Sean Angert
Hazel Seabrook

In an increasingly uncertain healthcare environment, hospitals can prepare for the challenges ahead and position themselves for success by taking a deeper look at their nonlabor expenses.

At a Glance  

To implement a comprehensive approach for nonlabor cost reduction, hospitals should:  

  • Set goals  
  • Identify areas to include or exclude  
  • Establish a project structure  
  • Develop a communications plan  
  • Collect and analyze data  
  • Establish teams to review opportunities for change  
  • Monitor progress and report results  

Today's budget constraints require that hospitals adopt an approach to nonlabor expense management that is broader, deeper, and more strategic than ever before.

Nonlabor expenses-including expenses for supplies, purchased services, and employee benefits-typically account for 54 to 65 percent of overall operating expenses. In this era of reform, it's no longer enough for hospitals and health systems to simply seek price concessions from their supply vendors. What healthcare organizations need is an approach that reexamines the entire thought process behind the use of supplies and purchased services and seeks opportunities for enhanced efficiency and value.

Going Broader and Deeper

A review of potential nonlabor savings opportunities should include all supplies (medical, nonmedical), pharmaceuticals, purchased services (clinical and nonclinical), and employee benefits. Healthcare organizations willing to take a more progressive and comprehensive approach to nonlabor expense management should look far beyond the price they pay for a given item. Rather than simply examining the cost per unit, they should ask the following fundamental questions:

  • How is the supply or service used by the organization?
  • How much is the supply or service used by the organization?
  • What quality outcome is the product providing?
  • Why is the product or service being used at all?
  • Will a change in the use of the product or service affect quality of care, efficiency, and/or cost?

Determining both the cost of the product or service and the quality and service drivers behind its use requires an approach and level of thinking that few health systems routinely use. For this type of analysis to take place, employees at all levels of the organization must actively participate in reviewing and analyzing how products and services are used in daily routines.

For example, using a traditional expense management approach to reduce the cost of 434 gauze bandages, a hospital committee might simply search for and switch to the lowest-cost supplier. But a more comprehensive approach-one with the potential for greater savings-considers factors such as:

  • What areas of the hospital use this product?
  • How many of these bandages are used, and for which types of patients?
  • How can the hospital measure and evaluate the quality of the product?
  • Could a smaller, lower-cost bandage be substituted in some cases?

By approaching the decision more strategically, the hospital will gain a better understanding of internal variations on use of the product throughout the organization and open up new opportunities to adjust or improve its use. This information will give the hospital greater leverage in negotiating specific pricing based on what is truly required to meet its needs. By analyzing the data and looking at the context of each purchasing decision, organizations will be more likely to arrive at the most efficient solution-and achieve far greater savings in the long run.

The same evaluation process can be used in analyzing the use of purchased services. One such example is the use of cell phones (see the sidebar below). The quickest and most simplistic way to examine an organization's cell phone costs is to review the rate plans against the organization's usage and try to switch to a plan with the lowest cost per minute. However, a more in-depth analysis of cell phone usage-the mix of devices, the departments using these devices, and policies for the use of devices by staff-may reveal that the organization is paying for cell phone service for employees who do not truly need the service to perform their jobs.

The "Next-Generation" Approach

At the heart of the "next-generation" approach is a deep and thorough questioning and data analysis of how products, services, and benefits are being used, and how reevaluating their use could improve financial and quality outcomes. This approach requires:

  • Leadership, involvement, and accountability of senior managers
  • A more strategic focus on long-term cost management
  • Concrete short-term and long-term goals (financial, quality, and service)
  • A review of all nonlabor categories, including services not contracted or managed by purchasing or supply chain departments
  • Significant involvement of stakeholders at all levels-especially clinical staff
  • Ongoing monitoring of progress toward savings goals

The following are specific steps healthcare organizations can take to implement a comprehensive cost management program for nonlabor expenses.

Set goals. The organization must first determine the scope of the project and what it is trying to achieve. This goal-setting process should be framed within the context of more effectively managing expenses while maintaining the highest levels of patient safety and quality. The effort will be undermined if stakeholders believe that quality or safety could be compromised.

This initial analysis should begin with a high-level review of metrics such as supply cost as a percentage of net patient revenue, and then should drill down to a more granular level to understand categories of expenses, utilization rates, and variations. It should examine expense trends, areas of cost creep, recent shifts in payer mix, vendor trends, and the cost and utilization of supplies, pharmaceuticals, purchased services, and benefits.

