A more precise approach to non-clinical spending offers opportunities for health systems to save millions on overlooked spending.
This article was originally published in Health Data Management.
This article is Part 2 in a 3-part series. Read Part 1: How to use more rigor in buying non-clinical products, services and Part 3: Procurement Analytics: 8 Key Metrics for Measuring Performance.
On average, the United States pays twice as much for healthcare as similarly wealthy countries, yet Americans are not seeing better results. Healthcare spending in the U.S. accounted for $4.7 trillion in 2023 and is projected to increase to $7.2 trillion by 2031. But how can a prosperous nation filled with top health technology innovators be struggling?
Health systems across the country face financial difficulty, although it has been estimated that 25 percent of healthcare spending is wasted on unnecessary services. With millions of dollars walking out their doors, healthcare executives are feeling the weight of these expenses. Unnecessary spending has troublesome impacts on each part of the healthcare journey, with patients falling behind as a result of systemic strain.
Patients are feeling the brunt of healthcare’s financial instability. Some 70 percent report dissatisfaction with the current healthcare system. Financial and operational health leaders are seeking ways to improve their organizational bottom line so facilities can focus on the mission of healthcare, which is ensuring healthy lives for all Americans.
In the face of an expensive, underperforming healthcare system, Time Magazine found patients report lack of access and affordability as major reasons for skipping or delaying care. Many health systems have limited non-essential service offerings.
However, untreated conditions can snowball into complex, costly health crises, further burdening healthcare systems and boosting public health costs.
With longer wait times and insufficient services, patients are frustrated and struggling to keep up with ongoing medical concerns such as diabetes and hypertension. Without access to primary care, these conditions are exacerbated and can escalate to emergency situations.
Improved access to routine preventative care is essential for the success of patients and health systems.
Amidst this financial uncertainty, healthcare organizations can take a different path to fiscal well-being. While reducing service offerings may lighten the financial burden in the short term, the downsides described above have persistent, long-term impacts on everyone.
However, there’s a better way to achieve financial success without reducing spending on essential areas. A focused approach to non-clinical spend management offers an opportunity for health systems to save millions on overlooked spending and provide the funding needed to ensure patient access and deliver high-quality care they rely on.
Non-clinical spending is an often-overlooked yet high-impact category in a hospital’s budget. According to proprietary research by indirect procurement services firm LogicSource, more than 20 percent of a health system’s net patient revenue will be consumed for non-clinical goods and services such as marketing, office supplies, IT, facilities and more.
Too often, system leaders assume their group purchasing organization (GPO) is addressing all their non-clinical costs, but LogicSource research shows that more than 75 percent of non-clinical expenses are not addressed by GPO contracts. This leaves potentially tens of millions in expenditures virtually unmanaged, without the sourcing discipline, category expertise or market intelligence being experienced on the clinical side of the organization.
By focusing attention on this expense base, health systems can lower their costs without lowering the standard of care.
Another roadblock on the path to cost savings is a lack of insight across industries for spending on the same goods and services.
Traditionally, health systems only benchmark expenses against other health systems. However, benchmarks from proprietary research conducted by LogicSource show that healthcare spends 7 percent to 12 percent more for the same products and services than those in retail, manufacturing and financial services industries, leaving health leaders with an inaccurate, often-overestimated budget forecast.
Being able to make comparisons across industries offers a window into what non-healthcare businesses pay for the same or similar goods. This strategy reveals areas for improvement and offers a clear path toward sustainable savings.
For example, one regional health system saved $6 million in their first year, focusing on their non-clinical spending. With a new approach to address these expenses with the same rigor as their clinical expenditures, the organization is on track to achieve more than $20 million in annual savings. This value is possible without limiting access and affordability of care.
Patients need reliable care now more than ever. Despite ongoing reimbursement challenges, totaling $522 billion in Medicaid and Medicare underpayments from 2018 to 2022, healthcare providers can take steps to put their financial future back into their hands.
Health systems must deploy cost-saving strategies that do not harm the wellbeing of their patients, communities or staff. This starts with deep analysis of how dollars are being lost and where the greatest recovery is possible with the highest level of system-wide benefit. With millions of dollars on the line, it’s clear that creating a comprehensive procurement and supply chain strategy is critical to securing financial stability now and in the future.
Just like patients need personalized care that understands them, health systems need a supply chain approach that considers their needs. Integrating strategic, enterprise-wide relationships rather than siloed, department-by-department relationships enables the full breadth of an organization’s needs to be met.
Shifting a supply chain strategy starts with organization-wide alignment from leadership down. Transparent, consistent communication across leadership, procurement, and front-line healthcare teams is invaluable in understanding what is really needed to help an organization run at an optimal level.
With these relationships and a comprehensive understanding of current and future needs, a health system can confidently create a plan for streamlining non-clinical expenses, freeing it to serve patients with much-needed, comprehensive service offerings. Primary and preventative care are pillars of a healthy community, and with the right strategy in place, these services will remain intact for years to come.
Despite persistent dialogue highlighting industry-wide financial distress, there is hope for healthcare organizations seeking to alleviate the cost burden. Many health systems have successfully resolved serious financial strain through non-clinical spending management. Although the path may seem overwhelming, there are many opportunities for executives to examine non-clinical spending strategies and get back on track.
About the Author
David Kirshner
Managing Partner, LogicSource
David Kirshner serves as managing partner for healthcare practice at LogicSource. David formerly served as CFO for Lifespan Health System, University of Rochester Medical Center, Boston Children’s Hospital, and several other healthcare provider organizations. He also served as a Senior Executive Advisor in EY’s Healthcare Advisory practice. He is a licensed CPA in Massachusetts and a member of the Massachusetts chapter of HFMA.
