By Jamie Oaks
“A wise man will make more opportunities than he finds.” — Francis Bacon
The idea that people must look for ways to create opportunities rather than rely on chance to find them was first proposed in the 16th century by English philosopher Francis Bacon (The Essays of Francis Bacon). While this concept may seem impractical amid a pandemic, it is often during the most difficult times that great ideas—and opportunities—are conceived. For hospitals and health systems willing to look further, new opportunities can result in significant cost savings, adding tens to hundreds of millions of dollars to a bottom line each year.
According to the American Hospital Association, the immense financial strain facing hospitals and health systems caused by COVID-19 will continue through at least the end of 2021. Projected total losses for the nation’s hospitals and health systems are estimated to be at least $323.1 billion in 2020. To mitigate the financial fallout, the immediate reaction by many healthcare organizations was to furlough employees and reduce headcount wherever possible. As CFOs put plans in place to minimize the long-term financial impact of the crisis, the next obvious target is supply chains, a hospital’s second-largest expense behind labor.
Historically, when pursuing supply chain cuts, healthcare organizations have targeted a mere three to five percent decrease in fees when approaching vendors. With COVID-19 the industry has become more bullish, asking for 15 to 20 percent reductions. While this reduction may seem favorable, if a contract is grossly out of line with the marketplace—and the organization is unaware—money is left on the table. CFOs and finance teams happily settle for a 20 percent reduction when a 40 percent reduction would have been easily attainable. Considering a hospital can have thousands of contracts, the numbers add up quickly. Unfortunately, this “guesswork” approach is a common method for cutting costs within the healthcare industry.
Knowledge creates opportunities
Supply chain cuts are a low-risk way to achieve significant gains with minimal investment. Yet hospitals and health systems continue to miss significant financial opportunities by not diving deeper into their spend and contract data. Following the simple formula—analyze spending and apply benchmark data to identify categories with the highest savings opportunities, then set goals for increased savings—is a surefire way to save millions. The same benchmark data can be used to increase an organization’s bargaining power. For example, with knowledge that a contract is grossly out of line, a proposed 20 percent reduction fee can easily be increased to 40 percent or more.
Another tactic is to look for savings that can be realized immediately. Analyze contracts to identify clauses and terms that lead to quick-hit negotiation opportunities like autorenewals and termination-without-cause contracts. Goals in these instances should be 20 percent fee reductions or greater. When considering the volume of contracts at any single hospital or health system, this quick-hit approach to every contract without a termination clause can yield notable costs savings.
Don’t forget to categorize savings opportunities and goals so everyone is on the same page. Roadmap visualization tools are a great way to keep buying teams organized and on task to achieve savings goals. CFOs and finance teams can easily track tasks and timelines to ensure targets are met.
The old-school guesswork approach to cutting supply spend is not enough in today’s economic environment. Hospitals and health systems must be creative. This means looking at other tactics and leveraging technology with rich data analytics capabilities. It is this level of insight and actionable data that puts healthcare organizations in a position to act and achieve immediate savings.
Jamie Oakes is Chief Sales Officer for TractManager. Jamie has more than 25 years of experience in the healthcare arena and specializes in strategic planning, revenue enhancements, and operational efficiencies. His work with hospitals, GPOs, managed care organizations, and large healthcare vendors has brought significant financial and organizational value to his clients.