A critical part of effectively managing a healthcare facility is ensuring adequate profitability. There are a variety of ways to reduce costs and improve profitability. Based on my experience as Director of Expense Management at Encompass Healthcare Data Solutions, I have identified eight ways to increase a healthcare facility’s profitability. While there are many ways to decrease spending, these suggestions are essential to running an efficient and profitable healthcare business.
1. Apply the 80/20 rule to your cost reduction efforts.
80% of a medical facility’s expenses come from only 20% of their vendors. Similarly, 80% of the costs incurred with each vendor comes from just 20% of the products purchased. To reduce the amount of money spent on vendors, focus your cost reduction efforts on the top 80% of your spending with the top 20% of your vendors. This prioritization can result in considerable savings by focusing on the vendors and products that cost the most.
2. Reduce the number of purchase orders created.
I have observed a medical facility place 1 to 5 orders with the same vendor every day. Most of these daily orders incurred shipping costs and large administrative fees. For example, it costs approximately $100 in administrative fees to create a purchase order, including placing an order, receiving shipments, matching packing slips with invoices, and paying the invoice. Reducing the number of purchase orders created can result in significant savings by lowering administrative and shipping costs. Work to determine how you can lower the number of purchase orders you consistently place.
3. Reduce employee turnover costs by retaining your “Rock Star” employees.
The number one reason people leave employment is not related to pay or benefits, but rather a lack of appreciation. Whether you are a neurosurgeon or a minimum wage worker, the number one reason you will leave an employer is that you don’t feel appreciated. I once worked with a wise anesthesiologist that said, “If you want to know who is important, let the garbage men go on strike.” Identify ways to express appreciation for your employees. This appreciation boosts morale, reduces turnover, and cut costs as a result.
4. Determine whether there is another manufacturer that makes the same drug or supply at a better price.
As of the writing of this article, there are seven manufacturers of the anesthetic Propofol. Identifying which manufacturer provides a drug or item at the best price can result in significant savings. Shop around for the lowest price for a drug or supply item, but keep in mind that not all distributors will stock all brands. Taking the time to compare costs can result in significant savings on drugs and supplies.
5. Use the generic equivalent of the product you are purchasing.
In addition to identifying the manufacturer that can offer the best price on supplies, it is also important to determine whether a generic version of the sought-after item is available. If the product you consider is a medical or surgical supply, does the distributor have a private label (e.g., exam gloves, gauze, bandages, tape)? For example, a medical facility reduced the cost of a high-volume injectable medication from $97 per vial to $4 per vial by merely purchasing a generic equivalent. This simple swap resulted in a 96% reduction in price, which saved the facility $22,000 per year. This example shows that using generic supplies can drastically reduce costs and, as a result, improve the profitability of your facility.
6. Ask for discounts.
Recently, an early pay discount was negotiated that resulted in a savings of $84,000 per year. Ironically, the facility was already paying their invoices within the early pay discount period, but they had not completed the 2-page document required to achieve the $84,000 per year in savings. This simple is an excellent example of how vendors may not volunteer savings opportunities; therefore, you have to know what questions to ask. Always ask if there are discounts available, and don’t be afraid to negotiate with vendors.
7. Negotiate a bulk purchase price for high volume items.
If cash flow is good and storage is not an issue, buying frequently used products in bulk could save you more than you might think. In the past, I worked with a large surgery center that purchased a year’s supply of a specific type of implant at a significant discount. Purchasing in this way not only saves money but also helps ensure adequate amounts of supplies on hand.
8. Hire consultants (subject matter experts) to help with things like facility accreditation credentialing staff and cost reduction.
Don’t be penny wise and pound foolish. Consultants can save you a lot of time, money, and frustration. Calculate the hourly worth of the in-house employee that would be completing your accreditation or cost reduction projects. For example, if the employee’s value is $50 per hour, and they put in 100 hours on a cost reduction or accreditation project, this has cost you $5,000. You also must factor in the decrease in productivity while the employee is pulled away from their regular duties to work on accreditation. Next, calculate the potential amount of money that this consultant could save you through changes in accreditation and cost reduction. These calculations can help you determine if using a consultant is the right choice for you.
Ensuring adequate profitability is a critical part of running a successful healthcare facility. There are many ways to improve profit, but the eight suggestions above are some of the best. Reducing costs by using strategies such as buying in bulk, reducing employee turnover, and negotiating prices can dramatically reduce the expenses needed to run a healthcare facility, increasing profitability. At first, it can be challenging to know where to start, but a significant first step is to hire a consultant to identify possible cost-reduction areas. Partnering with a subject matter expert can be an excellent way to begin reducing costs and increasing profitability, helping to ensure your healthcare facility’s success for years to come.