With so many cost-saving opportunities, what should health systems prioritize?
We need to take a step back and begin with the basics. I would say the initial focus needs to be the income statement. It’s a source of truth.
Managing and reducing operational costs is a difficult process for health systems. It competes with strategic initiatives, physician recruitment and other activities.
Focusing on the income statement can enable organizations to make sure they’re assigning resources and aligning strategic partnerships to the correct expense areas.
When we think about workforce optimization, we’re not talking about reductions in force or making staff do more with less. We’re really focused on understanding the barriers that create inefficiencies in workflows.
There are many inefficiencies in health care. If we can help eliminate those inefficiencies or eliminate those non-value-added processes that staff do, we will create cost savings and increase overall staff satisfaction.
Another area to focus on for cost savings is the supply chain. This is a health system’s second-largest cost area, representing 20% to 25% of total cost.
We have seen supply and purchased service costs increase over the last year. Throughout the pandemic, supply and demand issues have increased prices for health care supplies, and now we’re seeing inflation that’s beginning to increase the cost of supply items. Now is a great time to address the supply cost issue.
I would also mention that inventory costs have increased. Organizations used to buy inventory “just in time” or when they needed it. The pandemic changed that. Health systems began to buy supplies to have on hand.
Moving forward, there’s an opportunity to balance what you really need now with what you may need in case of another emergency. Balancing this will help you ensure your inventory costs are appropriate.
If you dig further into the supply chain, you’ll find significant opportunities to standardize and rationalize products that physicians use and those that health systems need for patient care.
There is still a significant opportunity to renegotiate pricing with vendors to lower your overall costs. There are plenty of opportunities to consolidate vendors and realize cost savings by renegotiating better pricing.
Another area to realize cost savings is the capital cost of ownership. Health systems have a lot of expensive buildings and use a lot of expensive equipment for patient care.
I think there is an opportunity to understand that capital cost footprint. How many sites do you have? How much technology have you invested in, and what is the cost of that to the health system? Are you utilizing that technology and those buildings appropriately?
When you think about the capital cost of ownership, you want to ensure that you have the right assets for the patient populations you serve.
Improving the digital front door is seen as a solution to many problems. Can you talk more about how the digital front door can help reduce costs?
Yes, this is interesting. We saw a lot of digital visits and digital technologies emerge during the pandemic. And it feels like it’s all been really good for health care. It can help significantly reduce health care costs overall and give patients more convenience at the same time. So, when I think about the digital front door, I think about modernizing the patient experience.
Many patients use mobile apps or their desktops to buy things they need or schedule services in other areas of life. This opens many opportunities for health care, too.
When you think about mobile technology in health care, much of it is centered around enabling patients to schedule their services and review their medical records. It’s exciting to think about being able to pre-register for a service without answering the same question from three or four people or being able to make payments or set up payment arrangements digitally.
There are opportunities in the digital arena to search for lower cost-of-care settings, particularly with virtual visits, that reduce some of the capital costs of facilities and more. If you can implement that in a very effective way in your market, you can eliminate significant investments. Digital office visits can expand your footprint without having to invest in brick-and-mortar buildings.
Earlier, you referenced strategic partnerships and what a partnership model could look like. How should health systems approach strategic partnerships to get the most value?
There are many partnership structures out there today, and there is a need to give health care leaders additional bandwidth to continue to push their organizations forward overall. Not just from a cost optimization perspective, but also digitally to expand their market footprint.
I recommend health systems consider strategic partnerships focused on more corporate overhead functions or areas further removed from patient care.
In my 30-plus years of health care experience, I’ve seen a number of successful partnerships in specific areas that have helped organizations reduce their administrative and corporate burden.
Revenue cycle is one such area. It can be a challenge to recruit individuals who want to make a career in revenue cycle, especially in smaller markets. These are typically lower-wage positions, and you’re often competing with local restaurants and shops for that same workforce.
There are real opportunities in this area to use strategic partnerships to increase patient satisfaction and increase your focus on core competencies.
The same goes for IT. There’s high demand for IT professionals, more so now than ever before. An organization may want to focus on IT from a strategic partnership perspective.
Care management is another area where partnerships can help accelerate initiatives while balancing the bandwidth of responsible executives. Optum provides care management services to a number of our strategic partners.
About Eric Young, Vice President, Optum Advisory Services
Eric Young has extensive hands-on experience in supporting performance improvement across hospital and health system finance, strategy and operations. He supports a wide array of health system margin improvement efforts with expertise in health system finance, cost management, revenue cycle and reimbursement, debt and capital management and strategic growth.
Young has 29 years of experience in health care finance and operations, including more than 17 years as a health system chief financial officer. He holds a Bachelor of Science in business administration from Urbana University and an MBA from Capital University.
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