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Article: Controlling Overhead Expenses in Healthcare

June, 2017

Vivek Kanade, Executive Director, Siemens Healthcare, explains how hospital operators can reduce avoidable overhead costs, and invest in high-value cutting edge technology for diagnosis and treatment to increase their institutions’ competitiveness


As Siemens Healthineers, our presence in in-vitro and in-vivo technology and solutions space for the past several decades has helped us closely witness the challenges that healthcare providers face.

One such challenge is better management of overhead expenses. With the ever increasing volume of patients and constant pressure to contain healthcare costs, hospital administrators are facing a pressing need to reduce expenses now, more than ever.

As we observe, healthcare costs are climbing worldwide at an alarming rate, hence reducing the total cost of healthcare delivery is a topic of vital concern for every healthcare provider worldwide. The number one area for improvement, as per a survey of U.S. hospitals, is to reach financial targets within a three-year time frame. Managing overhead costs (administrative costs) is one key lever to attain this target. The share of administrative costs in the total healthcare costs differs greatly from country to country. Due to limited availability of Indian datasets, I will reference a few international examples. While the Indian scenario would only differ in the degree of intensity, the basic challenge will remain the same. 

A study of hospital administrative costs in several nations which was published in Health Affairs (see chart 1) finds that hospital bureaucracy consumed 25.3 % of hospital budgets in the United States, far more than in other nations. Next highest were the Netherlands (19.8%) and England (15.5%). Scotland and Canada, whose single-payer systems pay hospitals’ operating budgets with separate grants for capital, had the lowest administrative costs (about 12%).

According to the study, hospital administrative spending approximately added USD 667 to per capita healthcare spend in the United States, USD 325 in the Netherlands, USD 225 in Wales and England, and USD 164 and USD 158 in Scotland and Canada respectively.  It was further noted that reducing U.S. per capita spending on hospital administration to the Scottish or Canadian levels would have saved more than USD 150 billion in one year.

Here, we examine seven ways in which hospitals may operate more efficiently and get their overhead costs under control.

1. Classify and record overhead costs accurately and consistently

Overhead costs need to be captured and classified correctly in order to accurately estimate the costs of clinical versus non-clinical care. Also, all costs accumulated in overhead cost centers need to be allocated to the final cost to ensure that each product category (patient and non-patient) has its fair share of overhead. It is critical that the most appropriate allocation statistic is used to allocate overhead costs to the relevant final cost centers or an end-product class - says Australia based Independent Hospital Pricing Authority.

If overhead costs are not accurately recorded and categorized, it impedes or prevents any intervention measures designed to reduce costs. Furthermore, it becomes more complicated to make targeted and useful investments in overhead expenses that could create a demonstrable added value.

2. Work on decreasing overhead costs that don’t contribute to better care (i.e. Value Based Healthcare)

Overhead cost need not be seen exclusively as an economic burden, they can significantly contribute to achieve higher levels of workflow efficiency and therapeutic quality. As an example our Biograph mMR, the MR-PET diagnostic imaging solution significantly shortens the diagnosis and the treatment timelines in the continuum of healthcare.  On other side our laboratory automation solution Aptio, provides workflow optimization of lab resources, reduces human intervention, brings greater efficiency and faster turn-around time (TAT).

However, the costs that do not contribute to a quality of care should and need to be reduced. The American Hospital Association (AHA) in its January 2016 issue of TrendWatch, advises hospitals to “consolidate administrative processes to achieve economies of scale. Administrative processes are not as unique as individual patients. There are economies of scale in centralizing functions, as many hospitals are learning from consolidation, and/or the adoption of standards to improve administrative and clinical operations across each of their organizational sites.” The study mentions that reining in administrative costs could also include consolidating management layers.

3. Take some tips from other industries

Consolidation, Managing Health and Industrialisation are the three megatrends that we see, as Siemens Healthineers.  Demographic changes and cost sensitivity is driving industrialisation of healthcare.  Howsoever we may think that healthcare is different from other industries, we can see common sets of challenges reflected on both the sides (see chart 2).  Hence there is a strong case for looking at opportunities to learn from other industries. It is favorable for healthcare providers to look at, and selectively adopt, successful cost-efficiency measures developed and perfected over decades by conventional industries.

For example, industrial production defines value with measures such as short throughput, optimal utilization, minimum downtime, short transport routes, low storage costs, low error rates, and a comprehensive knowledge of current stock quantities and the location of production resources. These measures are undisputed determinants of success, with high levels of attention and planning devoted to them and can find high resonance in the way healthcare organisations operate.

