This article was written by Lisa Miller.
Uncovering overlooked costs and spend sources is vital to ensuring your hospital maximizes its profit margins. US healthcare costs are projected to continue to rise by an average annual rate of national health spending growth of 5.5 percent through 2027 according to the Centers for Medicare & Medicaid Services (CMS).
While all hospitals monitor their costs, many take only the most visible and obvious into account. The following three insights will help your hospital to implement proven strategies to uncover overlooked costs and drive margin improvement.
12 month AP vendor spend report
I am a big proponent that every organization should pull a 12 month AP vendor spend report on a monthly basis. By producing a high level overview, your hospital can easily see what spend is taking place every month. It is one of the key strategies we advise our clients to implement in order to identify where your money is being spent each month.
In my experience, reviewing their AP spend report can often reveal some unexpected surprises related to hospital spend. However, with an in-depth understanding, you can ask the right questions and extract more data where specific areas of concern are identified.
The definition of an outlier is a case where costs exceed the projected or allowable amount for the specific treatment. In our experience at VIE Healthcare Consulting, all health systems have them.
For instance, a typical outlier may arise from bilateral surgery. Knee surgeries are common examples of this. Everything relating to bilateral care in a hospital usually indicates there will be either a higher cost incurred for the patient or a less profitable outcome for the hospital.
When we work with CFOs and administrators to identify bilateral spend, they always express surprise over the low profit margins in these cases, as well as their occurrence rate across the hospital.
Additional examples of outliers include:
- Clinical variations by service line and physicians.
- Waste reporting.
- Inventory issues – which are often linked to consignment. For example, how much does your hospital utilize consignment? Are you tracking it to ensure that levels are accurate? Can you utilize more? Do you own the consignment inventory? Several of our clients at VIE Healthcare have asked us to monitor their consignment inventory levels. Upon taking a deeper dive we found that they did in fact own the consignment inventories. Subsequently, we were able to add substantial revenue to their bottom line within a few months.
At VIE Healthcare, we endeavor to bring in best practices from other sectors.
Zero-based budgeting is one example of this approach. It is a little used system in hospitals that has enjoyed tremendous success in other industries.
Defined as “…a method of budgeting in which all expenses must be justified for each new period…“, zero-based budgeting enables a hospital to review their budgeting process from a different perspective, rather than an annual or monthly basis.
Rather than basing your budget forecast on last year’s numbers and increasing or reducing it by an agreed percentage, zero-based budgeting requires each hospital department to start from a zero budget and justify their purchases and spend.
At VIE Healthcare, we estimate that hospitals can reduce costs by 20-25 per cent with a zero-based budgeting approach.