How To Reduce Your Operating Room Supply Chain Costs
You can increase profitability by 15%
$1,800.
That’s the average amount that a joint study by the University of Michigan and Rutgers University suggests hospitals can save per surgery.
In this article, we will show you in detail how to reduce your OR supply chain cost and increase your profit margins.
Specifically, you will learn how to:
- Analyze surgical case cost based on your hospital’s reimbursement.
- Optimize your managed care contracts and increase service line profitability by up to 25%.
- Present cost to physicians and reduce costs by 14%.
- Negotiate with your implant vendors with these tips.
How to analyze surgical case cost based on your hospital’s reimbursement
Hospitals bill patients and insurers at a premium — expecting reimbursement far more significant than their actual costs to generate a profit. Unlike fee-for-service models — where more services equal more revenue — the new models reimburse hospitals a fixed amount for the surgical episode. Consequently, these models focus on cost control, shifting the burden of cost minimization to hospitals.
With the many variable costs involved in direct vendor agreements, hospitals find themselves reworking agreements or analyzing costs in search of profitability — which can sometimes be challenging.
So here are seven things you can do to save cost and increase profitability by 15%.
7 Areas to Identify $1 Million and 15% Profitability
These seven areas focus on cost and profitability and rely on leveraging people, processes, technology, and data to deliver meaningful results.
1. Contracting opportunities
The ability to have direct and strategic contracting with your vendors is key. By leveraging your negotiation skills, you can eventually get competitive prices that will help reduce costs.
2. Mapping costs to actual reimbursement
The actual reimbursement is a key differentiation, and there may be a 30 or 60-day lag. But, getting the substantial refund and getting it by the code red detail and mapping it to your cost will allow you to spot and see things in this analysis that you wouldn’t see otherwise.
3. Inventory management
Most hospitals struggle to manage both proprietary and consignment inventory items. And when they fail to manage inventory properly, valuable time is lost. Critical implants or equipment are not ready/available, and as a result, procedures can be delayed from 10 minutes to hours.
According to a study, supply chain costs can account for as much as 40 percent of healthcare costs. But a University of Arkansas study found that if demand and inventory were better managed, savings could range from 6 percent to 13.5 percent of total healthcare costs.
4. Reduce and eliminate waste
It is a fact that ORs generate up to two-thirds of regulated medical waste. To be more specific as much as 70% of hospital waste comes from operating rooms. According to a 2015 study by the Journal of Neurosurgery, approximately $968 in OR supplies were wasted per procedure, which means that by eliminating or reducing waste, you may well be able to save and make it profitable.
5. Physician Cost Awareness
Researchers from Indiana University conducted a cost analysis of the robotic partial nephrectomy with a group of physicians aware of prices and a group that’s not. With the first group, they found expenditures of $5,243.04 per case. But with the second group who were given feedback on the prices of the operations, the total costs of the OR decreased by 17.2%, or $899.67.
So by keeping physicians aware of operating room costs, you can decrease overall costs.
Physician cost awareness is essential because showing them positions where their costs must not go ultimately reduces costs.
6. Standardization Opportunities
Standardization of supplies, devices, and implants used by physicians is imperative. Not only does it reduce hospital expenditures, but also it improves healthcare quality.
7. Preference Cards
Inaccurate physician preference cards significantly damage a hospital’s efficiency and credibility. Therefore, it is essential to ensure that doctors have the correct preference cards and that these are standardized to make operations efficient and save costs.
Bonus point — Optimize OR prime time utilization
It’s imperative to measure OR prime time utilization to have a higher-level overview of available prime time versus used prime time.
“The best way to have visibility is to have a structure. And I think the first structure is the comparison of what’s available versus what’s used,” said Miller.
Doing that across different areas in different positions will help you know how to schedule things and benefit from a more efficient system.
Now that you know where to look to redirect your OR spending, here are some important tips to help you get your cost-saving strategy right.
6 Steps to Getting Your Cost-Saving Strategy Right
1. Get the pricing right.
Pricing is an essential component of your cost-saving strategy. Here’s how to get the pricing right.
- Benchmarking from two to three external resources (one could be your GP0 — but you need additional benchmarking sources).
- Review all agreements annually and in-term reviews for pricing opportunities,
- Analyze reimbursement when possible.
2. Get the utilization right.
Are you operating following standards, or are you doing things depending on your moods? What are the changes that happen in your OR that affect costs?
Here’s how to figure this out.
- Get insights into variations.
- Seek insights into standardization.
- Dig insights into product conversions.
3. Systemize data analytics
One cannot talk about cost savings without talking about data. Data is what gives insights on what to optimize and what to eliminate.
Here is how to use data in your cost-saving strategy.
- Use multiple sources of data that are assimilated, analyzed, and compared.
- Visualize key utilization and metrics on a line item basis monthly.
- Utilize data analytics to support the management of spending from your own information systems.
4. Culture of cost awareness
We can’t stress enough the importance of a cost-awareness culture. Here’s how to cultivate it.
- Run program for employees to understand and see costs.
- Maintain scorecard and feedback system for physicians and surgeons so they can see their costs in real-time.
