As healthcare organizations face increasing financial pressure, they should pay close attention to every dollar of revenue and expense to maintain financial discipline. This is especially true for long-term care organizations, where average margins are already razor-thin and many are operating at a loss.
Organizations often keep a close eye on productivity and staffing costs, but non-labor expense reduction opportunities are often less visible and harder to identify because they occur at a line-item level. This can lead to potential savings being overlooked. Below are five strategies that can help long-term care organizations increase visibility of these opportunities and achieve non-labor savings.
Benchmarking Non-Labor Expense Metrics
Benchmarking provides a starting point for identifying areas that may warrant further review. High-level benchmarks, such as supply cost per patient day, dietary cost per patient day, or utility cost per square foot, can help organizations understand where there may be savings opportunities.
Once you know where to look, you can then expand on the benchmarking in several ways. For example, if supply cost per patient day appears to be out of line, you can look at the individual items purchased and benchmark their prices against the market. Many long-term care organizations have not benchmarked their line-item supply costs, but doing so can open a pathway to savings, often through your group purchasing organization (GPO).
Organizations should not view benchmarking insights as proof of overspending, but as indicators of where leadership should focus its attention. For example, a facility with above-average supply costs may be purchasing higher-cost products, experiencing utilization issues, or simply serving a more complex resident population. Benchmarking helps identify where the organization should perform deeper analysis to understand which of these may be the case.
Standardizing Purchasing Across the Enterprise
Standardization opportunities are especially common in organizations with multiple locations and decentralized purchasing processes. In a recent analysis for a multisite company, we found variability in purchasing for a variety of supply areas, including examination gloves, sanitizing wipes, absorbent pads, and batteries. We estimated that adopting a standardized process could result in savings of between 8% and 10% in each category.
Establishing a value analysis team (VAT) can help organizations identify and implement standardization savings opportunities. These multidisciplinary teams, which include supply chain and clinician representation, can lead this process and administer trials to help gain acceptance from patient care teams.
Discussing Savings Opportunities With Your GPO
A GPO can be one of the most valuable resources for identifying and implementing non-labor savings opportunities. A regular business review process, often quarterly, creates structure for analyzing your purchasing data to identify potential savings, including conversion opportunities, standardization opportunities, or even off-contract purchases where the GPO price would be more favorable.
These opportunities should become part of your regular discussion with your GPO. Savings opportunities often come from either taking advantage of the GPO’s tiered pricing system, where certain changes may allow you to capitalize on a different tier price, or identifying conversion opportunities where savings could come from a change in brands. A quarterly review process with your GPO helps keep these opportunities at the forefront of your value analysis process and supports a pathway to savings.
Monitoring Contract Compliance
Whether an agreement with a vendor is through your GPO or a direct contract, you need a process to make sure you receive the contracted price. Due to the volume of transactions, this process can be difficult for even some of the most advanced supply chains. Outside organizations can often assist with reviewing transactions and matching them to contracts for a percentage of the overcharges recovered. In addition, companies that specialize in areas such as telecommunication or waste removal can also look for opportunities to achieve more favorable pricing.
Even small pricing discrepancies can add up to significant expenses over thousands of transactions. Regular monitoring allows organizations to identify incorrect pricing, missed rebates, and contract administration errors before they become recurring issues.
Looking for Opportunities in Your Self-Insured Health Plan
For those organizations large enough to have a self-insured health plan, two areas typically present opportunities for savings. The first is care management for high-cost claimants. While high-cost claimants may be few in number, they can substantially increase costs to the plan. Engaging a third-party case management company to manage high-cost medical claims can help reduce unnecessary utilization and improve care management.
The second area that may offer savings opportunities is utilizing the lowest net cost model for pharmacy benefits management (PBM). Many of the larger PBMs tend to permit higher-cost, name-brand drugs as part of the formulary because of manufacturer rebate incentives. However, the cost of these drugs net of the rebate can still be higher than some lower-cost alternatives. The lowest net cost model focuses on comparisons like these to help drive down costs to the plan.
Often, these two approaches save organizations more than $1,000 per employee per year.
How Forvis Mazars Can Help With Non-Labor Cost Reduction
Non-labor expenses span hundreds of categories across the organization, making savings opportunities less visible than labor-related initiatives. By implementing structured processes around benchmarking, standardization, GPO optimization, and contract compliance monitoring, as well as looking at self-insured health plan strategies, long-term care providers can increase visibility of potential non-labor savings and focus resources where the greatest opportunities exist.
While no single initiative will solve margin challenges on its own, a disciplined approach to non-labor expense management can often generate savings between 2% and 4% of total expenses, helping organizations strengthen financial performance without compromising patient care.
Our team has extensive experience supporting healthcare organizations with non-labor savings across a wide range of categories. If you have questions or would like assistance with your strategy, please reach out to our professionals today.