Historically, healthcare supply chain and value analysis professionals are estimating projected and promised savings on price, standardization and value analysis projects on their monthly, quarterly or annual savings reports. Yet supply chain and value analysis professionals’ estimated savings in today’s healthcare economy isn’t good enough.
To this end, what I’m calling “closed-loop” savings validation systems are becoming a best practice at hospitals, systems and IDNs to ensure that these often-fungible savings guesstimates turn out to be real, tangible, and reliable for budgeting purposes.
Validation is mission critical
In addition to verification of your supply chain and value analysis savings for budgeting purposes, there are eight additional mission-critical reasons that we have identified below on why supply chain and value analysis professionals need to audit their supply expense savings estimates:
1. Data is inaccurate: Our research shows that only 64 percent of the supply chain expense savings reported to hospital, system and IDN senior management by supply chain leaders is correct. This is because the savings reports submitted are frequently overstated or understated.
2. Trust, but verify: How often do you think your vendors meet their promises or guarantees? Not often enough, by our measurement. You could be losing 10 percent, 15 percent, 25 percent or more on any given contract if you aren’t validating your savings. More often than not, it’s been our observation that healthcare organizations lose savings on the start-up of a new contract or value analysis initiative because of poor in-service of the new product, service or technology. This is because what can go wrong, will go wrong and often does. An example is nurses utilizing more I.V. sets than necessary in a 24-hour period when a new I.V. product is introduced.
3. GPO savings suspect: Our studies show that GPO savings projections frequently can be off by as much as 33 percent because GPOs are not careful to eliminate outliers, correcting unit of measure issues or understand how a product, service or technology is employed. So, buyer beware: Never accept a GPO savings projection without first conducting your own cost savings estimates or you could easily be disappointed in your GPO savings results.
4. Curb your losses: By validating all of your contract and value analysis savings before, during and after implementation of your savings initiative you can self-correct any variance from your original savings projections. A client of ours projected savings of $1 million in year one of their new contrast media contract only to find that they actually have saved only $125,000 after we audited the contract in the first six months. Happily, this client has now rectified the reasons why they weren’t meeting their contrast media targeted savings and adjusted their savings estimates accordingly.
5. Savings understated: We have seen supply chain and value analysis savings to be understated by as much as 22 percent because things change (i.e., people, policies and procedures, etc.) during the term of a contract or savings initiative. This means these supply chain departments weren’t getting credit for their hard-earned unreported savings. Why wouldn’t you want to take credit for your successes by authenticating your savings?
6. Savings overstated: More often than not, your supply chain and value analysis savings projections are overstated by 5 percent, 10 percent or 15 percent. Again, that’s because things change (i.e., people, policies and procedures, etc.) during the term of your contracts or savings initiatives. One of our client’s volumes dipped 16 percent in one year, but the commodity savings estimates, based on the previous year, were never adjusted down by the supply chain department. Do you see how easy it is to overstate your savings in a volatile marketplace?
7. Budget distortions: If your CFO is budgeting based on your supply chain or value analysis savings projections, you can have some big surprises when the savings don’t appear on your healthcare organization’s general ledger. It happened to a supply chain manager I know who was called into his CFO’s office to explain where the 12 percent savings were on his new I.V. set contract. These savings weren’t reflected in his system’s financials that the supply chain manager had been boasting about for weeks on end!
8. Verify contract ROIs: GPOs and vendors also promise savings and expected ROIs for healthcare organizations in their contracts. Shouldn’t you know for certain how much your GPOs or vendors are really saving you?
Bottom line
The bottom line on projected, promised, and even guaranteed savings is that they need to be validated on a quarterly basis to ensure that your initial savings projections are being realized. If not, you need to have a mid-course correction on your contracts and VA outcomes. For example, one of our clients was only saving one-tenth of his projected savings on new floor gloves after one year of a three-year contract only to find out, after a thorough investigation, that his new floor glove dispensers were very wasteful. Once this problem was corrected with new dispensers, he then realized his projected savings of more than $90,000 over three years.
Can you guarantee that all of your projected, promised and guaranteed savings are really happening? If not, that is the purpose of a “closed-loop savings validation system.” Without one you are really flying blind!
