Year after year, SVAH’s studies have shown that 19% to 33% of the savings supply chain or value analysis professionals are reporting to their senior management do not stick. Meaning, for numerous reasons that we will discuss shortly, many projected annualized savings don’t hit their healthcare organization’s bottom line.
Why Your Savings Don’t Stick or Hit Your Bottom Line
I can recall a materials manager of a regional health system telling me that he was once called into his CFO’s office to explain why a new IV set/solutions contract he touted would bring about big savings wasn’t showing up on his healthcare organization’s financials.
After some investigation, the materials manager found that his clinicians were choosing high-end IV sets that were costing twice as much as his former IV contract product mix, thereby costing his IDN more money, not less as he had projected.
How could this happen? Our studies have shown that this scenario isn’t an unusual occurrence at any hospital, system, or IDN in any given year. It happens all the time, because of lack of training, change in product mix, or confusion on the part of clinicians that are employing the new product, service, or technology. Yet, supply chain or value analysis has reported these savings to their senior management like it was a fact.
3 Ways to Ensure Your Product, Service, and Technology Savings Stick Each Year
As I illustrated in my IV example, too often, the practice of projecting savings is confused with true documented savings that hit your healthcare organization’s bottom line, which can vary in its timing, size, and scope. To prevent this from happening at your healthcare organization, we are recommending three ways to ensure your savings hit your hospital, system, or IDN’s bottom line every year as follows:
- Track, trend, and validate all projected reported savings. To do so, you will need to start with the Historical Baseline Activity-Based Cost (e.g., cost per procedure, cost per test, cost per patient day, etc.) of the previous commodity before your change, then compute the running Activity-Based Cost once the product, service, or technology has been introduced into your organization. The difference in these two numbers is your actual documented savings (Historical Baseline Activity-Based Cost – Current Activity-Based Cost = Savings) for the period that generally takes one quarter to be considered accurate.
- Analyze all supply utilization outliers on a quarterly basis. Since things change and people change, you will need to continue to track, trend, and validate (like the above protocol) all supply utilization costs on a quarterly basis. Any outliers found to be above or below their historical baseline need to be investigated, especially if you had projected a savings for this outlier in the current fiscal year. Therefore, your savings are always a measure in time, not permanent.
- Observe that the new product, service, or technology is working as promised. Another way to ensure your product, service, or technology is working as promised is to observe (i.e., get out from behind your desk) the new commodity in action. If it is performing as promised, there is a good chance it is saving you money. However, don’t forget the two other options (above) to make sure it is really saving you money.
Saving money is an art and science, but making sure that your savings is hitting your healthcare organization’s bottom line is all about measurement before, during, and after the purchase. Then and only then can you count it as a true savings.
Don’t Believe It Until You See It with Your Own Eyes
Every day we see healthcare organizations’ projected savings that never happen as promised (e.g., reduction in utilization, infections, or volume) by suppliers. That’s why we suggest that you don’t believe these savings projections or promises until you see them with your own eyes. The above three ways we have recommended to ensure that your savings stick is the best way we know of to guarantee that your savings really do hit your hospital, system, or IDN’s bottom line. It’s another way of saving TRUST, but always VERIFY your savings and promises made by your suppliers.