Cost Savings Through Budgeting Processes

Cost Savings

In the world of hospital budgeting, value is everything. Capital equipment purchasing decisions are weighed along several key considerations – quality of care, sustainability, service costs – that all ultimately relate to getting the most out of every dollar spent. But as pressures mount to unearth greater efficiencies and new savings from departments that are already stretched thin, institutional leaders are examining any and all opportunities to extract additional money from the process.

Mohan V. Tatikonda, professor of operations management at the Indiana University Kelley School of Business, said budgeting is most usefully considered within the context of strategy development.

“What they are doing is determining strategy, and the budget is the finance side,” Tatikonda said. “When one is thinking for the next year, and the next three to five years, this is the time when tradeoffs can be considered, because there’s only so much in the way of resources available. It’s a portfolio of options, opportunities, and investments, and the executives involved need to play them off each other.”

Equipment purchases are just one aspect of a budgeting process that Tatikonda said is invariably a zero-sum game, and which includes considerations like facilities improvement, service roll-outs, supply chain and staffing. No matter how immediate the need to acquire new medical equipment, if it comes at the cost of something else, operational weight must be given to those strategies that help the institution differentiate itself from its competitors. In that sense, Tatikonda said the question of how to spend money is more properly a question of how management best improves institutional culture. But those ideals can be difficult to sustain when executives in leadership positions turn over frequently.

“The strategy process for any enterprise has to be sustainable, and it has to be greater than the charisma of the current CEO,” Tatikonda said. “Budgeting by default becomes strategy, but it’s not a purposeful strategy process. This is a bit about corporate governance: turning long-term objectives into short- and medium-term doables.”

Equipment purchases are just one aspect of a budgeting process is invariably a zero-sum game, and which includes considerations like facilities improvement, service roll-outs, supply chain and staffing. Mohan V. Tatikonda

Hospital financial goals are sometimes contingent upon broader strategies that don’t always sync up with departmental needs. Calling for hard, across-the-board cuts sometimes “doesn’t show a lot of wisdom and it doesn’t reflect priorities” within the lines of service themselves, Tatikonda said. But it can drive greater economic discipline by forcing ranked choices.

“Whether the percentage is achieved or not may not be the real issue,” Tatikonda said. “It’s putting in place a system where ideas can percolate and be acted upon. The real aim is to drive certain creativity and behaviors.”

To that end, sometimes process and quality improvement (and the language associated with it) can have a bad connotation farther down the leadership chain “because of how some of these things get implemented in an organization,” Tatikonda said.

“There are people who are tired of the fad of the day, of the month; tired of another set of obligations when they’re already beyond 100 percent and so forth,” he said. “Most health care system executives first bang on cutting costs on the supply chain side because that’s easier than working on the physicians.”

Attorney Harry Nelson, managing partner of Nelson Hardiman, LLP of Los Angeles, California, blamed institutional siloing for inefficiencies in the sales and buying processes. Good support for interdepartmental communications enables all stakeholders to participate in conversations about their needs, to adhere to institutional and system-wide strategic goals, and to follow industry and technological trends.

“One of the challenges for hospitals and other health care organizations around technology and software is that the pace of change has been accelerating,” Nelson said. “It’s not rocket science to do the narrow, cross-comparison shopping, but asking the question of where we’re going on a three to five-year horizon is valuable.”

Nelson also blamed a saturated market full of high-quality technology solutions for overwhelming the discussion about equipment needs, particularly in the high-interest areas of informatics, clinical decision support, and electronic health records. By having “a strategic perspective in terms of pushing back on where things are going,” he believes institutions can cushion the inevitable shortfall created by technology obsolescence, especially as software inevitably gets exponentially cheaper and faster.

“There are all these tools, but it’s almost like the marketplace is too full of good products,” Nelson said. “I think people are investing in a whole generation of surgical training tools that are going to be surpassed by a generation of VR and augmented reality.”

“I think that the real question is looking for value: good process and good leadership,” he said. “A lot of the marketplace assumptions people were making are being upended, and you can see it when you look at the pricing. In that environment, a smart process is going to be one that pushes back on big purchases and looks for value.”

Nelson said those health systems that contract with third-party experts to guide their purchasing arrangements will make out the best in the current environment. Given the industry-specific expertise among technology and business enterprise leaders, there’s enough guidance available for hire that can pay for itself in the process.

“If you’re going about decisions as you have to find the wisdom on your own, and you’re not looking at some of the collective intelligence that’s out there, I think there’s a short-sightedness,” he said. “There are firms that will come in who offer enormous value when they earn a small percentage of the savings that they bring in.”

“Whether the percentage is achieved or not may not be the real issue, it’s putting in place a system where ideas can percolate and be acted upon. The real aim is to drive certain creativity and behaviors.”-Mohan V. Tatikonda

Bill Barber, vice president of operations for MD Buyline of Dallas, Texas, is an executive in an organization entirely dedicated to competing in the capital purchasing consultancy space. MD Buyline operates in the intermediate space between vendors and hospital buyers, with technology experts, a database of equipment prices, and TCO/ROI calculations that help outline the parameters for individual purchasing decisions. The company has 3,000 hospitals members, and in the last 13 months has processed 60,000 quotes valued at a collective $6.8 billion. Part of the value the organization provides is in helping inform equipment purchases with tech briefs and supplier histories, but just as much of it has to do with pricing benchmarks. Barber said many supplier quotes are padded at the outset, which in turn prompts CFOs to pad their budgets to compensate, driving up costs significantly.

