Accounting for the New Normal – 10 Ways to Slow Spending without Impacting Care

Overview

Revenue degradation experienced due to the COVID-19 pandemic is impacting hospital finances across the country. Suspension of elective surgeries and procedures threatens the viability of many healthcare organizations. Even after suspensions are lifted, it is uncertain if patients will schedule elective surgeries and procedures due to their fear of contracting COVID-19. Healthcare organizations report that Emergency Department and physician visit volumes have also declined as people are complying with stay at home orders throughout the United States. High performing hospitals find themselves looking for opportunities to reduce expenses, even if temporarily, to avoid layoffs and keep doors open to serve their communities.

There are many cost reduction strategies that can significantly impact the bottom line without reducing workforce. When considering a cost reduction strategy, it is important to consider the financial return in combination with the execution difficulty. After decades of experience in the for-profit sector, our team has summarized some of the top impact expense management strategies. While some tactics are easy to execute quickly, others are more strategic in nature and may take longer to implement. We have included both, as all have the potential to keep US hospitals viable to continue providing important care to patients in the communities they serve.

As expense control becomes paramount for hospitals, leaders should review these 10 areas for potential savings. Most ideas involve operational change, so be sure to engage an interdisciplinary team at your facility to ensure a thorough cost-benefit analysis has been completed before implementation.

Institute a daily productivity management culture
Align staff with workload through demand matching
Ensure nurse staffing grids align with budget
Analyze avoidable overtime and shift differential abuse
Increase expense oversight and hardwire approval processes
Review off-contract expenditures and consider target areas for contract review and renegotiation
Implement equipment management processes to mitigate DME losses
Perform cost-benefit analyses for insourcing or outsourcing departments
Leverage department directors to identify additional opportunities
Review rent and lease agreements considering new opportunities to work from home

To avoid layoffs, top performing leaders are searching for ways to manage expenses in the short and long term. While seasoned hospital expense managers likely have experience with these focus areas, refreshing analyses through review with finance and operational leaders can illuminate new opportunities. We recommend a detailed approach when reviewing each idea for consideration. In our experience, steps can be taken immediately to begin financial stewardship efforts, independent of outside support, to drive significant improvement results in your hospital.

Labor Management

Even in the most efficient hospitals, labor represents roughly 50% of all expenses. While challenging to manage, labor is widely considered the most controllable hospital expense. Requiring collaboration between finance, HR, operations, nursing, and even IT, small changes can drive swift and significant impact to the bottom line, upwards of millions of dollars per month in savings, depending on the size of the organization.

The most important labor management strategy for any hospital is to establish a daily productivity management culture. Daily productivity management includes two primary components. The first is increased performance visibility through department-level reporting, reviewed daily by department and C-suite leaders. The second is a support and accountability structure through daily action plan creation and results monitoring. Many hospitals review productivity results on a weekly, bi-weekly, or monthly basis. High performing hospitals review productivity daily.

While managing productivity daily may seem like a lot of work, there is much to be gained by reviewing productivity performance. The data tells us if we are understaffed or overstaffed, which is critical for both quality patient care and finances. By engaging in a daily productivity review that uses actual volume and hours for the prior day and monitoring daily, pay period, and month-to-date performance, the facility can expect to see an immediate impact on productivity.

Daily productivity management is considered an industry best practice because this initiative requires no change to budgeted productivity targets or reduction in force. To demonstrate the potential impact, one 237 bed hospital saved $1,558,084 in one year by implementing daily productivity management. If your team begins daily productivity management, it is highly recommended that you hold an education session for all leaders, including the C-suite. Some leaders have more experience than others and it is critical that there is a time to learn in an environment that makes it safe to ask questions. We have seen the best results in hospitals who provide productivity “cheat sheets” to their leaders and executives to avoid conflicting guidance.

Demand matching is another high-impact labor management strategy. While demand matching requires more preparation via data analysis, it has significant potential to pay-off without negatively impacting team member engagement. In fact, better alignment of staff with volumes is likely to improve staff, physician, and patient satisfaction, as it ensures the right staff are in the right place at the right time to care for patients. One group of 6 Emergency Departments in Central Florida implemented demand matching and reduced annual labor spend by $2.3M, without reducing workforce or adjusting team member compensation in any way. Another Cath Lab saved $266,824 by aligning staff with volumes.