Identify areas to include or exclude. Many areas can be included in a review of nonlabor costs. In addition to examining supplies, professional services, and pharmaceuticals, there are opportunities to better manage human resource-related benefits, including premium-pay practices (e.g., overtime pay and shift differentials), health and retirement benefits, and other compensation practices. These benefit areas can be a significant source of savings, but they should be approached carefully based on the environment and local healthcare market.

A hospital may have good reasons, however, not to want to make cuts in specific areas-and these reasons should be carefully considered as well. Perhaps certain contracts have recently been renegotiated, or the organization has made a commitment not to reduce physician compensation or employee retirement benefits. Whatever the specifics may be, if certain areas are off limits for a cost review, they should be identified at the beginning of the process. It should be kept in mind, however, that to prepare for future financial hurdles, organizations can no longer afford to have "sacred cows." They must be willing to challenge every expense item.

Establish a project structure that emphasizes accountability. To change underlying organizational cultures that may stand in the way of reducing costs, the project needs a structure that ensures accountability at the most senior levels of the organization. Although it may sound simple, design and accountability play critical roles in the ultimate success of the initiative. Organizational commitment at the highest levels is critical. Naming one or more senior executives as the "executive sponsor" of the effort helps achieve this. The executive sponsor should establish a steering committee to oversee and guide the initiative. Steering committee members would likely include the CFO, COO, chief nursing officer, chief medical officer, vice president of supply chain, director of pharmacy, operating room director, and other key leaders. The steering committee would then designate additional work team leaders, who would form work teams to take on specific cost-cutting initiatives. (See the section below  "Establish teams to review opportunities for change.")

Develop a communication plan. The scope and size of the effort, particularly in a multihospital system, requires a well-considered and executed communications plan. Nonlabor cost-management projects can involve hundreds of distinct initiatives, and the sheer volume could make it difficult to manage key messages if there is no coherent communications strategy tying them all together. A lack of coordinated communication can lead to confusion and resentment among employees who will be affected by changes; effective communication can ensure buy-in and support.

Linking the expense management initiative to the organization's core mission is one effective way to build understanding throughout the organization. Framing a cost management effort within the context of stewardship of resources, enhancement of staff and patient safety, enhanced quality of care, and the long-term success of the hospital or system can help staff understand and contribute in a meaningful way to the effort. The specific communication process will depend upon the organization's existing communications infrastructure. Routine management, staff, and medical staff meetings are often ideal forums for gathering input and providing updates.


Collect data. Each hospital's circumstances are driven by demographics, market, history, and staff. To get an accurate understanding of the potential for nonlabor cost savings, it is necessary not only to compare the organization with other, similarly situated hospitals, but also to collect information on existing contracts, current staff benefits, purchase orders, group purchasing expenses, and accounts payable, as well as demographic information related to volumes, patient days, and outpatient visits. Clinical quality and patient satisfaction metrics also should be incorporated, where appropriate.

Analyze the data. For each expense category being examined-whether IV catheters, telecommunications services, or premium pay-an analysis of current practices and costs should pinpoint how each product or service is being used and by whom. A combination of both internal trend analysis and available external data (where reliable) should serve as the basis for review. The analysis should be coupled with in-person interviews with nurses and other staff to gain a deeper understanding of what drives decisions to use specific products/services and how changes might affect care processes, service, or physician behaviors. Clinical decision making should always be supported by sound current clinical evidence, not by product preference or personal passion. Teams should then be formed to examine each category or subcategory in greater detail.

Establish teams to review opportunities for change. Once it becomes clear where opportunities exist, the steering committee will designate key staff to lead and serve on work teams.

Work teams charged with further investigating and endorsing potential changes should be made up of members who are both familiar with the services, products, or care processes they are examining and willing to think creatively and communicate new ideas with peers and team leaders.

At least in the beginning of the process-and possibly throughout-steering committee members should attend work team meetings and report progress to the executive sponsor.

Once work team members are chosen, they will determine how frequently their teams should meet and what their teams should accomplish during each meeting. Work teams will review, discuss, and prioritize the potential utilization improvement and savings opportunities. Every team member should have a role in the process, so that ownership of the end result will be spread evenly among all participants. If there are many areas to tackle, subgroups may also be formed, each of which should have a leader who is accountable for results. Physician champions should be added as needed when a physician preference item is being considered. Their input, steerage, and ability to act as liaisons to the medical staff are critical.

