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Unlocking Value in Hospitals through Cost Optimization (Part-2)

In Part-1, we saw some of the key steps that hospitals can take to optimize revenues by increasing patient footfall and enhancing average revenue per patient — Arresting revenue leakages, Cross Selling, Aligning Service Mix and optimizing demand channels.

In the second of the 2-part series that covers enhanced hospital performance, we deep dive into measures that can be taken to optimize costs in hospital operations.

While enhancing revenue has several key levers, optimizing costs becomes trickier as it comes with tradeoffs of maintaining quality — drastic cuts in key areas like consumables for instance can lead to impact clinical outcomes and patient experience making it imperative to adopt a balanced and methodical approach.

A — Reducing Direct Costs

1. Strategic Procurement for Optimal Cost Management

Procurement is a crucial area where hospitals can unlock significant cost savings. By implementing strategic procurement practices, hospitals can optimize their spending and negotiate better deals with suppliers. This includes strategies such as bulk purchasing, vendor consolidation, and negotiating central contracts with key suppliers. Bulk purchasing, in particular, can leverage economies of scale, allowing hospitals to secure lower prices for high-volume items like medications, medical supplies, and equipmentExample: In a Hyderabad based Hospital, the procurement team analyzed the usage patterns of surgical supplies and identified a high volume of consumables being sourced individually. Through bulk purchasing and negotiating central contracts with key suppliers, they successfully reduced costs by 15% without compromising on the quality of surgical materials. For instance, by negotiating a central contract with a trusted supplier, they secured lower prices for surgical gloves, gauze, and sutures, ensuring a steady supply of high-quality materials at a reduced cost.Additionally, hospitals should prioritize the procurement of generic drugs over branded counterparts whenever possible. Generic drugs are typically much more cost-effective while providing the same therapeutic benefits as their branded counterparts. By actively encouraging the use of generic drugs among physicians and patients, hospitals can reduce their overall drug expenditure without compromising on quality of care

2. Efficient Resource Allocation through Service Outsourcing

Hospitals often operate a multitude of in-house services, such as laboratory and diagnostic facilities. While these services are crucial for comprehensive patient care, managing them internally can lead to inflated operational costs and inefficient space utilization. Therefore, hospitals should consider outsourcing such services, especially when facing space constraints or when external providers can offer more cost-effective solutionsBy partnering with specialized external providers, hospitals can streamline operations, reduce overhead expenses, and optimize resource allocation. This strategic approach not only improves cost-effectiveness but also allows hospitals to focus on their core competencies, ultimately enhancing overall operational efficiency and patient care delivery.Outsourcing can also provide access to cutting-edge technology and expertise that may be costly or impractical for a hospital to maintain in-house. For example, outsourcing advanced diagnostic imaging services or specialized laboratory testing can ensure access to the latest equipment and techniques while avoiding the substantial capital investment and operational costs associated with maintaining such facilities internally.

3. Standardizing Care Packages

Hospitals typically offer standardized care packages that bundle a host of services offered (preoperative assessments, surgical procedures, postoperative care, medications, and follow-ups). By adopting an analytics-driven approach to standardization of care packages, hospitals can unlock value by optimizing input costs and better manage channel margins.Example — Total Knee Replacement PackageFor instance, the composition of a knee-replacement package can vary by the type and make of materials used, payment mode (cash vs insurance), and the medications offered. By analyzing historical data and forecasting demand, hospitals can optimize the components of these packages, negotiate better deals with suppliers, and streamline the procurement process.Standardizing care packages also facilitates better cost control and predictability. By offering a predetermined set of services at a fixed price, hospitals can better manage their expenses and avoid cost overruns. Additionally, standardized packages can improve transparency and enhance the overall patient experience by providing clear expectations and pricing upfront.

B — Optimizing Key Overheads

1. Being smart about marketing spends is important

Marketing is a critical aspect of hospital operations, but an ineffective marketing strategy can lead to overblown budgets with little return on investment. A spray-and-pray approach without understanding the most relevant channels for marketing spend can result in wasted resources and suboptimal patient acquisition.For urban hospitals, an efficient digital marketing plan can significantly improve the return on advertising spend. By leveraging data analytics and tracking channel-wise effectiveness of campaigns, hospitals can optimize their marketing efforts and allocate resources more effectivelyRather than relying solely on traditional marketing methods, hospitals should adopt a data-driven approach that allows for measurable mechanisms to track the performance of various marketing channels. This insight can help hospitals make informed decisions about where to allocate their marketing budgets, ensuring that their spend is targeted and effective.

2. Getting the Doctor Engagement Model Right

The model of engagement with doctors is a critical factor that directly impacts hospital branding, patient footfall, and consequently, revenue. The engagement model depends on various factors such as a doctor’s seniority, brand recognition in the local market, marketability, and clinical outcomes.Hospitals should strive to align the incentives of senior doctors with those of the hospital itself. This can be achieved through partial revenue-sharing models or partnership arrangements for select doctors. Such an approach not only helps cut costs by reducing attrition, referral costs, and fixed costs but also drives revenue growth by fostering a more collaborative and aligned relationship between the hospital and its medical staffBy getting the doctor engagement model right, hospitals can benefit from increased patient loyalty, improved branding, and a more sustainable revenue stream. Additionally, a well-designed engagement model can contribute to better retention of top medical talent, reducing the costs associated with recruiting and training new doctors

3. Manpower Optimization

Staffing models for employees other than doctors are often overlooked, leading to overstaffing, higher delivery costs, and higher attrition rates — all of which can result in cost overruns and potentially impact overall patient experience and clinical outcomes. Designing efficient staffing models that take into account the specialty mix, facility layout, and clinical workflows can help drive significant savingsKeeping attrition rates low among non-doctoral staff, especially nursing staff, is crucial. High attrition rates in these roles can lead to increased hiring and training costs, reduced service levels, and higher staff workloads, creating a vicious cycle that often prompts hospitals to over-hire and create additional layers of staffing, directly contributing to higher costsExample: A hospital in Hyderabad implemented workforce management tools to optimize staffing levels and improve employee engagement. By analyzing patient flow patterns and clinical workflows, they identified opportunities to streamline scheduling and reduce overstaffing in non-clinical roles. Additionally, by offering competitive compensation packages and professional development opportunities, they reduced attrition rates among nursing staff by 25%, resulting in significant cost savingsMeasures to improve employee engagement and increase retention, such as competitive compensation packages, professional development opportunities, and a positive work culture, can have a direct impact not only on costs but also on overall patient experience and service levels.In addition to optimizing staffing levels, hospitals should also consider implementing workforce management tools and technologies. These solutions can help streamline scheduling, monitor staff productivity, and identify areas for process improvement, ultimately leading to more efficient resource utilization and cost savings

By implementing these cost optimization strategies across procurement, outsourcing, care package standardization, marketing, doctor engagement, and manpower optimization, Indian hospitals can unlock significant cost savings while maintaining high-quality patient care and operational efficiency.