Demand matching is the process of aligning staff to workload by time of day for any area where staff are organized into shifts. In order to effectively analyze demand, accurate hourly workload, or patient census, information is required. Once demand by hour is quantified, review with the department leader to compare results with their experience and brainstorm revised schedules and shifts required to meet the demand. It is important to consider recent operations as well. For example, due to COVID restrictions, many ORs have condensed surgical blocks to increase efficiency, with fewer rooms running longer days. Most departments should be able to implement the revised schedule in the next schedule period. If significant adjustments are required, and existing staff members are unwilling to adjust their schedules, the recommended complement of shifts can be added through attrition.

Another straightforward labor expense management tactic that is commonly overlooked is nursing grid, or matrix, to budget alignment. Nursing unit grids are designed to be a staffing plan for each unit, as they assign a specific number of staff members for each patient census level. While most leaders operate under the assumption that nursing unit staffing grids are supportive of the budget, they are very commonly out of alignment. The exception would be rare cases where the facility uses an automated system that forces reconciliation to budget annually or as modifications are made.

Maximizing the effectiveness of nursing grid to budget alignment requires great attention to detail, but the impact is significant. For example, one 808 bed hospital saved a net of $1.1M by zero-basing grids through one-on-one sessions with each nursing leader. While finances certainly benefited, this was a discussion that was overdue with nursing leadership, who sponsored this effort. One department determined that it would be best to transition away from their LPN model, netting them additional $323,926 in annual savings.

Identifying avoidable overtime (OT) and shift differential abuse is another top expense strategy that can provide timely bottom line relief. The first step is to establish categories for OT utilization and begin regular reporting by category. The table below is an example of categories that can be reviewed for appropriate utilization.

Developing reports for regular visibility into OT utilization by employee, as well as educating and supporting leaders to have conversations with staff, will drive timely improvement - especially if incorporated into a daily productivity management accountability structure. Trending employee occurrences on these reports will help identify frequent offenders for disciplinary action, if required.

One method to reduce avoidable overtime is reviewing team member FTE commitment levels. Commitment quantifies how many hours each team member will work per week (most nurses work three 12 hour shifts per week, which is 0.9 FTE). If team members do not work their full commitment level, the department is forced to operate short staffed or use avoidable premium labor. If a team member is regularly working hours below their current FTE commitment, crucial conversations should occur with their manager to resolve or adjust the commitment level. As an example, if three full time RN team members work 0.6 FTE each, rather than their 0.9 FTE commitment, this creates space to hire an additional 0.9 FTE RN.

Additional tactics used to reduce overtime include:

Analysis of on-call versus call-back hours, highlighting departments with no on-call schedule
Provide written guidelines on hospital and unit-based scheduling policies helping managers to minimize reliance on overtime
Regularly attend daily bed board meeting to learn staffing needs across units - consider cross-training
Socialize the importance of a full 30-minute meal break
Require management pre-approval for all overtime - discuss during daily productivity review
Partner with HR to encourage crucial conversations with team members daily
Post reminders and trends alongside department announcements
Celebrate when an overtime reduction is sustained

Additional analysis may include identifying hourly employees paid for more than 50 hours per week and reviewing the highest paid hourly employees. This exercise can quickly expose inappropriate utilization of shift differentials, overtime abuses, or salary conversion opportunities. Other potential shift abuses can include shift differential stacking and manipulative mid-shift clocking to gain a shift differential inappropriately. Below is an example two team members intentionally clocking out and back in at 3pm during the same day to obtain a differential. In this case, we found the team members inappropriately obtaining differentials with this practice by switching job codes with similar scope of practice – a Clinical Technician and a Sitter.

Once opportunities for inappropriate utilization are identified, HR software rules may be quickly adjusted to prevent further abuse. While results can be realized within weeks of initial implementation, monitoring of overtime and shift abuse is an on-going activity. Ensuring leadership visibility of performance metrics supports department leaders to hold team members accountable for inappropriate utilization. In our experience, beginning this work with an education session for all leaders can be helpful to ensure department leaders are fully supported in this new expectation.

