in silos, rather than as a unified team. But for many hospitals, the scenario is all too real. And the cost of a breakdown in collaboration can be staggering.

"The thing that gets hospital leaders juiced up is when they solve a crisis," says Bristol CEO Kurt Barwis, CPA. "At Bristol, we've guided our staff toward a fundamental shift in thinking: 'How can I help keep those crises from happening?' And to do that, one of the first things you have to do is to engage your staff in working with each other, outside of the boundaries of their individual departments, to help the hospital succeed."

Bristol Hospital is an example of a hospital that has improved its performance through a culture of teamwork. After four years of multimillion-dollar losses, including a nearly $8 million deficit in 2006, the hospital posted a loss of less than $260,000 last year under the direction of Barwis, who joined the health system in mid-2006. At the time, patient volumes were falling, while expenses were skyrocketing. One of the first things Barwis did was to gather managers into an auditorium, where each manager gave a presentation regarding the financial performance of his or her area and the factors that affected that performance. "Each one looked at their situation differently," Barwis remembers. "It was really eye-opening."

As part of the turnaround, Barwis and representatives from finance worked with clinicians to reduce expenses without cutting FTEs-and while maintaining a commitment to high-quality care. "We actually added $600,000 in expenses in our quality department," Barwis says. The results have been positive: Last year, the hospital's ED treated 2,000 more patients than in 2006. Patient satisfaction is improving, and employees are happier, too. "The focus on quality is really what is driving improvements to our bottom line," he says.

Cost control is one of the biggest challenges that healthcare CFOs and other executives face. In a recent survey of healthcare finance leaders, HFMA's Healthcare Finance Outlook 2008-2013, managing labor and supply costs ranked among the top 10 challenges facing healthcare finance executives.

Labor expenses-both salaries and benefits-are the biggest component of costs for hospitals, fueled by a shortage of talent (nurses and other healthcare professionals) and rapidly rising benefit costs, according to the report.

See Exhibit 1

exhibit-1-A Team Approach to Cost Containment

The national healthcare alliance VHA, Inc., has found supply chain costs are the second-largest expense for hospitals, with most of it in four service lines: cardiology, cardiac surgery, orthopedic surgery, and neuro-spine procedures.

Today, finance leaders recognize that to achieve significant cost savings, they must collaborate with clinicians to reduce expenses in two key areas: labor and supply chain. But differences in personality types and perceived differences in goals often keep these two groups from connecting to do what's most needed: focusing on high-quality care while being good stewards of the organization's resources.

"Usually in hospitals that are struggling, the worse the organization's financial performance gets, the wider the communication gap between clinicians and finance seems to become," says healthcare executive consultant Kathy White, RN, MS, who has a background in critical care and trauma nursing. Collaboration between finance and clinicians is essential to reducing costs while maintaining high-quality care-keys to surviving in today's healthcare climate. Here, hospitals share their strategies for working with clinicians to reduce labor expenses and supply chain costs.

Working Together to Reduce Labor Expenses

Since 2003, Saint Thomas Hospital of Nashville, Tenn., has collaborated with its nurses to more effectively manage labor costs-and has saved $2.7 million by reducing its nursing bedside orientation hours per equivalent patient day. This team approach also has resulted in enhanced productivity, lowered agency and overtime costs, and improved employee satisfaction.

"We're not perfect, but we've come a long way since we've begun thinking about this strategically," says Sue Willoughby, RN, BSN, a coordinator for benchmarking and productivity for Saint Thomas Health Services. "Ultimately we selected a tool to effectively manage our largest controllable expense and greatest asset-our workforce."

Five years ago, Saint Thomas took a hard look at its nursing labor costs and discovered it lacked timely productivity data that would allow nurse managers to effectively set staff levels to the fluctuating patient workload. Saint Thomas implemented a workforce management tool that enabled the hospital to more effectively analyze productivity by gathering data from payroll, patient accounting, time and attendance, and budgets. The tool also breaks out overtime, agency, and traveler expenditures, so nurse managers can allocate resources and make decisions that allow them to stay within labor budgets.

But selling nurses on the advantages of using the tool wasn't easy. "Initially, there was some resistance," Willoughby recalls. Many nurses questioned the validity of the data and the value of benchmarks that compared Saint Thomas' labor hours with similar hospitals nationwide. "Their reaction was one of denial: the feeling that our patients are sicker, that our geography is different, our resources are different, and our support systems are different," she says.

To bridge the gap between finance and the hospital's nursing staff, nurse managers and finance had to agree upon a common language for discussing what is meant by terms such as "productivity." That's an obstacle that many hospital financial managers face in working with nurses to reduce labor costs, White says.

