The Hospital Revenue Problem, and How Better IT Cost Control Can Help

Spend Matters welcomes a guest post written by Jon Winsett, CEO of NPI, a spend management consultancy, focused on eliminating overspending on IT, telecom, and shipping.

Last week, Moody’s Investors Service released a dismal report on the financial state of nonprofit hospitals. For the second year in a row, revenues have declined and their rate of revenue growth has reached historical lows. The trends that are driving this downturn reflect a rapidly changing healthcare payment ecosystem – including low rate increases from commercial payers, more reimbursement cuts from the federal government and more high-deductible health plans contributing to bad debt. Healthcare Finance News shares more here.

Some nonprofit hospitals redoubled their focus on cost containment in order to slow down the rate of expense growth. HFN’s article says this:

“The expense growth rate slowed in 2013 but still exceeded revenue growth. Contributing to the slower rate of expense growth has been cost containment efforts by hospitals and the shift to lower cost and more efficient outpatient settings. Going forward, Moody’s report said the agency expects cost containment efforts will focus on changing processes and care delivery, both methods whose benefits will take time to realize…”

As the report points out, changing processes and care delivery are two necessary reactions to the revenue problem plaguing nonprofit hospitals.

In tandem with these long-term approaches, hospitals need to implement expense control measures that deliver more immediate impacts without sacrificing quality of care and service. Two spend categories that are prime candidates for improved cost control are IT and its first cousin, telecom. The discrepancy between what two hospitals with similar technical requirements pays for software, hardware or network services may be 20, 30 or even 50 percent depending on the vendor.

Pricing disparity for IT and telecom products and services is only getting worse – and this comes at a time when healthcare delivery is becoming more automated and regulated. It points to a serious need for hospitals to improve the ways IT and telecom are sourced and vendors are managed.

Here are four steps that hospitals can take right now to reduce IT and telecom expenses:

  1. Benchmark every purchase. The most important step hospitals can take to making meaningful cuts in IT and telecom costs (without sacrificing capabilities) is to validate fair market value pricing and discount levels for every purchase over $25,000. This requires insight into what similarly sized customers are paying for the same offering. If you don’t have this information in-house, seek outside pricing expertise. In most cases, the payoff is immediate. (NPI finds that 35 percent of purchases are at fair market value and 65 percent show material opportunity for improvement in pricing and terms.)
  2. Eliminate or minimize annual rate increases. Annual rate increases for software and hardware support and maintenance have gotten out of control. Negotiate these increases out of your vendor contracts, or cap them to keep costs in check over the term of your agreement.
  3. Know your licensing options. BYOD, mobility and the overall consumerization of IT has resulted in substantial changes to vendor’s licensing programs – some of which are advantageous to customers, many others are not. It’s crucial that IT sourcing teams understand all licensing programs that fit their technical and business requirements – not just the ones being heavily promoted by their vendors. At NPI we find costly mismatches in areas such as Microsoft, Oracle, and SAP licensing; and wireless program selection.
  4. Take a cross-functional approach. IT is perhaps one of the most complicated categories of sourcing in the healthcare setting. Departmental users, sourcing experts, and IT professionals should all be involved to make sure business, finance, and technical requirements are met.

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