Department staffing hours of operation should also be evaluated, especially for procedural departments. This can be easily identified in a demand matching exercise. If demand matching was not performed, reviewing the on-call vs call-back hours trending by department is a quick way to determine hours to staff vs hours for on-call required.

The exercise of reviewing on-call vs call-back utilization almost always illuminates a labor savings opportunity. Call pay is occasionally abused for purposes other than staff being on call. If you get this far, you might also consider quantifying education and orientation hours to compare nursing units to one another alongside turnover rates for additional insight.

If you are new to this type of analysis, a great place to begin review is the Cath Lab. One hospital saved $331,112 by appropriately adjusting their call model to align with state recommendations and better aligning their staff with volumes, ensuring on call staffing models were only used during hours of the day when staff are rarely required, but should be available for emergency support. You should also have HR pull information for every department.

Span of control can also be evaluated as a potential cost savings. This metric references the number of direct reports each leader has within their span of control. A general rule of thumb is at least ten direct reports per leader, but no more than twenty. The most important thing to review for span of control is excessive management layering within a department or service area. For example, if there are multiple leadership positions within a department (directors, managers, supervisors), an opportunity may exist to adjust by transitioning some team members to front-line staff.

Expense Approval Process

Map out the expense approval process within your organization. The current process may provide appropriate oversight during normal operations, but in times of financial crisis, a more thorough review process may be warranted. Some examples for tightening the process include CFO approval for all expenses over $1,000, CFO approval for all catering, CNO approval for contract labor on nursing units and CNO approval for all sitter hours. Often, heightened awareness around expense review discourages avoidable utilization of these expenses. Even though it adds review time for the C-suite, temporary high level scrutiny for expenses ensures all high-dollar expenses are thoroughly reviewed, discussed, and held if necessary.

An additional long-term expense containment strategy is to ensure all department leaders have monthly visibility and accountability into their department’s detailed expenses. This may require some additional report generation, distribution, and education. This approach encourages director ownership of the unit as a business, supporting their own development as leaders. Accountability may be incorporated into the monthly meeting model.

Supplies and Services - Contracts Review and Renegotiation

Supplies are a top expenditure for hospitals. As with all areas, each perceived opportunity to reduce supply cost should be evaluated for potential expense reduction with careful consideration of downstream impact. One of the first steps to take when searching for supply cost opportunities is ensuring participation in a Group Purchasing Organization (GPO).

If your organization participates in a GPO, work with accounting to list all vendors paid within the last 12 months. Next, highlight all off-contract vendors. Review each vendor and expense individually with the department impacted to quantify the savings opportunity and propose transitioning to vendors within the GPO for better pricing. If the vendor is local or there is another reason your organization is hesitant to transition, identify similar vendors within the GPO. Then use GPO contract information to negotiate better pricing with your preferred vendor.

Contract renegotiation opportunities hold huge potential for expense savings. Savings opportunities vary based on the size and scope of the contracts but typically 5% – 20% savings can be achieved with informed and aggressive renegotiation. Areas to consider reviewing include:

Specialty Rentals - Beds and IV pumps are typically the largest expenditure
Capital equipment agreements - Lab and Operating Room should be reviewed
Plant Operations - Recycling & medical waste, Landscaping, Maintenance contracts (Sprinklers, fire alarms, refrigeration, HVAC)
IT&S and Telecommunications - Xerox machine rental and service agreements
Outsourced departments - EVS, Valet, Couriers, Lobby coffee service, Food and Nutrition and Security (Ensure agreement reflects any reduction in resource requirements, especially if entrances were closed for COVID-19)

If your facility is a part of a system, any non-system contracts that impact the same region hold significant opportunity to transition to system contracts to leverage purchase power and negotiate a lower price. Examples to review for potential conversion to system contracts include:

Medical gas systems, supplies, and servicing
Medical record management, release of information and storage agreements - Opportunities still exist to assess square footage and record destruction opportunities, even though many facilities are moving to electronic medical records
Waste management agreements - Review cost of ownership against leasing options for baling equipment
Service agreements

While reviewing contracts, familiarize yourself with any language around price points by purchase volume. Then work with departments like Pharmacy or Surgical Services to review all high volume / high cost supplies for lower cost alternatives or vendor consolidation opportunities. Sutures, staples, and high cost drugs with clinically equivalent alternatives are good examples at most facilities. Many surgeons are not aware of the cost differences between clinically equivalent instruments, trays, drugs, or supplies. Analyzing cost per case between surgeons for the same procedure can illuminate large disparities in the cost to perform the procedure. Working with surgeons and being transparent about the cost differences can lead to increased standardization without impacting clinical outcomes. This standardization also has downstream efficiencies in central sterile processing, instrument and tray utilization, and storage space.