Monitor progress and report results. Using the goals established at the beginning of the process, teams should track their results to monitor their progress. Data should incorporate baseline, benchmark, and postimplementation metrics and should be reported to the steering committee on a routine basis-no less than quarterly. These dashboards will be critical to the sustainability of the results over the long term.

To make the most of the cost review, the team structure should remain in place even after initial goals have been met. At the beginning of each fiscal year, new goals that incorporate new products and services, shifts in demographics, and changing market conditions can be set and monitored.

Creating a Culture that Supports Nonlabor Expense Reduction

Having a team structure in place to analyze changes in product and service offerings and utilization as they occur and adjust goals accordingly will ensure that nonlabor expense management becomes a culture within the organization rather than a one-time boost to the bottom line.

By taking this approach-looking more deeply and broadly at an organization's expenses, involving senior leadership, ensuring accountability, setting goals, and monitoring performance-organizations can set and meet ambitious savings targets while maintaining their focus on providing high-quality care and service.

Sean Angert is a managing director, Huron Healthcare, Chicago (

Hazel Seabrook is a managing director, Huron Healthcare, Chicago (


Spotlight on Telecommunications: Optimizing Management of Wireless Devices  

According to industry statistics, healthcare spending on telecommunications is expected to increase by 44 percent over the next three years, approaching a cost of $12.4 billion by 2013.a As the use of wireless devices and applications becomes more pervasive, related expenses are rising exponentially for many organizations. Technology and contracting terms change rapidly, leaving organizations with outdated policies and contracts that often do not reflect the most efficient use of their resources. A nontraditional approach to expense management can reap significant savings in this area.

Carefully examining an organization's mix of devices, policies for their use, and variations in usage by department or individual can help disclose significant cost saving opportunities. Savings of 10 to 20 percent are possible if an organization is willing to take an all-encompassing view of its telecommunications spending rather than opt for a quick switch to a lower-cost plan or provider. One multihospital health system set a target of $420,000 in annual telecom savings, but was actually able to cut $715,000 from its yearly expenses by taking a more comprehensive approach. Below are suggestions for other organizations that wish to achieve similar results.

Create a work group of accountable individuals. The group may include the CIO, a telecommunications manager, and representatives from supply chain or purchasing and finance. The group should begin its examination by pulling all relevant telecommunications contracts, invoices, and other usage records.

Ask the right questions. Rather than focusing narrowly on cost per minute for cell phone coverage, broaden the examination to include all handheld devices used within the organization, including cell phones, PDAs, and pagers. For example, an organization might be able to eliminate the use of pagers if all personnel already have smart phones that can perform the same function.

Develop the spend profile. The members of the work group should examine several months of detailed data to determine telecommunications utilization and cost drivers. Look at where duplication
might exist, how usage varies by department and by individual, and who uses the services most frequently. If there are a handful of high users, they might be driving much of the overall spending. Adjusting those individuals' usage or restructuring a contract to drop them to a lower tier of coverage may lead to significant savings. The work group should outline what types of devices are necessary for the organization to function and which carriers can provide the best service to meet these needs.

Address the culture. Approaches to managing wireless device costs can vary significantly among organizations. In many organizations, policies exist, but are not routinely followed. Wireless devices are sometimes seen as an employee benefit rather than a cost of doing business. Employees should view their telecom expense not as an entitlement, but as use of an asset for which they are accountable. An organization's policy should outline which employees need access to the devices, and consideration should be given to imposing an expense limit for certain employees or departments. Creating a culture that emphasizes responsible stewardship of resources, similar to management expectations of medical and clinical staff regarding supplies, can have a significant cost impact.

Monitor expenses. Mechanisms should be developed to track wireless expenses for each department and employee. If managers and staff do not know their budgets and costs, they will not understand where and why changes may be necessary.

Negotiate with suppliers. Some suppliers will agree to change the presentation of their invoices to enable an organization to track and benchmark usage and spending. Also, as new devices and plans hit the market, it may be worthwhile to go back to suppliers to incorporate new savings opportunities.

Once the organization's telecom expenses are carefully analyzed, solutions can be explored to meet savings targets. A wide range of options are available, from working with suppliers to adjust tiers of coverage to overhauling the organization's policy so that coverage becomes an employee-borne expense that must be reimbursed. The approach and ultimate results will depend largely on the balance the organization is trying to strike.

Publication Date: Tuesday, March 01, 2011

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