Introduction to Cost Cycle Management

Reimbursement constraints continue to put pressure on Health Systems throughout the country. Consequently, more and more efforts are focused on creating an efficient well-organized Cost Cycle Management process. Ensuring every bit of revenue captured can make a difference when considering bottom-line margins.

While a sound Revenue Cycle Management approach is definitely “best practice” and necessary, SpendMend has recently noticed Health Systems applying this same approach towards Cost Cycle as well. Cost Cycle Management gives visibility to the costs associated with conducting business and securing the necessary products and services to support the Health System on a day-to-day basis.

An important facet associated with Cost Cycle Management is the containment of Financial Leakage.

The Reality is financial Leakage occurs in every organization. Even though organizations invest considerably in preventative controls (to prevent financial leakage), it still exists. Due to the unique challenges within the Healthcare Industry, Financial Leakage is more prevalent than in any other industry:

Complexity – Departments tend to function independently with different systems and procedures that are not easily transparent, and many times structured to support the clinical needs. (i.e. Surgery, Supply, Pharmacy, etc.)

Compliance – while investment in processes/procedures is sound, a Health System still relies on individuals to comply with those processes. Lack of compliance will harm the data used to contain Financial Leakage.

Change – one of the most consistent attributes in today’s Healthcare Industry is “Change”. Merging with other Health Systems, upgrading or even changing ERP systems, restructuring departments, and changing GPO providers are just a few examples. Many of these changes are also happening with a demanding vendor base as well.

When considering the bottom line margin at the typical Health system, every dollar not contained within the Cost Cycle has a huge impact and can correlate to 50 – 75 times its weight in new revenue.

Here are some compelling stats from our 2017 audits:

For every $1 billion in hospital spending, the recovery equals over $1 million.

Every $1 million recovered is equal to more than the profits of $75 million in Patient Billings

In 2017, we recovered over $100 million for our clients, or the equivalent of over $7.5 billion in Patient Billings

As attention grows towards prevention and containment within Cost Cycle Management, organizations are discovering that the issues causing Financial Leakage are not transparent but rather “Dark”. By uncovering the “dark data” embedded in the process, organizations are beginning to gain full Spend Visibility. Only when full visibility is accomplished can an organization approach a sound Cost Cycle Management process.

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Financial Leakage Sneaks into Supply Chain

Financial Leakage can find its way into Supply Chain in a variety of ways, but a lack of time, insufficient data, expired, returned, and recalled items, as well as cost management, can plague an entire department.

Lack of Time – A SpendMend 2018 survey showed that the average Supply Chain Professional spends 2.5 hours per day on tasks outside of their daily assigned tasks. That adds up quickly over a week which is 12.5 hours, 78 workdays, or 30% of your total working year on other tasks. These tasks could be due to training, inadequate systems, understaffing, or manual processes overriding system or human errors. Financial leakage can fall through the cracks by rushing through tasks or never getting to them. Imagine having 30% more time every day to finish your specific tasks.

Insufficient Data – Actionable data allows you to make informed decisions to best serve your health system. According to Global Healthcare Exchange, 66% of healthcare leaders say they lack Real-time reporting. Financial Leakage can creep in where decisions need to be changed after orders are made or the wrong product is chosen. Insufficient Realtime Data can all cause communication to fail between Contracts, Purchasing, AP, and Supply Chain allowing Financial Leakage to drop through the cracks.

Expired and Returned Items – Expired items are often caused by insufficient data. Global Healthcare Exchange estimates 7-10% of products expire on shelves. Based on previous monthly or quarterly data you can order less of certain products, so products are not just thrown away. From our own SpendMend experience we find most health systems have dysfunctional return models and processes allowing for a major recovery area. Healthcare Distribution Management Association estimates that 3-4% of products are returned. Return modules are often not accurate and suppliers may or may not make you aware of return credits.

Costs – Financial Leakage caused by cost inefficiencies can cost hundreds of thousands of dollars every year. One small area where money is rapidly spent is shipping. An overnight shipped product can easily cost over $100. Another area that can be easily overlooked falls on the supplier. You may be getting charged the wrong tier for items you purchase often.

All these areas are where Financial Leakage can sneak in unseen, but with a strong united effort reaching for full Spend Visibility you can gain better control over your process

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