Sustaining Savings

Barton S. Richards
Lee P. Kuhn

An HFMA Healthcare Financial Pulse Resource

With hospital nonlabor cost-reduction initiatives, identifying opportunities and capturing cost savings are only preliminary steps; the critical third step is sustaining the savings.

At a Glance

• Organizations can sustain savings through spend visibility, demand management, and appropriate contracting and sourcing techniques.
• Going green—for example, by using multi-use versus single-use products—can produce long-term savings.
• A well-defined materials management team, organized around spend categories, can help ensure that projected savings are fully realized.

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Assuming your team has been able to negotiate a contract that will produce savings, complacency in sustaining the savings can easily follow the initial sense of accomplishment. After your team has presented its findings or negotiation results to the executive team, energy and momentum may drop off as star performers on the team turn their attention away from the project and back toward more routine duties. The CFO is left thinking, “If I just realize 50 percent of the savings that this team is communicating to me, I’ll be OK.”

The reality may not be so simple. Hospitals face at least three impediments in their attempts to sustain savings:

• Limited available resources to support the efforts needed to sustain savings as staff members juggle their everyday duties
• Insufficient means to obtain the information needed to ascertain whether savings have been achieved (such as processes for measuring results)
• Reluctance to acquire the enabling technology required to support savings efforts (e.g., the technology is not well understood or thought to be too expensive)

To begin to overcome these obstacles and pave the way to sustaining the savings from cost-reduction initiatives over time, you should ask the following probing questions:

• Can we see projected savings from the initiatives in our profit and loss statement?
• Do we have a process of integrating captured savings into the hospital department budgets?
• Do we have a “spend visibility” tool—i.e., a tool that provides detailed information regarding the hospital’s purchasing practices, such as suppliers used and who is making the purchase?
• Do we have access to benchmark information to regularly check contracted pricing for market competitiveness?
• Do we have a review process in place to verify that contracted pricing is being invoiced?
• Does our supply chain team receive performance reports from the supply base that validate pricing, service, and quality?
• Are all supplier contracts stored and managed by a contracts administration team?
• Is our payer department communicating sufficiently with our supply chain team to ensure that all reimbursement levels are understood and to keep the team from negotiating low prices that limit the amount that can be reimbursed?
• Has our hospital invested in a claims reconciliation process or in charge capture software that can verify that billing is for the appropriate supply expense?
• Are we using a department profitability report to reinforce appropriate behavior, especially on physician preference items?

A “no” answer to any of these questions points to an opportunity to better realize savings over time. Among the most common opportunities for ensuring your organization will be able to sustain savings are spend visibility, demand management, and appropriate sourcing-contracting techniques. Many organizations have found environmentally friendly ways to seize these opportunities (see exhibit) .

Spend Visibility

Having spend visibility allows you to answer four key questions:

• What are you buying?
• Who are you buying from?
• What are you paying?
• Who is making the purchase?

Knowing the answers to these questions can help you not only realize savings from cost-reduction initiatives, but also identify potential areas for cost improvement or savings leakage. The following are just a few of the many ways to create spend visibility.

Saving scorecards. For each cost-reduction initiative, you should implement a monthly or quarterly savings tracking tool that allows you to compare actual savings achieved with expected savings. For example, a hospital that initiates a program to reduce the cost of hip implants would create a monthly report showing the volume of the various devices purchased, the price paid, the prior price paid, and the savings realized.

Supplier reports. Sometimes, your suppliers’ usage reports can give you the clearest insight into what you are spending. Typically, suppliers have more information on your spend than you do. Many organizations include a requirement in their supplier contracts that the supplier provide usage information on a regular basis. These reports should be precisely defined with the supplier up front to avoid the need for rework to get the required information.