Barber said most purchases are dictated by capital equipment life cycles or larger business decisions, such as whether to add, remove, or overhaul lines of service. But within those decisions, he said vendor selections are determined by existing relationships among the parties. That can lead to a superficial exploration of the marketplace and its available options.

“They go with someone they’ve worked with in the past, or they know the suppliers,” Barber said. “They know the type of need, the features and functionality, and then they name a price.”

Sometimes, CFOs will invite departments to make capital equipment wishlists, but these are frequently scaled back depending upon the life expectancy of the technologies involved and the funds available. The bulk of budgets are taken up with annual replacement costs rather than any long-range planning.

“The optimal process would be to have an annual replacement budget and any new services budget,” Barber said. “We don’t see that too often within the hospitals. It’s plugging holes first.”

Decisions around equipment purchasing should be calculated against procedural breakeven points that determine whether the hospital can perform enough with it to justify the cost. Sometimes the institutions can’t do enough with the technology to justify paying for its acquisition, maintenance and repairs. For that reason, Barber said his clients also seek comparable calculations to use in negotiating service-level agreements, purchase services like lawn care, laundry, food and consumables.

Creating a culture where purchasing decision-makers can get honest feedback all the way down their lines of service is critical to the budgeting process, said Dereesa Reid of Irvine, California. Reid, who co-founded a startup called Notable Systems and operates a consulting company called Care Infinity, operates with a foot in both worlds of value-driven healthcare technology startups and purchasing consultancy. As a former orthopedic institute CEO, she has experience building institutional lines of service, performing revenue-cycle calculations, and managing workplaces from academic medicine to physician joint ventures.

Reid said the equipment budgeting process always starts with addressing bottlenecks to patient care, and making sure inventories are stocked with working backup. Immediately thereafter comes revenue-generating equipment, which she said is forcing institutions to consider whether the technologies they purchase are truly money-makers. Part of the challenge comes in the fact that “by and large, you get paid the same” for surgeries performed with brand-new equipment as with legacy technologies. Conversations are forced to be focused on operational efficiencies and patient demographics as much as on the age and condition of technological assets.

“There may be things you can invest in that actually improve efficiency,” Reid said. “The doctor’s time is some of the most expensive time spent in health care. If they can do a better job taking care of patients and moving them through safely, it produces a return on equipment.”

“Hospitals have been typically deeper pockets for the medical equipment industry, but surgery centers aren’t out there buying the latest and greatest stuff,” she said. “It’s a different model of care. They buy what is good for the patient, and safe, but they don’t overspend. At what point is it want versus need?”

“Surgery centers aren’t out there buying the latest and greatest stuff, It’s a different model of care. They buy what is good for the patient, and safe, but they don’t overspend. At what point is it want versus need?”-Dereesa Reid

Reid also maintains that device-makers don’t typically innovate equipment that is less expensive than its existing counterpart. The latest-and-greatest gear always costs more, she points out, and usually any cost savings occur in buying technology that’s at least a generation behind. Combined with the fact that hospitals would rather cut capital budgets before they cut positions, sourcing brand new devices requires a concerted institutional focus. Sometimes capital reserves are drawn from contingency funds, but they’re not the first place most leaders want to look to spend money, and as the economy contracts further, the same budgets are squeezed more tightly.

“The worst-case scenario I’ve seen is where a surgeon might want some very expensive piece of equipment and the hospital buys it and it sits in the corner and collects dust,” Reid said. “Those things don’t happen so much today. Buying high-tech equipment to attract a single surgeon is a real short-term thing that may or may not work. You don’t want to get into the business where you’re just buying toys.”

Like Hanson, Reid argued that organizational culture counts for a lot during the budgeting process, but those gains must be measured on a long timeline. When C-suite executives and physician leaders are able to more effectively communicate with their counterparts deeper in the ranks, it creates a culture of understanding that quality of care is based as much on institutional need and patient-centered value. It’s not the kind of strategy that works in a rapid fashion, she said.

“I would like to see financial analysts going into the nursing units,” Reid said. “The deeper they can be in the nursing department, the better they can understand the supply chain. Everybody in the finance and accounting team, when they have time, need to get out on the floors and talk to doctors and nurses. The decision-making process and budgeting process will be light years better.”

The returns on investing in a bottom-up culture as opposed to top-down decision-making are tangible for decision-makers as well. Closing the loop with front-line staffers can drive the kind of programmatic excellence that many institutions pursue, but which few truly achieve. To wit, Reid shared a story wherein a technician stopped her once in the hospital cafeteria to thank her for purchasing equipment that made his job function better.

“He understood on the front line that there was a process to getting a new piece of equipment so he could be more efficient in the OR and we could get more cases,” she said. “When was the last time that leaders really sat down and really talked to the front line – doctors, nurses, environmental equipment [users] – and said, ‘Does this piece of equipment really make a difference?’ ”