- Implement a formal process to analyze new supplies, services, technology, and equipment that others review and question.
5. Adoption of cost innovation
Adopting cost innovation is a way to support your cost-saving strategy with tools and models that make the implementation of your strategy easy and efficient.
Here’s how to do it.
- Play with insourcing from outsourcing/outsourcing to insourcing.
- Adopt new technology and the integration of it.
- Develop risk-sharing models with vendors.
6. Discipline of cost management
You may have the most effective strategy imaginable, but it’s only the discipline with which you implement it that determines the results. Here’s how to combine discipline and strategy to get the most cost-saving results.
- Access to line-item details for all of your spending.
- Dedicate time each month to reviewing utilization.
- Perform quarterly financial and operational business reviews with high-volume vendors using your own data.
- Host business reviews.
How to optimize your managed care contracts and increase service line profitability by up to 25%
While the industry’s transition — from volume to value-based provider reimbursement models — is driving many stakeholders to pursue new cost-cutting measures, hospital vendors are in a race to increase their margins.
Here’s how hospital vendors are increasing their margins and how to optimize your managed care contracts and increase your profitability.
6 Ways Hospital Vendors Are Going to Increase their Margins
1. Changing their list price book every year
Their 2021 list price book will look very different from their 2016 list price book for the same items.
Vendors are increasing their margins because the discount they give to hospitals is off a list price. For example, you will see that you have a 30% discount for each year, but the list price of the book has increased by 35% for the last year.
2. Having internal pricing committees
You’ll hear a lot about internal pricing committees. When hospitals benchmark a price, the vendor’s response is to meet with their internal pricing committee before agreeing.
3. Complex pricing structures
Vendors have tiered and complex pricing structures. Multiple tiers present significant obstacles for healthcare organizations trying to reach the next pricing level. To get the best pricing, you have to move to the next level and incorporate additional spending. These tiers make it challenging to attain effective cost management for hospitals.
4. Utilizing the GPO’s access pricing
Utilizing your GPO’s access pricing so many times. The access pricing is significantly underperforming price. And you’ve got to go well beyond that access price and pay attention to understanding what kind of tier this is. And really, if this is a preference item, it should be direct contracting or doing something a lot more strategic.
5. Using rebates Vs. Giving invoice pricing
We’re seeing a lot more use of rebates and losing a lot more hostiles approaching back on the rebates, which is excellent. Vendors use rebates rather than reduce costs to hospitals directly. These rebates are based on volumes purchased by hospitals or how they utilize other vendor products.
6. Reintroducing the same products
These are new, shinier versions of the same products, reintroduced with additions. It’s essentially the same product but with a price increase of 25–30%. Using a revision component in a primary case increases costs that hospitals don’t receive reimbursement for.
Going about these new margin changes and increasing profitability
Here is a step-by-step guide on how to go about increasing supplier margins.
Leverage contracts
Contracts can be very beneficial to organizations. A great contract usually means a great price. Unfortunately, contracts are only discussed when renewal is due. A study has proven that approximately 9% of organizations’ total revenue is lost because there is no formal way to manage a contract.
A great way to avoid this pitfall is to rely on a contract management system that gives you a monthly overview of your OR spending.
Not managing a contract can also lead to poor vendor performance, which may not meet the deliverables or prices promised in the original agreement.
This is because contracts help you understand what the high-cost implants are and regulate how the vendor performs. This way, you protect your costs and can plan and manage significant expenses without them coming as a surprise at renewal.
Hone your negotiation skills
Blue Cross and Blue Shield (BCBS) conducted a study titled “The Extreme Cost Variation in Healthcare” that compared and analyzed three years of independents for typical knee and hip replacement operations.
The report examined procedures in 64 markets across the U.S. and found that their cost can vary by as much as 313 percent, depending on where the operations are performed.
This extreme variation in health care prices can have obvious financial consequences for consumers. However, it is not entirely due to the vendors.
Researchers have found that up to 50% of the variation in implant costs is related to a hospital’s specific purchasing approach and characteristics. Some of these characteristics include vendor negotiations, vendor relationships with surgeons, etc.
The underlying message is clear: If you have good negotiation skills, you can get reasonable prices from vendors, save money and increase your profitability.
How to present costs to physicians and reduce costs by 14%
There are mainly two actions items to complete when presenting costs to physicians.
- Compare vendors
A big mistake to avoid when you want to present costs to physicians is to base your presentation on only one vendor. An excellent approach is always to compare vendors. Weight them up from an Extended Price point of view but also from a Cost Savings Opportunity point of view.
So, instead of sticking to the high-level overview of how each vendor compares, it’s important to go into detail and see how they compare from the perspective of each item.
- Compare vendors with benchmarks.,
Once you have benchmarked the vendors against each other, you can then compare them against industry benchmarks. This allows you to see which vendors offer competitive pricing and which have the most reasonable pricing.
Based on the results of the analysis, you can now implement your cost-saving strategy.
Download 15 Effective Cost Savings Strategies That Most Hospitals Can Apply Right Now: HERE
Learn how these five principles can help you reduce costs immediately