Third-party tools. Spend visibility or spend analysis tools, first introduced about 10 years ago, have greatly improved capabilities, ease of use, and cost. These web-based tools collect data from existing procurement applications, accounts payable, procurement cards, and other third-party systems. There also are tools built around particular spend categories such as temporary services or nursing. These tools provide an easy way to review contract compliance, analyze volume information, and create reports that show spend by category to help you identify where spending is not with preferred suppliers.

The greatest challenge in achieving total spend visibility is ensuring that you have captured data from all of the relevant systems. For some spend categories, such as employee health benefits and travel, additional data sources are needed to provide total visibility. It is important to take the time up front to determine the various sources of spend information, including accounts payable, procurement cards, time and expense systems, and materials management systems.

Demand Management

Demand management is the process of reducing cost by decreasing and controlling the quantity of the items purchased or by opting for a less expensive product instead of a more expensive one when there is no material tradeoff in quality. Demand management can help you effectively optimize the results of your cost-reduction initiatives and uncover additional  savings opportunities. Examples include:

• Defining consumption requirements (e.g., when goods or services should be ordered and in what quantities)
• Matching specifications to need (e.g., amount of RAM or other peripherals for a PC)
• Standardization (e.g., limiting the types of pens to a set number to drive the deepest discount)
• Substitution (e.g., substituting brand name products with private label products that meet the end-users’ needs)
• Service levels (e.g., adjusting levels of facility maintenance and support activities, such as mail delivery, to meet but not exceed user needs)

Demand management does not mean trying to save money by purchasing items that do not meet the end-user requirements or specifications or establishing service levels that greatly increase risk. An organization’s spend should always conform to and meet the needs of the business.

When implemented effectively, however, demand management can help a hospital both sustain and increase its savings from efforts to reduce costs. As with other cost-reduction initiatives, capturing the results of the various demand management strategies helps to build momentum and organizational support. For example, if product A is less expensive than product B and it can be demonstrated to the end users that the items are technically equivalent, effective demand management can provide the means to capture savings.

Sourcing and Contracting

Contract management is often overlooked when it comes to realizing savings. Hospitals typically file contracts in multiple places including legal, materials management, or revenue cycle management. By implementing a consistent, standard contract management approach, a hospital can better understand what pricing it should be receiving, identify agreements that are up for renewal, and create more visibility into rebates that may be owed.

Approaches to managing contracts can range from a file cabinet or a simple electronic spreadsheet or database to a third-party software application. To optimize their contract management, hospitals should seek means to improve visibility to basic, critical contract information, such as:

• Start and end dates
• Termination requirements or other notice provisions
• Pricing and/or discount tiers
• Rebate structure
• Minimum revenue commitments
• Renewal policy
• Location(s) covered

Monitoring existing contracts is also an effective way to identify additional sourcing opportunities. For example, if a contract for laundry services is set to expire in six months, it may be a good time to either approach the incumbent supplier to negotiate an extension or to prepare to test the market and identify alternative suppliers.

Initiating sourcing events on new categories and even categories that have been worked previously typically yields significant savings and is another key lever to sustaining savings. A building block to a successful sourcing initiative is having knowledge of the marketplace. Whether the products in question are office supplies or physician preference items, such as implants, knowledge of what others are paying is one key to success.

Another means to sustain savings is to engage a third party that works on a contingency basis to audit invoices for utilities, telecommunications, and services such as courier services and identify savings opportunities.

Green Initiatives

Going green is an important goal for every organization today, and it does not necessarily have to cost more money. In fact, in some cases, going green can produce cost savings, and the solutions can often be self-sustaining. For example, opting for multi-use instead of single-use items (e.g., refillable print cartridges or items that can be sterilized and reused) can drive significant ongoing cost savings and reduce waste.

In the facilities area, implementing simple solutions in terms of lighting and electronic monitoring or controls can make meaningful and measurable sustained impact on the hospital’s monthly electric bill. Looking at the hospital’s fleet of vehicles, and requiring that replacement vehicles be energy efficient, could also help to drive out cost and reduce the organization’s
carbon footprint.