One advanced supply chain tactic is supply par level review to potentially reduce inventory on hand. While a sensitive topic lately, due to drug and PPE shortages, this can be especially useful for high dollar / slow moving supplies or items with short expiration dates. While politically challenging to ensure all surgeons agree, this can be a huge benefit to the bottom line. In the current environment, bulk buying may not be feasible for many items, but may be worth financial consideration for certain supplies.

Meeting with departments who utilize specific supplies to understand the operational impact of a shortage can help prioritize which supplies meet criteria to reduce supply on hand and immediately reduce spend. Additional pharmacy opportunities can include improving documentation to optimize drug prices, high cost drug utilization, and tracking drug waste dollars.

Nonprofit organizations have a great deal of flexibility around pricing. Along with GPO pricing that for-profit organizations may leverage to reduce spend, nonprofits can receive even further discounted 340B pricing for drugs. Work with your pharmacy leader to understand more about opportunities specific to your organization. Opportunities include documentation and thorough review of formulary.

Also discuss high cost drugs with your pharmacy leader. Pharmacy leaders will be able to list the top 5 high cost drugs that can be better managed in your facility. Improvements may require crucial conversations with clinicians, so make sure to understand utilization drivers. A common solution is to ensure an approval process is in place for focus drugs. This ensures that patients may be prescribed the drug when needed, but a physician-to-physician conversation, often with the Chief Medical Officer, is required to move forward. Drug waste is another topic where opportunities to reconsider par levels and distribution throughout the facility. Simply reviewing drug waste by month, totaling the initial cost of the drug, and trending performance will often demonstrate significant results. Identifying drugs that are wasted due to expiration can inspire problem solving sessions around par levels for each unit’s Pyxis or Omnicell.

Mitigate Durable Medical Equipment Losses

Another frequent problem hospitals face is lost equipment. This typically occurs when there are no designated storage areas or staff are not aware of or compliant with storage procedures. One common example is IV pumps tucked away in closets not designated for IV pump storage. Another example is IV pumps or wheelchairs accidentally taken with patients who are being transferred or discharged from the hospital. It is also common for smaller equipment, like telemetry monitors, to accidentally be laundered with linens, requiring replacement.

While RFID tracking, equipment management systems, and automatic equipment detectors in linen rooms have proven most effective, there are low-cost solutions. One idea is to designate areas for unused equipment that are easily accessible. Educate staff on the new process for equipment storage and audit to ensure compliance. If you already have an equipment management system, and RFID or barcode tracking are included, the system can provide detailed insight into equipment location and status, when used appropriately.

A large equipment savings opportunity lies in establishing criteria to determine when to rent, return, or purchase equipment. Utilizing a clinical decision tree to drive specialty bed utilization can also be effective. Rental equipment needs should be based on current utilization and historical needs such as department census by month. With effective equipment management, a facility should see equipment utilization rates around 75%.

Insource vs Outsource

The decision to outsource hospital functions or employ staff to provide the resources in-house can be difficult. Potential damage to long-standing relationships with physicians or vendors, concern for staff impacted, market impact of perceived loss of personal touch, the significant hiring effort to insource in a full department of EVS or food service staff, and more intangible factors drive this determination.

Some areas often considered for outsourcing include: EVS, Food Service, Linen Service, Instrument Sterilization, Quality Review, or any area where volumes are too low to support employed staff required to perform the service.

First, review low volume services and quantify the financial component, typically contribution margin. Once complete, quantify impact to operations and local intangibles like employee morale. Some have used an FMEA-like points system to prioritize areas for further discussion with the leadership team.

