April 28

The Importance of Cost Optimization After the Pandemic


We are all in a new world of mitigation, PPE, social distancing, etc., that has been one laser focus for us for months. The goal was to stop the coronavirus pandemic from spreading and prevent the overwhelming of our healthcare systems. Now that we see a light at the end of the tunnel, we need to start thinking about refocusing our supply chain efforts on cost optimization to ease the budget pressures our healthcare organizations are facing now and in the relative future. Here are four ideas on how to align with your senior leadership’s goals and collaborate with your peers to make this transition as painless as possible:

1. Reduce conflict and debate over spending cuts and budget allocations, even amid urgent budget pressure, with visualization and data. Even under the worst circumstances, your department heads and managers won’t want to cut their expenses. That is where visualization (graphics, charts, diagrams, etc.) and data is helpful in painting a vivid picture of waste and inefficiencies in your customers’ supply streams. In most situations, your department heads and managers will agree to cut their costs once they visualize the data.

2. Avoid deep arbitrary cuts in cost, service, or quality. Too often, senior management will want to cut 5%, 7% or even 10% across the board on supply expenses. This decision is dangerous since it penalizes supply expense stewards and really does not tame wasteful managers. A much better way, we have found, is to target your savings through benchmarking, then make intelligent and defensible cuts to your hospital’s supply budget. One of our clients saved 40 million dollars annually on her supply expenses by employing this strategy.

3. Focus your cost cutting efforts to minimize waste and inefficiencies in your supply streams. In our opinion, it will be almost impossible to obtain price concessions from your vendors as we open up for business, since they are in a budget crunch themselves due to the pandemic. Therefore, savings beyond price (i.e., value analysis and utilization management) should be your mantra to your value analysis teams that can save you 7% to 15% in less than 18 months.

4. Concentrate your savings initiatives on reducing your supply utilization misalignments (beyond price and standardization). Prior to Covid-19, hospitals, systems and IDNs had reached a high level of maturity with their price and standardization efforts. However, this only represents 1% to 3% savings for a healthcare organization’s total annualized supply budget. Considering that 87% of all hospitals, systems, and IDNs have not engaged in any organization-wide supply utilization program or an annual utilization savings assessment, this opens up a whole new world of savings for you. These utilization savings can add up to 7% to 15% of total budget.

Cost optimization has not changed in healthcare, it has just become more urgent due to the effects of the coronavirus. We believe cost management initiatives will now shift from price alone to savings beyond price. Hopefully, these four ideas will lead you in the right direction.

Be Strategic In Your Cost Optimization Decision Making

Urgent budget pressure for all healthcare organizations is real. As these four ideas suggest, it is necessary for you to be strategic vs. making shoot-from-the-hip decisions about your cost optimization initiatives to avoid jeopardizing your hospital’s short and long-term financial health. As we see it, this is a rational approach to cost management that you should champion at your healthcare organization.

Below are some similar articles that you may find interesting.

The Flip Side of the Coronavirus Crisis

How Value Analysis Can Help You Better Source During the Coronavirus Pandemic

5 Things Supply Chain Leaders Need to Do to Avoid Coronavirus Cost Overruns

Request Demo of SVAH’s VA and Utilization Tools


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