The Dynamics of Cost Reduction

By George Hampton

At the risk of sounding like “Captain Obvious,” the health care industry as a whole is struggling financially. Everyone is being called to task for savings and clinical technology programs are certainly no exception. Perhaps your program has flown under the “cost cutting” radar in the past. I know that many organizations don’t have a real grasp on what they are spending on clinical technology, but many have an impression that whatever they are spending is probably too much. This impression, whether real or imagined, leaves the director of the Clinical Technology Program in a challenging position. If you are exercising cost saving measures, are you able to show the results, or if you’re not actively cutting expenses, where do you start? The situation certainly sounds bleak, however there can be ways to make it a positive. Let’s discuss some of the variables of cost reduction in the hope that we can construct a clear vision that will help you get started or validate your current efforts.

Obviously, there is no “model” program that would necessarily fit every application. A CT program’s expenses can be simplified into four basic categories: Contracts, Parts, Outside Labor, and Salaries (I know, more Captain Obvious stuff). This is management 101 stuff for a leader in the CT industry. However, my experience has taught me that the understanding of the interdependency of these expense categories is less common. From a forensic standpoint, the efficacy of a CT program can be diagnosed by looking at the proportionality of these expense categories. From an adaptive perspective, the performance of the CT program can be modified by strategically adjusting the proportionality of these expense categories.

Let’s set up a consulting scenario. I am called in to determine the efficacy of a CT program in an average metropolitan hospital. The CT program has four techs and one manager. My first task would be to determine the total CT spend. My team would scrub all the financial data from the hospital to establish the total CT spend from all the possible originators. We would be careful to accurately determine the four main category expenses. With this data gathered, we would draw a conclusion by looking at the magnitude of the relative categories (Contracts, Parts, Outside Labor, and Salaries).

The data gathered is used as a basis for a conclusion. We would look at the staffing levels and the specific training of the staff. We would determine if the four techs in this scenario are enough to support the CT program in its current form. Inevitably, the staffing levels would also come into consideration for whatever changes we would recommend. The total contract spend would also be considered. A high contract spend, as a percentage of the total budget (70 percent or greater), would indicate a heavy reliance on contracts. Low parts spend against a high contract and outside labor spend would indicate heavy use of outside repair sources or depot repair. As mentioned before, heavy reliance on contracts and outside labor would call into question the use of the internal staff. Are they just doing periodic maintenance? Why aren’t the internal technicians doing the majority of the repairs? As an example; if I have a tech fully trained on my cath lab, I would expect to see him do 80 percent of the work or greater. As I said in the beginning, no model fits all, but the critical eye of someone evaluating a program will be drawn to extremes.

Ultimately, the point of this article isn’t to scare you or increase your stress. The point is to encourage you to make necessary changes in your expense categories and protect yourself from analysts by being aware of the interdependency of these factors. I would recommend starting with your staff. Establish a plan for training that will deliver a highly effective program. Additional staff can be justified when you have a plan to reduce contract expenses. Set a target for contract reductions. When contract spend decreases the CT program is taking on more financial risk. Risk is not a bad thing here; it just means we are paying for what we need, as opposed to the “insurance” against expense that contracts provide. As contract expense decreases parts spend should go up, as the in-house techs are doing more of the work and buying the parts necessary for that work.

Outside labor might increase slightly but should be the smaller expense overall. Remember we want to do as much work in-house as possible. Lastly, monitoring financials and benchmarking is critical. You must be able to show the financial benefits of your program. Many programs use Cost/Value as a benchmark. The Total Cost of the equipment inventory compared to the Total Annual Expense (all expenses! Office supplies to MRI contracts). Highly effective programs can achieve Cost-to-Value scores of five percent or less.

Wisdom is the application of knowledge – If you are a leader who understands all this and your program is on the ball, your knowledge and experiences can make a great difference for your peers, please share. If you are in a CT leadership role and this is new information to you, don’t despair! You can do this! Just take it step by step. Gather data, analyze data, make a plan, and monitor effectiveness.

George Hampton is the president of Tech Knowledge Associates, a clinical technology management provider that was formed to bring unique value to its clients by guaranteeing savings, capping their expenses and protecting them from catastrophic failures. For more information, contact TKA at info@ii-techknow.com or visit ii-techknow.com.