Hospitals should be wary of unforeseen problems in pursing such initiatives, however. Consider, for example, the following scenario:

The supply team has implemented changes as part of an expense reduction initiative. Although it is a strong initiative that has reduced expenses, it also has resulted in about $700,000 of lost revenue. The problem is that a supply was switched from a disposable product to a reusable product, and the reimbursement on the disposable supply wasn’t taken into consideration. There was no reimbursement on the reusable supply. The cost reduction from the reusable supply didn’t nearly cover the loss in revenue from the disposable supply. In addition, the reusable supply wasn’t as reusable as originally thought and had to be replaced more often than expected, thereby further diminishing the expected cost savings.

It is critical that good cross-functional communication be in place to avoid such a situation, where an improvement in one area causes costs to increase in another.

Leading Practices

Among the most challenging aspects of sustaining savings are making sure you are actually realizing the savings that you contracted and being able to devote resources to seeing savings initiatives supported across the organization. An effective way to achieve organizationwide support of the measures required to realize projected savings is to establish a well-defined materials management team whose role would be, in part, to educate staff across the organization regarding the actions required to sustain savings.

Defining the team’s roles and responsibilities is a critical first step. To ensure the team has the requisite knowledge for its charge, its membership should be organized around spend categories. Many organizations will group their spend into four to seven major category buckets to leverage their resources more effectively.  For example, an effective approach might be to have one team member who manages the sourcing activities for IT and telecommunications, another for office-related products (supplies, copiers, faxes), another for medical/surgical supplies (packs, bandages, etc.), another for facilities management (janitorial, security, utilities, landscaping) and so forth.

Most important, a category manager should be named as the point person for engaging key stakeholders during the initial phase of each cost-reduction initiative. He or she should work with suppliers to establish reports that detail ongoing usage and savings. Stakeholders such as finance should be required to sign off on savings that have resulted from supplier negotiations or process improvements as a means to legitimize the results. In addition, budgets should be updated to reflect the new level of spending that is required.

Having physicians and other clinicians involved in reviewing and testing the new items prior to switching a supply item out facilitates the change process and gives them a sense of ownership in the realization of savings.  The contracting group should be engaged to determine whether any changes made could affect expected payment.  The chargemaster team can also play a critical role to determine whether the existing charge code structure and processes need to be updated.

Providing a regular communication channel to the hospital’s administration is also critical in sustaining savings. Having the materials management team present monthly or quarterly updates on cost-reduction initiatives to the hospital’s leadership, with reports on the savings realized, can help keep the organization focused on the initiatives and create a channel for requesting assistance to overcome obstacles thrown up by unsupportive departments or employees who are undermining efforts to achieve projected savings. These meetings also provide an excellent means of ensuring executive support for the initiatives.

These monthly or quarterly meetings also should include finance, the revenue cycle team, executive management, and any other departments that will be affected by current or future sourcing initiatives. For example, the cardiology and orthopedic departments should be present for progress updates on initiatives related to physician preference items.

At the very least, before negotiating with suppliers, especially for physician preference items, the materials management team should share its negotiating strategy and goals with the managed care team so that the impact of the potential results is understood. For example, some payers set a cost or charge threshold when reimbursing implants. The cost and associated charge of some stents can be very close to the threshold for reimbursement. If the supply team negotiates a contract that lowers the cost of high-volume stents below the reimbursement threshold, the hospital would lose a significant amount of reimbursement.

Investing in technology tools is also a key enabler to sustaining cost savings. As mentioned previously, spend analysis and contract management tools are effective at identifying maverick spend and additional sourcing opportunities. Charge capture software that verifies whether all supply expense is being submitted in claims should also be reviewed.

The materials management team also can be charged with building and maintaining a competitive benchmarking database to facilitate comparisons of the hospital’s performance with best practices. Fulfilling this charge can involve substantial effort, so depending on the extent of the hospital’s internal resources available for such a task, the team may want to consult with outside experts armed with such benchmarks. Building out the database requires active participation with the existing and potential suppliers to keep abreast of industry trends and changes, as well as defining a structure to capture the ongoing market intelligence.