Discussions around insourcing and outsourcing should include representatives from all areas: finance, operations, culture, interdependent clinical programs, and more. Consider taking your FMEA analysis to the next level by ranking each focus area by effort and impact. Once a decision is made to outsource – or insource – a department or service area, select a leader to supervise the transition and create a project plan.

If your hospital is a part of a system, additional opportunities to optimize spend can exist. First, review low volume services. Consider the potential to share a service with other facilities in the region to reduce cost. One out-of-the box example is a multi-campus facility with low utilization of ultrasound employees in close proximity. They saved more than $100,000 employing this strategy between the Emergency Room at the hospital’s main campus and several Free Standing Emergency departments within 20 miles of one another.

Leverage Department Director Expertise

Your department directors are your greatest resource. Some have decades of experience in your hospital and most have significant experience on the front line themselves. They can be aware of opportunities that may not stand out on a financial report. Ask them for ideas, with special consideration for high revenue and expense areas such as Surgical Services, Clinical Documentation Initiative (CDI), Pharmacy, Case Management, and Food and Nutrition. Because surgical services and pharmacy have such high-cost medications and supplies, there are usually opportunities in these areas. For example, reviewing the pharmacy formulary for off-contract drugs or obtaining physician agreement around standardizing supplies and renegotiating the contract based on moving to one vendor can be very impactful to expense reduction goals. One 8-room OR saved $2M annually by moving to a sole provider contract for surgical implants and bulk-buying several months of inventory. Other successful initiatives include engaging your clinical leadership to decrease avoidable blood utilization and opportunities in surgical areas such as anesthesia medication documentation, and instrument reprocessing programs.

Often overlooked, food services can provide several opportunities for potential cost savings. Reducing catering for meetings, standardizing floor stock of foods for patients, and reducing cafeteria hours and days of operation. Benchmarking food cost per patient day to other hospitals can also identify potential savings.

While sometimes a longer-term strategy, Case Management and CDI can significantly impact both revenue and expense. Case management leadership can readily identify opportunities that exist with physician documentation, discharge delays, care coordination and timeliness of filing and pre-approvals. Reviewing denial rates by category can also be a fruitful exercise. CDI leadership can also share opportunities to improve accuracy in documentation to improve appropriate revenue capture. For example, opportunities often exist to improve anesthesia medication documentation, which can ensure the hospital is paid for drugs dispensed. Interdisciplinary team rounds are a great place to implement ideas, but usually require C-suite engagement and sponsorship to be effective.

Some hospitals select to share a portion of savings with department leaders who propose and execute on ideas for their areas, as an incentive for idea generation and execution. In our experience, this is a meaningful way to engage leaders as it demonstrates the value of their contribution and can present a growth opportunity for potential C-suite jobs in the future.

Rents and Leases

During COVID-19 more people than ever are working from home. Evaluate non-essential employees for potential work from home or shared office space by reviewing job descriptions and evaluating team member needs. Must they be located onsite? How much time do they spend outside the office? Do patients or visitors need to find them? Do they require privacy in a personal office space or cubicles?

Alongside the employee office space needs assessment, also review owned office space availability and assess capacity. Review monthly expense and termination dates for each lease. Generally, leases with the earliest termination date have the least penalties for early termination associated. The less the penalty, the greater the ROI when terminating a lease.

Finally, after weighing the cost of the lease against the needs of the staff, decide whether to continue or terminate the lease. Once complete, consider consolidation of real estate to identify office space you may not require in the future

Often overlooked when considering rent are equipment rentals, which are often a hefty monthly expenditure at most hospitals. Tightening the approval process on equipment, such as bed rentals, can help manage this cost.

Conclusion

Hospitals utilize these and many more cost reduction strategies, even in times of normal operations. This financial crisis is far outside the range of normal for most hospitals. Instead of having a few focus initiatives for the year, as many facilities consider common practice, this situation requires all high-ROI strategies to be considered and rapidly deployed. While we believe patient volumes will be restored in time, concerns around near-term viability are grave. Hospital leaders must aggressively manage expenses through this interim time and must continue tight management once patient volume stabilizes to allow time to recover losses and avoid closure of services, or worse, the community.