Find the cost-savings lurking in your supply chain

In the past few years, most hospitals' supply budgets have already undergone one or two rounds of cost-cutting. However, many hospitals are, once again, taking out the knives as they prepare to deal with the financial ramifications of the Patient Protection and Affordable Care Act, as well as ongoing repercussions from the recession, including pressures from their Medicaid and commercial payers. The question is: Are there still legitimate opportunities for supply-chain savings at already cost-conscious hospitals?

The answer is an unequivocal "yes," says David Markoski, senior vice president of Supply Chain Performance Services at Irving, Texas-based VHA Inc. "There are absolutely opportunities for every CFO in every organization to go after. With most organizations that we work with, we routinely find that they still are missing 10 to 20 percent of the opportunities for cost reductions." Markoski, recently cited as a "Pro to Know" by Supply & Demand Chain Executive magazine, launched a VHA cost-saving program that reduced client hospitals' supply chain budgets by more than $66 million in 12 months without negative repercussions for operations or patient care.

The two key areas that can deliver high-value cost savings are physician preference management (e.g., operating room, cardiology, spine, neurology) and pharmacy, advises Markoski. "When we do a project, usually about 60 percent of the savings that we identify will come from those areas. So those are the biggest opportunities that organizations still just haven't aggressively gone after."

There are four keys to finding savings in hospital supply budgets, says Markoski, whose team works with hundreds of hospitals nationwide. This week, we'll share the first two keys:

Key No. 1: Launch the cost-saving process with executive leadership.

"Senior management has to create the organizational goal and the strategic plan--and be responsible for that success," he says. "The process can't just be handed down to the materials manager/product team leader, telling them 'Here is our goal, go ahead and take out $2 million, $3 million or $10 million.'"

Hospitals that maximize their savings make their goals part of the "the culture of the organization," adds Markoski. "They lead by example, and they are willing to invest the necessary resources. An example of those resources would be a clinical product value analysis team that has a true leader to drive the team."

Key No. 2: Create organizational support.

Once the hospital has established financial targets and goals for each department, "you need to create a process and teams around each of those areas and hold those teams accountable," says Markoski. "The people who are truly responsible for the supply chain costs are the clinicians and the physicians. Those are the ultimate users of those products and services, and they need to be held accountable for helping to drive out some of the supply chain opportunities. Materials management has limited opportunities for success without their support."

Hospitals shouldn't "wait to get 100 percent of the organization fully on board," says Markoski. However, hospitals do need to identify physician and clinical champions for each targeted area and "get them engaged early and often."

To win over physicians and other clinical leaders, the executive team needs to explain why cost cuts are necessary, says Markoski. However, saying that "we want to be more profitable and save money" isn't the way to go. Instead, CFOs should explain what the savings will be invested in, for example, infrastructure or staffing, he advises.

Another key to gaining support is to celebrate even small successes as hospitals go through the cost-cutting process, says Markoski. "Hospitals that are successful at sustaining cost cuts let the organization know what clinical leaders are doing and share their success stories." Communicating those successes often spurs other physicians and clinicians to get involved, he points out.

Hospitals also should reward behavior, he recommends. For example, some hospitals have been successful establishing incentive plans or bonuses to get clinicians to spearhead cost-savings initiatives.

Check back next week for Markoski's final two keys to creating a process that sets the stage for supply chain savings. - Caralyn