The Total Picture

A hospital’s ability to drive spend to preferred suppliers ultimately depends on how well its materials management team understands the entire procure-to-pay process and on the utility of the technology tools that the hospital uses for catalog management and order placement.

In short, the best way to avoid our opening scenario—and to sleep peacefully at night with full confidence in your organization’s ability to sustain its savings—is to have the right resources in place, with effective application of spend visibility, demand management, and contracting-sourcing techniques and with determination to seize green opportunities wherever possible.

Barton S. Richards is managing director, The Claro Group, Chicago (brichards@theclarogroup.com)

 Lee P. Kuhn is principal, The Claro Group, Chicago (lkuhn@theclarogroup.com)

10 Steps to Sustain Hard-Earned Savings

These 10 recommendations can help healthcare organizations avoid situations in which actual savings fall short of projected savings and, in some instances, can help them realize savings that far exceed those initially projected:

1 Create a savings sign-off process, where the budget holders of the affected area need to approve the captured savings and the associated reduction in their budgets. If the budget holder won’t sign, it is most likely a signal that he or she doesn’t believe the savings are real.

2 Invest in spend visibility software. Inexpensive solutions exist in the marketplace.

3 Ensure that your supply chain team understands the supplier markets in which the hospital spends money. Physician preference items, such as orthopedic and cardiac implants, are typically large spend areas that can be benchmarked.

4 Develop clear communication channels between your contracting group responsible for reimbursement negotiations with the payers and your supply chain team responsible for negotiations with suppliers.

5 For key suppliers, jointly develop scorecards to track and measure performance.

6 For utilities, telecommunications, courier, and other rate-based services, seek the help of an invoice auditor. These firms typically work on a contingency basis and will keep a portion of billing errors they uncover.

7 For temporary and even some professional services, consider investing in a vendor management system that will ensure that contractors are billing at negotiated rates.

8 Continue to encourage strategic sourcing efforts. Even mundane areas such as office supplies are ripe for renegotiations sooner than you might think.

9 Invest in a contract management database. Like the spend visibility tools, this software is not as expensive as it once was and will pay for itself again and again through tracking owed rebates and contract renewals. Hospitals tend not to have a centralized place for contracts.

10 Once strategic sourcing efforts are completed, consider demand management techniques as a means to continue to move the needle toward year-over-year cost savings.

Sustaining Savings: A Hospital Example

The experience of a healthcare facility in the Southeastern United States illustrates how integrity in sustaining savings is achieved when an organization coordinates supply, documentation, charging, cost, and reimbursement data. The hospital initiated a revenue opportunity review that included analyzing medical-surgical supply expenses and corresponding operating income. As part of the process, the hospital reviewed the entire process from procurement through reimbursement to determine both cost and revenue implications for key payers.

One area that appeared to present significant opportunities for cost reduction was the use of implantable cardioverter defibrillators (ICDs). When the cost and revenue associated with these items were analyzed, it became evident that there was significant variation in profitability across payers when costs were compared with actual reimbursement. Although finding the lowest-cost ICD was one possible approach, the hospital decided that the best approach would be to take a more holistic view of the item that would also consider how it was reimbursed.

A look at the managed care contracts was revealing. Although this hospital actually had a significant number of patients using ICDs as outpatients, the payer’s contract did not include a carve-out for ICDs for patients on an outpatient basis. The hospital was losing money every time it utilized an ICD on an outpatient basis.

The hospital’s leaders realized that for effective managed care contract negotiations, hospitals require a strong awareness of costs for the patient population and each patient’s potential level of severity. By using a multidisciplined approach (involving patient financial services, cardiovascular service line leaders, contracts group, and medical records), the hospital was able to better understand its cost structure and go back to the payer to set up the contract to better reflect the way patient care was being delivered.