Bending Your Hospital’s Cost Curve: A $95 Billion Opportunity for Innovative Expense Reduction

Healthcare executives seem to be adjusting their strategies to become more efficient and lean, regardless of what ends up happening in Washington.

For example, the most recent Advisory Board Company annual survey of healthcare CEOs this year had some surprising responses. An entirely new concern – finding innovative ways to reduce expenses – hadn’t appeared in previous years’ surveys and was 2nd among 26 issues ranked.

Based on the analysis of the results, the Advisory Board Company’s chief research officer commented that “our survey shows executives are considering new strategies to remake their cost structures to respond to the changing environment.”  As you can imagine, this particular point jumped out at us.

As most of you already know, remaking cost structures and finding innovative ways to reduce expenses is always easier said than done.  Many of the obvious opportunities to reduce spending – like payroll and supplies, the two largest expense categories for hospitals – have already been tapped.

There is, however, one overlooked and underleveraged area where hospitals can become more efficient, leaner and help remake cost structures: capital equipment spending.

Though a smaller percentage of total hospital spending than payroll or supplies, capital equipment spending is far from insignificant. U.S. Census Bureau survey data indicates U.S. hospitals spend an estimated $95 billion on capital equipment and related expenses (such as service contracts) annually.

From our experience working with hospitals across the U.S., the $95 billion spent on capital equipment every year is far from fully rationalized. However, we have seen clients innovate and “bend their cost curve” by re-engineering not just how they select and buy, but also by paying more attention to their costs to maintain and operate their equipment fleet.

Hospitals embracing a comprehensive lifecycle approach have reaped the savings benefits due to more enhanced perspectives on their capital equipment spending. These hospitals recognize that for every $1 of equipment purchased, at least $2 to maintain and operate are also incurred – expenses that had been overlooked in the past.  This more holistic approach to capital expenses (balance sheet items) as well as operating expenses (income statement items) has allowed them to dramatically reduce total cost of ownership of their capital equipment and significantly increase asset efficiency.

The key to generating improved ROI and significant cost savings has been introducing the right information to enable smarter decisions as well as actionable information to implement these decisions.  These hospital executives not only know the right price, they also get the right price!

If you’re not sure where to get started, feel free to get in touch with us to learn how other hospitals have innovated and remade their capital equipment cost structures.

About the Author