Strategic Value Analysis In Healthcare

Most Healthcare Organizations Have One (Or At The Most Two) Savings Streams And Think They Are King Of The Hill!

Every year new cuts from Medicare, Medicaid, HMOs and insurance companies squeeze your healthcare organization’s bottom line. This leaving only one option for your hospital or system if you are to continue to meet your mission; you must make savings happen to fill in for your revenue gaps each year! This is when panic sets in for most supply chain professionals because the pressure is put on them by their management to make savings happen – now. It doesn’t need to be that way!

If you want to stop this madness, insanity, and folly, you should realize by now that every year you need to target new supply chain savings to continue to improve your hospital or system’s bottom line. You should also understand that GPO savings are quickly eaten up by inflation (2.7% in 2004) every year, and that GPO savings are only one savings stream for you to tap into.

From my experience, multiple savings streams are the most productive way to insure that your hospital or system makes its bottom line every year. Here are 3.5 reasons why you need to have multiple savings steams to keep your savings flowing year in and year out:

1. Your GPO and standardization savings alone won’t provide you with the savings yield that your hospital or system requires yearly, since our studies show that these savings are net out to less than .005% annually.

2. Most of the ripe fruit has been picked from most healthcare organizations’ vineyards; to move to the next level of savings performance you will need to explore new savings streams.

3. You have heard of the phrase one trick pony. Well, that’s what you are if you are relying on your GPO savings as your sole savings stream. You need to learn two, three, four or more new savings tricks to stay relevant in your profession.

3.5 You need to think differently and do differently to generate the savings that your management is looking for to keep your hospital or system stable, secure and viable in the 21^st century.

So now that know that you need multiple savings streams, how do you find them? Your first line of defense should be a comprehensive supply value analysis program that continues to generate savings in excess of the inflation rate annually for our clients (in some cases) for 5 to 8 years. This supply value analysis program would be the jumping off point for other savings streams to develop, such as activity-cased costing, inventory analysis, outsourcing, process re-engineering, contract administration, electronic auctions, process mapping, lean purchasing, and cycle time analysis. Once you build the foundation of your savings streams with value analysis, new savings streams will quickly open up that you never dreamed possible.

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I have a real concern that my hospital’s inventories are bloated, but I don’t know how to measure if this is really a fact. What’s your advice? S.C.

The quickest measure to see if your hospital’s inventories are bloated is to calculate them on a per occupied bed basis. Meaning, divide your inventory values by department by your average occupied beds (e.g. $253,936.23/96 = $2,645.17 per occupied bed), then benchmark this number with three like size hospitals in your community to see how you measure up.

P.S. If anyone else has a burning question that you would like me to answer, please call or e-mail me and I would be delighted to answer it.

5% To 8% Savings Can Be Cut And Pruned From Your Food Service Contracts Without Cutting Quality

I estimate that 40% to 45% of hospitals and 10% to 15% of nursing homes outsource their food service departments to a third party. These healthcare organizations believe that they are getting the lowest possible cost by doing so. This might be true in many situations, but the hard facts are that if your food service contract isn’t structured properly, the reverse (higher cost) could be the case. To avoid the downside of food service outsourcing, I have listed below four recommendations to assist you in keeping your food service contractor cost in line:

1. Sign only management contracts, rather than departmental fixed price contracts with your food service contractor. This means that the contractor doesn’t have control over your employees or food purchasing. They are just hired to manage your food service operations. This will enable you to have more cost effective options, such as buying your own food or reducing your FTE’s as you see fit.

2. Have your food service contractor bid on your food purchases (don’t accept that they have the lowest cost because of their volume purchasing), since food service providers receive manufacturer rebates that generally don’t pass through to your organization on a fixed price contract. By bidding your food you will know what your true raw food cost is too.

3. Don’t allow your contractor to have an up charge (5% to 15%) for their catering and special functions services. The reason for this is that you don’t want to give them an incentive to build up or promote this service to obtain extra profits

4. Don’t accept that your contractor’s labor costs are at the lowest possible levels. Contractors have a tendency to do only what they need to meet the terms of their contract. Therefore, perform your own staffing studies to insure that your staffing is appropriate. Often, it is not!

Lastly, benchmark the terms, conditions and fees of your contract with peer healthcare organizations to insure that your food service contract is at the lowest cost possible. You might be surprised what you find out through this process.

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It is clear to see in the healthcare world that Value Analysis is here to stay, yet there is no clear cut "Complete HOW TO" system that you can rely on in order to bring your organization to the next level of supply chain savings. More and more organizations are hiring full time staff totally dedicated to Value Analysis to attack the "SAVINGS BEYOND PRICE" that is the next level of major savings opportunities for Healthcare Organizations.

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