"Everything we do in the clinical world is based on volume-and there is a lack of understanding about how finance measures that volume and how clinicians have to measure that volume," White says. "Clinicians think shift to shift, hour to hour: 'I have a train wreck in the ED, so it's going to take this many people.' Finance people think in pay periods and in months, connected to operating statements and averages."

Saint Thomas' finance and nursing departments worked together to create productivity reports that were useful to clinicians in managing to their volumes. Finance representatives then educated both nurse managers and staff on the new workforce management strategies. The hospital established benchmark goals and built accountability into processes. Saint Thomas also implemented biweekly labor reporting to keep nurses up to date on their progress in meeting labor targets.

Today, collaborative efforts among nursing and finance to reduce Saint Thomas' labor costs have enabled the hospital to more effectively deliver high-quality patient care and enhance the hospital's bottom line.

How can you work with your nursing staff to better control labor expenses? Willoughby and White suggest these strategies for success.

Begin with the basics. Pull a group of similar nursing professionals (such as your inpatient nursing directors)together and talk about key volume statistics, how benchmarks are derived, and what the benchmarks mean for individual nursing units. "Onemonth, I gave a presentation on financials and productivity to nursing units: 'This is what you've got to work with, and this is why your manager is on you about productivity,'" Willoughby says. "When you're having a group meeting, this is a good conversation to have."

Work with nurse managers to develop an operations or productivity report that is truly useful. By involving nurses in its development, the report will provide nurse managers with the data they need to manage to their volumes and to plan for and allocate labor costs in the short term and long term. "Tools such as this also force nurses to get their charges in on time, which helps clean up all of operations," White says.

Establish biweekly reporting of labor utilization per unit. "The advantage of biweekly reporting is that it gives nurse managers a warning sign when their labor utilization is off target," Willoughby says. Biweekly reporting also gives managers a heads-up when data need to be corrected (for example, when nurses are floating to other areas, but aren't costing their hours to those areas). "It's hard to remember what happened a month ago," Willoughby says. "We're also working on daily reporting for our nursing units."

Biweekly reviews also put hospitals in a state of "perpetual budget readiness," White says, by giving finance and nurse managers the opportunity to continually evaluate their inpatient business and alert them to changes in trends. "The biweekly review is sacred," White says. "You have to establish that discipline from the top."

Add a nurse who has a business background to your finance team. "Nurses in general are suspicious of someone who's not a nurse," Willoughby says. If you are not able to add a nursing professional to your finance staff, make sure there is a staff person in your department who is dedicated to working with nurses regarding financial issues. "Nurses need to know whom to call in finance to help them investigate things. They need to know who their advocates are," she says.

Collaborating for Supply Chain Savings

Last year,Moses Cone Health System, based in Greensboro, N.C., saved $4.5 million by forming teams comprised of supply chain personnel, finance professionals, and clinicians to target areas where the health system could save money on supplies, especially high-dollar physician preference items.

Three years ago, Moses Cone adopted value analysis teams at its hospitals, each one representing a clinical specialty, such as radiology, cath lab, and orthopedic surgery. Each team reviews data regarding the types of products that are used, how many procedures are performed using those products, which vendors supply the products for the health system, and the extent to which individual physicians use specific products. Team members then approach physicians with the data and ask for their help with reducing supply costs, negotiating with vendors for better pricing on implants, identifying infrequently used products that can be removed from storeroom shelves, and standardizing supplies where possible.

"A couple of years ago, we went through this process and saved $600,000 to $700,000 on joint implants because we were able to work with the physicians to pressure the vendors to get better pricing," says Ken Boggs, vice president for supply chain at Moses Cone.

"In radiology, the director of radiology and my contract administration staff spent time with a couple of the lead physicians in interventional radiology and have worked on understanding which 'neuro coils' they're using to prevent stroke or treat brain aneurysms. We've helped them to understand how certain neuro coils add to the cost of procedures, and to reexamine whether others are still needed. For example, 'Can we quit using this one that you're saying is outdated? Can we at least get it off the shelf?' That has resulted in some inventory savings for our health system."

Today, there are 13 value analysis teams throughout the health system. One of the keys to Moses Cone's success is that the health system shares a portion of the cost savings with physicians through investments in new equipment and technology.

"That's been very helpful from the standpoint of getting physicians engaged in cost savings efforts," Boggs says. "Really, the biggest hurdle you've got to get over is to get the physicians' attention enough for them to think about ways to save. A lot of times physicians are so pushed on time that they may just simply not take the time to fairly evaluate different levels of product. This gives them a stake in the game."

