Amidst massive (i.e., 20-30% annual) revenue decline caused by COVID-19 and steadily growing fixed costs, hospitals are suddenly facing declines in their margins of 200-300%, leaving executives scrambling to reduce costs. Previous focal points of hospital value management, like clinical supplies and purchased services, are now becoming much harder to find meaningful latent value. Labor reduction, always a last resort, is already a reality for most hospitals. To minimize the further labor loss, hospital executives must get creative in where they find quick value.
Information Technology (IT) expenditure, constituting 20-30+% of operating budgets and growing at a rate of 20% annually over the last decade, is the best target for rapid and large-scale cost reduction. IT expenditure therefore should be a hospital system’s prime target for non-labor cost reduction at the system level.
IT spend has been left largely untethered over the past ten years. Massive Enterprise Electronic Health and Medical Records (EHR / EMR) software implementation initiatives from the likes of Epic and Cerner have continuously sapped up CIO budgets and mindshare. This lack of disciplined and habitual pruning of IT budgets offers a plethora of quick savings opportunities of substantive magnitude.
Reducing IT spend is a full contact sport, with its hospital-unique challenges. Hospital IT spend is broad, and the details and data needed to make an impact are buried under a myriad of constantly changing contracts. C-suite collaboration between Finance and IT for cost reduction has been organizationally avoided in the past. Finally, bandwidth and expertise can be limited in tackling such a complex spend portfolio.
Successfully driving COVID-19 cost recovery through IT spend is simpler than it sounds.
Hospital C-suites must know where to focus within their IT spend to see results. CIOs and CFOs must learn to collaborate more deliberately at the enterprise level. Lastly, hospitals must find, retain, or hire dedicated bandwidth and expertise needed to drive specific IT cost savings initiatives and strategies within a well-managed game plan.
What type of strategies and initiatives are we talking about? Here are two that should be on the top of everyone’s list….
Strategy #1: Assess and adjust IT infrastructure requirements immediately
COVID-19 and the cost urgency it brings has led to immediate staffing and strategic realignment for all health systems. This shift has instantaneously changed hospital IT infrastructure needs. In addition to all the latent value within IT, there is also an immediate need to restructure infrastructure to account for these changes. Whether it is the network, storage, non-clinical software, cloud hosting, telecom, or all the above, the new world order of post-COVID-19 hospitals requires adjusted infrastructure to support it.
Ignoring or delaying these infrastructure decisions is not an option. Costs of misaligned infrastructure affect bottom line almost immediately. Future infrastructure needs are much harder to predict in uncertain COVID-19 environment and its aftermath. IT vendors supporting health systems are not incentivized to proactively communicate infrastructure realignment needs to their hospital customers. It is therefore up to hospitals to identify it for themselves, and then make the necessary changes happen.
Hospital leadership must prioritize the mission-critical and high-cost areas of infrastructure first, knowing exactly what to look for within their contractual agreements with IT vendors. The COO must be a part of these conversations, ensuring the best possible grasp on future needs, especially in labor and head count). Finally, remember to facilitate collaborative and positive interactions with vendors, and know the details in your contractual arrangements before engaging in negotiation discussions.
Strategy #2: Refresh strategic vendor relationships with optimized terms, regardless of contract lifecycle
Strategic vendor relationships account for 30-40%+ of IT spend within just a handful of contracts. A majority of this spend is occupied within a handful of relationships. Many of the relationships are held by monopolistic entities (e.g., Epic, Microsoft, GPOs, etc.). It would be far too difficult to address meaningful cost reduction without making these relationships a major priority.
This exercise cannot be a shakedown. The switching costs of changing a strategic partnership is far too high. Hospital leadership must instead deeply understand their strategic contractual relationships, the flexibility within them, and understand the predicted business outcomes of all feasible strategic tactics. This tactic is contract lifecycle agnostic, meaning even if a new partnership was recently contractually signed, it should be evaluated for modification. Whether it is a major contractual overhaul, an extension of period of performance, or a re-structuring of financial terms, engaging strategic commercial relationships with “win/win” negotiating scenarios that will yield meaningful results. If facilitated correctly, a hospital’s strategic partners will gladly participate in the process.
Tying it all together
Neither of these strategies, even if executed perfectly in unison, will solve all COVID-19 financial woes. Digging out of this mess will be a multi-year effort. Making meaningful near-term impact, whether for momentum or simply to keep the lights on, is fundamentally important. In a world of limited options, there is no better category to facilitate this better than IT.