16 Mar The Hidden cost of lower cost; how line-item savings could cost you more in the end
There is a great deal that has shifted and continues to shift in the healthcare landscape. We will undoubtedly have a different system in 10 years than we have today. Just look at the changes that have occurred over the last 10 years since the passage of the Affordable Care Act.
But one thing will likely remain; cost will be a target for improvement in healthcare purchasing.
We have all seen the headlines in recent times about the increase in drug prices, surprise billing, and hospital consolidation. The common thread among these hot-button issues is cost. Cost to the hospitals. Cost to patients. Costs to insurance companies.
While there is a lot to discuss, debate, and deliberate over, there is one topic that is often overlooked but can be a real issue if not treated properly. That is, the cost of low cost.
Let’s start in consumer terms. Consider dish soap. It all seems the same. There are multiple shelves filled with dish soap at the local store, all priced differently. Being on a budget and trying to save for the next vacation, its easy to look at the bottom shelf to save $1.29 on soap. But when you get home and try to tackle the lasagna dish, you realize you just used half the bottle. In the end, if you stay with that soap, you will probably end up paying more, because of the quality difference.
This is a simple example, but it is as true as ever in the hospital supply chain. Hospitals are trying to save costs for all the right reasons. Lowering expenses leads to higher profit margins. Higher margins mean more reinvestment into important healthcare services and the health of the community. Higher and uncontrolled expenses lead to lower margin and less investment. It is no surprise then that when presented with the opportunity to save 20% on a single line item, most would jump at the chance.
However, there could be hidden costs associated with that savings. These are the hidden costs that could be costing more in the long run.
In one study, a group from North Mississippi Medical Center looks at its wound care dressing costs, realizing it was a high spend category. What is interesting about the high spend in this instance is that it was not because the hospital was purchasing high individually priced items, it was buying a large amount of various wound dressings. Some were high quality, other lower quality, and many redundant. But the mix of quality and over lapping vendors led to a high spend. Despite having many vendors, which often leads to higher costs, especially given product redundancy, one of the main issues that was uncovered was quality.
Quality for wound care dressings often boils down to being able to leave the dressing on for longer and having a wound that heals faster. In this case, when the hospital reduced redundancy and brought higher line item priced items into the facility, it was able to save on spend in the category, despite each line item looking much higher than it previously had.
You may be asking, isn’t the above example about standardization? The answer is yes. But it is also about not looking for the lowest priced items in order to save costs, without understanding the full impact of these products.
One high spend area if you are in a hospital that does high volume of surgical procedures is patient drapes. They are disposable. They are not reimbursable and can add a lot of cost to each procedure. Many hospitals look for ways to save on these items, and for all the right reasons. What if in an effort to save on patient drapes, you bring in a single access drape for angioplasties that does not absorb as well as the previous drapes. Furthermore, there were some features of the previous drape that allowed surgeons to hold tools or guide wires and tubing. With reduced absorbency and lack of other provisions, surgeons are now dropping tools and using blue towels by the arm load to control fluid.
While it seemed like you were saving 10% on a single line item you may have just increased costs by 5% because of the extra downtime and supplies that are being used in each procedure.
Whether you are a nurse, a nurse manager, a supply chain director, or a purchaser, how should you be looking at individual items to determine if there is a true, fully loaded cost savings?
To start, look at cost. It is fine to start there as a benchmark. In a previous article we wrote about how to measure ROI of new products, many of those ideas apply here as well. In order to understand if you are saving money, it is important to look at the full impact. Is the new product going to increase nursing time? Will it increase downtime? What are the issues doctors are going to have using it that could cause unforeseen impacts on efficiency? Will we have to buy more because it will take more to get the job done? Understanding the total cost of an item is critical when making new purchase decisions.
On the other side of this coin, if you are being told that a new lower cost item is being brought into your hospital, ask the above questions. Push to understand what the impact to your daily practice is going to be. Some of those impacts may not be worth the savings in the end.
Finally, work with the vendor. They may try to sell you on price alone, but do not let it stop there. Have them produce evidence to show that you will not be impacted in other ways by switching to a lower priced product. There are many less expensive medical devices that do an incredible job. There are others that do not perform as well as premium products. Understand your total cost of the products and services you are bringing into your facility. They may cost you in the end.