Lack of discipline costs real money: Non-clinical spend targeted for cost savings | Viewpoint

The recent Costs of Caring Report published by the American Hospital Association is an urgent wake-up call for health system CEOs and CFOs.

Mark Van Sumeren

The report, America’s Hospitals and Health Systems Continue to Face Escalating Operational Costs and Economic Pressures as They Care for Patients and Communities, paints a dire picture of the financial health of our nation’s healthcare system.

Consider the following six points cited in the report:

1. Many health systems continue to operate at a deficit, and for many others, margins remain below 1%.

2. Inflation rose more than 2x the growth in reimbursement from 2012 to 2023.

3. Since the start of 2022, days cash on hand among health systems has declined by 28.3%.

4. Last year alone, the average age of capital investment in medical equipment and infrastructure increased by 7.1% across all hospitals.

5. Hospital employee compensation increased 45% from 2014 to 2023 versus inflation of 28.7% (57% faster).

6. Cumulatively, Medicare underpayments from 2013 to 2017 were $375 billion. From 2018 to 2022, they grew to $522 billion.

These metrics underscore the pressing need for immediate and decisive action. Pursuing the same performance improvement efforts isn’t sufficient to change the tide. Cost-cutting initiatives in 2024 must be bold to be effective.

Never before have new ideas to improve health systems’ financial position been so necessary and welcomed by executive teams. This article presents an urgent strategy to improve health systems’ financial health: introduce discipline to back-of-the-house, non-clinical spending.

New opportunities lurk in the shadows of clinical care

Non-clinical expenditures typically consume 20% or more of a health system’s revenue. Examples include grounds maintenance, window cleaning, parking lot management, food, beverage, trash services, and even health IT.

Yet, health systems often fail to apply the same discipline in sourcing and contracting these types of services as their counterparts in other business sectors such as consumer goods, hospitality, and education.

For example, a health system may pay substantially more for ground maintenance than a neighboring shopping center or community college campus. Furthermore, decentralized contracts for these services result in disorganized, deregulated, and ill-informed spending.

Five proven steps to regulate non-clinical purchases in healthcare

Indirect procurement encompasses a broad spectrum of areas, including employee benefits, IT services, facilities management, and professional services. These represent a significant portion of healthcare spending yet often remain unseen and under-optimized.

Here are five steps healthcare systems can take to improve their non-clinical procurement processes to unlock new cost savings in the supply chain.

1. Assess procurement processes and measure against a procurement maturity model.

Self-assessment tools are now available to help health systems gauge their processes, workflows, and performance in managing indirect spending.

These tools identify areas for improvement across various procurement steps, departments, and care delivery locations. By understanding where organization-wide procurement processes currently stand and measuring their current maturity level, health systems can close gaps in procurement practices and begin finding valuable efficiency and cost-saving opportunities.

2. Apply data analytics.

Data analytics are crucial for gaining insights into spending patterns and cost-saving opportunities. Real-time visibility into non-clinical procurement activities is essential to improve resource allocation, leading to increased operational efficiency and agility. Enhanced data analytics also support better decision-making and more effective negotiation with suppliers.

3. Foster strategic supplier relationships.

Many non-clinical suppliers, such as those mentioned above, have transactional relationships built at the departmental level. Shifting from department-by-department relationships to strategic relationships with enterprise-wide key suppliers leads to better pricing, improved service levels, and more reliable supply chains. Best-practice relationships include regular communication and collaborative planning with suppliers with innovation and quality improvements continually introduced.

4. Standardize and automate procurement processes.

Consistent processes reduce complexity and errors. Implementing standardized workflows across the organization ensures compliance with procurement policies and achieves cost savings. Automation coupled with consistency reduces manual workload and minimizes the risk of human error in such steps as requisitions, approvals, and order management.

5. Invest in continuous improvement.

Healthcare is a specialized industry that requires nuanced knowledge and a commitment to continuous improvement. Health systems should invest in training and development programs for their procurement staff to ensure they are experienced with the latest tools, techniques, and best practices. Access to benchmarking data and insights from other industries is also extremely valuable to innovate non-clinical procurement processes.

Be bold in healthcare supply chain

While clinical excellence remains paramount, a new focus on non-clinical expenditures has emerged as a powerful, often overlooked, lever for improving financial health.

However, there remains a lack of discipline in the procurement of these goods and services.

Traditional purchasing processes for non-clinical items no longer suffice. This is especially true during a year when margins are thin, and services are restricted.

Now is the time to use self-assessment tools, best practices, automation technology, and benchmarks from other industries to improve the procurement process for back of the house spending. It’s a worthwhile journey—one step at a time.

Mark Van Sumeren is strategic advisor on healthcare and board advisor for LogicSource.