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Hospital CIOs: Is Now the Time to Start Saving?

Posted by Matt Clark on Feb 17, 2015 11:30:00 AM
Matt Clark

The hospital CIO is in the middle of the perfect storm. Regulatory forces such as Meaningful Use and ICD-10 demand that they accomplish Herculean efforts in short time frames with limited staff. Growing security threats force hospitals to adopt stringent risk and security postures, which often make it harder to accomplish larger projects.

Furthermore, industry shifts towards risk-based payments have all stakeholders looking to the CIO to capitalize on the volumes of data being collected to better support clinical and financial decision making. We can all agree that IT and the CIO deserve support as they face these challenges.

CIOs start saving

Hospitals would be mistaken though, to think that they can continually write checks to IT without enforcing contracting discipline. Low margins and uncertain growth projections place pressure on the entire organization to drive out inefficiencies and achieve cost savings.

In this area IT has lagged behind. While other departments have spent the last two decades adopting lean methodologies, value analysis teams, and strong contracting processes, IT has largely received a pass in these areas. In this article we discuss several common objections and provide some simple steps that CIOs can take to gain some quick savings wins and adopt better purchasing processes.

Objection 1: IT has special knowledge and should make the purchasing decision.

The typical argument goes that IT alone understands the technology, and therefore should lead the purchasing process. Personal biases towards or against certain vendors can limit the hospital's chances to gain savings through competitive bidding. I've even heard of an example where a CIO refused to participate in his regional purchasing coalition's competitive bidding process, electing to give away offered savings by trading them for more functionality and a level budget. 

Supply chain teams can add much-needed discipline to IT decision making. One simple step that the supply chain team can take is to apply the well known "Five Whys" technique to vendor selection. While the initial answers to why a specific vendor is preferred might sound something like, "They just have the best product offering on the market", continue to dig into the root cause of that belief.

Asking "Why" can help distinguish between a well thought out rationale for the purchase (and therefore more focused contract negotiations) and simple personal bias unsupported by facts. Often the outcome of these exercises is that as more vendors are admitted to the short list, stronger competitive bidding leads to more price concessions.

Objection 2: The opportunity cost of pursuing savings projects is too high.

CIOs and their leadership teams can often reflexively table projects which aren't related to the core operational goals for the year. Refusing to spend some time obtaining savings can be like refusing to stop to change the oil in your car because you have too far to drive. You might gain another thousand miles, but at some point you'll find that the lack of maintenance prevents you from reaching your goals. 

The good news is that CIOs can lean on their supply chain teams to augment their staff and pursue savings opportunities, reducing the demands on already-taxed IT managers. Specifically, supply chain teams can reduce the contracting overhead borne by IT managers, optimize existing contracts by maintaining awareness of evergreen renewal dates and opportunities to re-bid, and pick the low-hanging fruit by assisting in appropriate vendor selection in the first place. These suggestions require little effort on the part of IT, and can add up to a full percentage point to the hospital's overall margins.

Objection 3: The IT budget is a small percentage of the overall budget.

The IT operating budget typically constitutes about 2-3% of total hospital expenses, and a staggering 20-30% of total capital expenditures. While it could be argued that achieving 10% savings on an aggregate 5% of the budget is not worth the effort, to do so is to take a short-sighted view of the evolution of health care over the next 10 years for at least three reasons.

First, as we shift towards risk-based payments the demand for systems which support coordination of care at all levels of care will increase. Second, as with the rest of our economy, there is a shift towards SaaS and other outsourced services requiring IT integration, shifting more of the hospital's operational budget under the authority of the CIO. Finally, over the next 10 years hospitals will make the shift from being big data laggards to being leaders in their use of analytics to support operations. 

Hospital IT operating budgets have risen for the past five years, and there is no sign that the trend will reverse itself. Remember, increased capital expenditures on IT products almost always require larger operational expenses on an ongoing basis. While undisciplined contracting processes within IT may cause some issues now, those issues will only compound over time if left unchecked.

One simple step that CIOs can take is to leverage purchased services analytics to identify all of their spending. While typical IT budgets may be 5% of the total hospital spend, analysis of data from hospitals in the Valify Purchased Services Intelligence database shows that hidden departmental spending can often swell that number to 6-7%, presenting more opportunities for savings. 

Conclusion

CIOs are going to face some huge challenges over the next few years, but at the same time they must also share in the mandate to maintain the financial viability of the organization. Current IT staff may be unable to take on new projects, however, by leaning on their supply chain counterparts and trusting them for their expertise, the CIO can lead the organization to both short-term and long-term rewards.

Lastly, hospital IT departments can take simple steps to leverage purchased services analytics to identify their total spend, adopt well-known supply chain processes for new contracts, and allow supply chain teams to optimize the existing contracting portfolio.

Have a different opinion? Let us hear about it in the comments!

Healthcare Purchased Services Contracting Tip Sheet - Free Download NOTE: This post echoes some themes in a discussion held in the Healthcare Purchased Services Professionals group on LinkedIn. Please join the discussion!

Topics: Purchased Services

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