4. Streamline bureaucracy

All over the world, hospital operators are working under the burden of excessive complexity and bureaucracy. Even a seemingly straightforward activity such as filling a prescription order is fraught with unexpected intricacies.  In the evolving healthcare industry, managing the requirements of many different health-benefit plans places a heavy administrative burden on clinicians.

One of the most effective ways to reduce overhead costs is to optimize the recording and billing of services provided. Billing represents a great source of expense for hospitals, as does attempting to collect on bad debt. Hospitals that educate their patients on the billing process are more likely to have complying patients and avoid protracted disputes and bad debt. Another option is to outsource the receipt of payments from automotive insurers.

5. Use IT to reduce costs

Healthcare is challenged by large amounts of data that is diverse, unstructured, and growing exponentially. Data constantly streams in real time, through interconnected sensors, monitors, and instruments. A simple example can be our “predictive maintenance” that can potentially identify a component, that is about to fail.  Replacing it before the failure event can potentially reduce downtime costs. 

Even in 2010, an average U.S. hospital already had to manage one billion terabytes of data, which is expected to rise by a factor of 50 by 2020. Added to this is the growing demand for providers and payers to retrieve, analyse, and share data.  This makes a strong rationale for why healthcare organizations must consider migrating from their traditionally fragmented technology infrastructure to cloud-based solutions.

As a technology provider we have forayed and invested heavily in developing portfolio of digital solutions.   All of these solutions are designed to improve one or more of the following 4 deliverables: 1) Improving accessibility, 2) Managing costs, 3) Increasing quality care and 4) Supporting population health management. 

In nut shell, a comprehensive and flexible digitalization of hospital processes is essential in order to enhance efficiency and quality of care, counteract the overhead cost induced by complexity, and improve transparency.

6. Use diagnostic imaging more efficiently, lab testing more selectively

Computed tomography, magnetic resonance tomography, X-rays, and other forms of imaging generate large volumes of data. A significant portion of the information collected in imaging diagnostics remains unused because it is stored in different formats and at different locations, among other things. Experts estimate that using all of this data efficiently could save hundreds of billions of overhead dollars in the United States healthcare industry alone. 

A systematic networking of diagnostic imaging equipments, as well as the overarching analysis of operational data, can give large hospitals, hospital groups, and diagnostic centers an overview of their equipment fleet utilization. Information about the nature, timing, and duration of the examination could be used, for example, to optimize the utilization of the devices. Hospital groups could determine whether each piece of equipment is being used efficiently and for the right examinations at its current location.

Workflows could also be improved. For example, body coils have to be rearranged for different magnetic resonance imaging investigations. Knowing the time this takes allows for a more efficient and tighter organization of scanning sequences.  Siemens Asset Utilization Management solution is a step in that direction and helps providers extract optimum value from their investments in our technologies.

In labs, redundant laboratory testing has been estimated to waste up to USD 5 billion each year in the United States, according to the American Journal of Clinical Pathology.  In order to prevent unnecessary laboratory testing, providers should be cautious when first ordering tests. Computerized physician order entry systems that allow for system-defined rules for utilization management would help physicians order tests more effectively.

7. Get your staff on board

The Harvard Business Review recommends that hospitals align any cost-cutting initiatives with their organizations’ mission and culture, and then engage clinical and administrative staff across their organizations to collaborate in the process.

Healthcare providers have to face an environment with fast technology evolution and following high training costs, with evolving patient populations, as well as handle unplanned downtimes. Hence major attention is given to the topic workforce which not only becomes more and more crucial because of rising labor costs, but also because of expected staff shortages – especially in regards to expert staff in the medical arena.

Achieving more with less – this goal of manufacturing companies also applies for hospitals in their efforts to fulfill their tasks with the scarce personnel available. This is where Siemens Healthineers Education Services come into play. With this offering Siemens Healthineers helps healthcare providers worldwide by enabling users with expertise and efficiency. Also in the long run helps healthcare providers in making their employees feel more appreciated.

In summary, like all other businesses, healthcare institutions too have certain operating expenses required for the continued function of the business, such as governance and documentation, billing, supplies, energy, rent, property maintenance, transportation, capital charges, cleaning, waste disposal and other non-clinical personnel expenses.

Hospital operators who reduce avoidable overhead costs, and invest in high-value cutting edge technology for diagnosis and treatment, will increase their institutions’ competitiveness. The fact is that if a hospital is able to successfully contain their operating expenses it will have an immediate advantage over those that do not.

The opinions expressed in this article are the author’s own.