A Value over Volume Approach
Most Healthcare organizations non-salary expense initiatives are focused on lowering the price of the products, services and technologies that they are purchasing.
However a word of caution, you are working harder and receiving much less than some of your peers are.
It seems our industry has always been so focused on price that we have forgotten about VALUE. Continuously fighting, reaching and stretching to shave dollars and cents off of “blanket” supply purchases while ignoring the low hanging fruit which is ripe with sweet returns. The challenge lies in helping your hospitals value analysis or “lean” team find those fruits which will deliver a significant boost to your organizations revenue cycle.
The 80/20 Rule
With so many different services, supplies and medical equipment present under one healthcare providers roof and limited human resources available to drive lean results, it is critical that we focus our efforts on the the correct areas. Thus using the Pareto Principle (80-20 rule) as a guide will quickly lead you to see that the majority of your costs can be found in only a few areas spread over several different types of supplies. Closer inspection will reveal that the vast majority of a hospital’s supply spend is in the following three areas: Operating Rooms, Cardiology and Radiology. Not surprisingly the highest dollar value items such as: drug eluding stents, balloons, pacemakers and catheters can be found in these service lines.
Ultimately these high dollar value items make up only 20% of your total inventory volume, but represent 80% of your costs. So focus on extracting every last bit of value from those crucial 20% and you will see your Value Analysis team will be able to produce returns up to 4X what could be done with the same amount of effort on the larger volume of supplies.
Some more food for thought
While the 80-20 rule makes it is easy to see why focusing our resource management initiatives on the most expensive supplies first is a logical starting point, it alone doesn’t do justice to the impact these medical devices provide.
When looking for value Consider the following:
- Chargeability: The cost of losing one $1000 stent is not the same as losing one thousand $1 gauze bandages. The cost associated with (loss/expiration/missed charge) the stent does not take into account the lost opportunity for revenue generated through reimbursement. So in reality, value = the cost of the item + the opportunity cost of losing that item.
- On Shelf Expiration: Many of these items have expiration dates which end up arriving before the device can be used.
- On Shelf Investment Capital: Lastly it is worth noting that inefficiencies created through bulk ordering of these higher priced items can be damaging as well. On hand inventory costs quickly skyrocket leading to hundreds of thousands of dollars in wasted capital which could be further invested into the Hospital.