Evolving Your Cost Cutting Initiatives to Drive Long-Term Sustainability
For many hospitals today, the question is no longer just how to improve margins; it’s how to craft a financial strategy for long-term viability.
I don’t know when exactly it happened, but it’s clear that at some point recently, hospital management teams figured out that traditional cost cutting measures alone are not enough to ensure financial viability and sustainability.
And in case you need further proof, with an aging population demanding higher and broader levels of care, it is of more than a passing concern that more than 100 hospitals (and more than 80 in rural areas) have closed in recent years.
The battle isn’t being fought (or won) at the tactical level anymore. By tactical, I mean, for example, squeezing your GPO contracts to cut your consumables’ costs another .3% isn’t going to accomplish the goal of keeping you in business. Suddenly, with all the turmoil in the healthcare market combined with increasing volatility in the reimbursement debate and ever-rising costs, hospitals need to plan investments in capital equipment and people in the context of what services will need to be offered in order for the hospital to stay in business.
I ran across a worthwhile discussion of this very topic developed by Bank of America/Merrill Lynch and published in Becker’s Hospital Review that sums the problem up nicely. Based on survey responses from hospital executives as well as a roundtable discussion, the article discusses strategic investments to maintain market relevance, capital investment management and long-term cost evaluation.
I talk to hospital management every day in our mission to help our client hospitals get an end-to-end view of their medical equipment lifecycle and improve their ROI on equipment acquisition, service contracts and value recovery at disposition. These discussions used to be solely about cutting costs, but these days, they’re more about acquiring and profitably deploying the clinical tools and infrastructure that address what the patient population will demand in the next three to five years.
For example, one of our hospital clients had a capital plan to upgrade its digital mammography systems to 3D/tomosynthesis and had the foresight to identify critical networking requirements that were needed to support the expanded clinical offering. In order to fund the additional network costs, the hospital reallocated budgeted capital by upgrading existing mammography systems instead of purchasing new ones, saving 67% on each unit and yielding $1 million in total savings that fully covered the additional network expansion costs. In addition, the hospital increased the average reimbursement by $50 per case, ensuring a positive ROI in less than a year. This is an excellent example of creative long-term planning that can drive strategic value.
Long term financial sustainability and improved margins are really about strategic cost reduction, or as we’ve written about in previous posts, bending your hospital’s cost curve.
Where does your hospital stand in the evolution from tactical cost-cutting to strategic financial planning in dealing with healthcare’s new reality?Tweet