At Banner Health, a 20-hospital system based in Phoenix, finance professionals worked with clinicians to develop a capped pricing model that establishes a fixed price for physician preference items. For example, the health system pays a set price for pacemakers to all vendors of these devices.

Traditionally, vendors trade market share for price: "For example, a vendor might say, 'If we have less than 25 percent of your market share, we're going to charge you $1,000 a unit. If we have 50 percent of your market share, we'll charge you $750 a unit. If you give us 75 percent of your market share, we'll charge you $500 a unit. And if you give us 90 percent of your market share, we'll only charge you $250 a unit," says Doug Bowen, vice president of materials management for Banner Health.

"I realized that my real role here at Banner Health was not to try to tell a physician which products to use. My real role was to try to manage the cost of the products coming in to Banner," he says. "The benefit of capped pricing is that you can allow as much physician choice as you want, and the hospital is going to pay the same price for the same product no matter who the vendor is."

Bowen worked to establish capped pricing at Banner Health in 2003, beginning with the health system's cardiology line. His materials management team obtained national market data on the average prices hospitals were paying for physician preference items in cardiology as well as data regarding prices for these products in the hospital's geographic area (in this case, the southwestern area of the country) and compared the data with the prices the health system was paying for these products. "You can't be too far out of the market," Bowen says. "But at the same time, you've got to set fair and reasonable capped prices that will allow your hospital to function in a DRG revenue environment. I like to think of capped prices as DRGs for vendors."

Banner Health's materials management department employs three nurses who specialize in managing products in a particular service line, such as cardiology. Each nurse leads a team of representatives from Banner's 20 hospitals who represent that service line to establish standards for products and devices used by the health system in the service line. The materials management nurse who specializes in cardiology presented the market pricing data for cardiology products as well as the prices Banner was paying for these products to the health system's cardiology standards team for their input on what the health system should be paying. Then, the materials management team met individually with cardiology physicians to share the data and ask for their input on what level of pricing they could support. "Ninety-five percent of the time, physicians are appalled at how much we're paying," Bowen says.

With the physicians' help, Banner's materials management department established prices for categories of cardiology products--such as "pacemakers" and "internal cardiac defibrillators"--that the physicians could support. Then the materials management department approached the vendors with capped prices for cardiology products that had the full support of both the physicians and Banner's cardiology team. "We didn't say a word to the vendors until we had spoken with the cardiology physicians and gotten their agreement," Bowen says. "We spent an entire year on this project, and in some instances we did end up paying more for a product category than we'd planned. But ultimately, we've saved more than $3 million each year in cardiology alone through capped pricing."

Today, Banner Health uses capped pricing to save money on total joints as well as spinal implants. "Spinal implants were the toughest of the three projects we've tackled, because of the wide variety of products. We ended up more than 40 different categories of product for spinal implants, whereas in most other product lines, we have less than 10," Bowen says. Capped pricing has enabled Banner to save more than $13 million on supplies across its 20-hospital system.

Boggs and Bowen offer these suggestions for collaborating with physicians to reduce supply chain costs.

Help physicians understand the cost profiles of the products they are using and their impact on cost of care. "The more you can make transparent what your financial circumstances are, the better off you'll be in working with your physicians to achieve supply chain savings," Boggs says. "Physicians are in fact business people. They want to know whether you're making money or losing money off the procedures they do, and if you happen to be losing money, sharing this information with them does have an effect."

Add clinicians to your materials management team. "A number of hospitals have added a clinical person to the contract staff, and I think that really helps to translate the business issues to the clinicians and the clinical issues to the contract staff and administration," Boggs says.

Be patient while securing buy-in. "No one should start an initiative such as capped pricing and say, 'You know, we want to implement this in a month, or three months.' It's not going to be successful," Bowen says. "You'll have the wheels fall off somewhere along the way if you don't take the time to touch all of the people involved and get all the buy-in up front."

A Win-Win for Finance, Clinicians-and the Organization

Collaboration between finance and clinicians has the potential not only to reduce costs for the organization, but also to improve employee and patient satisfaction and quality of care.

At Bristol Hospital, "Friday Night at the ER" is just one of a series of leadership training programs that has resulted in "happier employees, higher patient volumes, and improved throughput," Barwis says. Robert Rose, RN, MS, CNAA, BC, senior vice president of patient services and system chief nursing officer, agrees. "Initiatives such as 'Friday Night at the ER' have created new relationships throughout our hospital, from finance to nursing to housekeeping to IT," he says. "They've led to higher levels of teamwork throughout the organization."

Publication Date: Tuesday, April 01, 2008

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