Reducing Controllable Costs

Transcription

1 Reducing Controllable Costs Susan Petrie, Chief Operating Officer, Capital Link Tony Skapinsky, Project Consultant, Capital Link Advancing the Financial Strength of L.A. County Clinics February 9,

2 Session Overview Which expense items to focus on: Largest expense items on the P&L Those with no effect on quality of care Those with little or no impact on operations and work flow Fixed vs. variable (ease of impact) Short-term vs. long-term 2

3 Typical Health Center Costs Expense Category % of Revenues Salaries & Related Expenses 43% Fringes & Payroll Taxes 7% Professional, Contracted, & Consultant Fees 25% Supplies 8% Insurance 1% Training, Development, Education, Travel 1% Administrative & General 3% Utilities, Repairs, & Maintenance 3% Rent 2% Depreciation 2% Other Operating Expense 2% Total Operating Expenses 97% 3

4 Questions to Consider 1. How does your health center compare with a typical one? 2. If your expense breakout is not in-line, understand why. If no valid reason, how can you improve? 3. What have other health centers done successfully and how can you replicate? 4

5 Cost Reduction Opportunities 5

6 #1 Personnel-Related Expenses Improve efficiencies and work flow Strategically manage consultants and contracted staff Minimize insurance and other fringe benefit expenses 6 6

7 Back Office Support: Questions to Consider Can you afford your our own CFO/CIO, other? Short-term vs. long-term needs and costs? How significant and complicated are your requirements? Are you able to find and hire needed permanent staff? Is there a specialized expertise needed? 7 7

8 Shared Services and Outsourcing: What is the Difference? Shared Services: Certain activities and processes are delivered from a shared resource (employees and/or systems). Typically, the employees salaries and related costs are shared on a pro-rata basis. Outsourced Services: A business process expert provides specific contract services or activities. Usually involves a monthly or transactional fee. 8

9 Shared Services and Outsourcing: Benefits Reduced headcount/lower costs Access to particular expertise Allows focus on quality healthcare Economies of scale Accurate, effective information Synergies, sharing of best practices Meet compliance and regulatory requirements Standardize and optimize processes 9

10 Shared Services and Outsourcing: Challenges Fear over loss of control Concern over possible staff layoffs or community impact Cultural issues/juggling priorities Set up time and expense Getting buy-in Determining which services will be shared or outsourced Fear of change 10

11 Shared Services and Outsourcing: Why? Clear Objectives are Critical Cost savings? Improve service quality and consistency? Allowing a greater focus on core business? Other? Combination of items? 11

12 Shared Services and Outsourcing: What? Some Activities Work Better Finance and accounting Information technology Human resources Administrative and legal activities 12

13 Shared Services: Increasing Likelihood of Success Collaboration and partnership with similar organizations/objectives Agreement on governance structure and decision-making process Strong leadership and communications Same or similar systems (EMR, Accounting) Established, documented expectations Ongoing measurement: savings, customer satisfaction, quality 13

14 Outsourcing: Increasing Likelihood of Success Familiarity with industry/clients: Knowledge of health centers Ability to get up to speed quickly on your particular market Common systems and support: Able to integrate with your existing systems Regular check-ins: Established, documented expectations Ongoing measurement of progress: savings, customer satisfaction, quality 14

15 #2 Supplies, Administrative, Insurance and Maintenance Expenses Together comprise 15-20% of budget Supplies: 8% General and administrative: 3% Health insurance: 5% (in fringe) Other insurance: 1% Utilities, repairs, maintenance: 3% 15

16 Group Purchasing Organizations: How do GPOs save money? PRICE: Use collective buying power (and industry pricing expertise) for better pricing and services. ALL members get best available price. APPROPRIATE SUBSITUTIONS: Lower cost alternatives, generic or house brands with same performance/quality. INVENTORY MANAGEMENT: Access to items you need without over-stocking and tying up capital and space. 16

17 GPO Cost Savings Example #1 Two Health Centers: WA and CA EACH SAVED: $500K+ over 3 years 20-30% on telecommunications 10-20% on office and janitorial supplies 10-20% on payroll/hr admin 8% on medical supplies 21% on dental supplies 17

18 Other GPO Examples: Health Centers with 15K-100K+ Patients A1C diabetes test cost reduced from $8.00 to $6.50 and saved 19% per test Telephonic interpretation expense reduced from $1.10 to $.81 per minute and saved 26% per minute Medical supplies: saved 15% Office supplies: saved 19% Dental supplies: saved 17% 18

19 How Much Can I Expect to Save? Health centers not actively participating in a GPO can expect to save 5-25% on several categories of expenses. 19

20 Small Changes: Big Impact Average CCALAC Center Spends 8% on Supplies Earns a 3% Margin Saves 12% on Supplies Earns a 4% Margin 20

21 GPOs-What to Look For One that understands health centers One that does NOT require: A joining fee Minimum purchase amount Use of a certain vendor Long-term (or short-term) commitment Exclusive GPO relationship 21

22 #3 Strategizing Facility Expenses Understanding Occupancy Costs: Rent/Lease Expense Utilities Gas Electricity Water Trash Removal Insurance Security Maintenance/Repairs Landscaping 22 22

23 Lease vs. Buy Considerations Leasing: General Advantages Provides more flexibility for operations to grow (or shrink) Faster to negotiate and close (and less management time) No need to manage the overall building; saves costs and time Requires least amount of cash up-front Good choice for a CHC that is fairly new or is in a volatile or growth situation 23 23

24 Lease vs. Buy Considerations Owning: General Advantages Insulate health center from market pressures of rising rents Flexibility to use the building according to the organization s needs Provides peace of mind that facility is secure for the longterm Allows the organization to build its asset base and have readily available collateral that can be used for financing Is usually cheaper than leasing in the long run Works well for established health centers that know their space needs for the next 5-10 years 24 24

25 Additional Considerations: Owning What are your growth needs? Strategic facility planning What are your funding sources? Cash, capital grants, capital fundraising, & LT debt Operating Proforma/Comparing Cash Flows and Capital Outlays (Equity Requirements) What is your current debt capacity? What is your projected debt capacity? 25 25

26 Calculating Long-Term Debt Capacity Fiscal Year Budget Change in Net Assets (10,000) 10,000 Depreciation 300, ,000 Interest 20,000 25,000 Funds Available for Debt Service 310, ,000 Add Rent Rebate per mo) $240,000 $240,000 Sub-Total Cash Flow for D/S: 550, ,000 Discounted by 1.25 Debt Coverage Ratio $ 440,000 $500,000 Debt Supported by Adjusted Cash Flow Interest Rate: 7.00% incl. rent rebate $ 5,127,577 $ 5,826,792 Debt Supported by Adjusted Cash Flow Interest Rate: 5.00% incl. rent rebate $ 6,201,336 $7,046,

27 Questions/Comments? Overview of Cost Reduction Opportunities: #1 Personnel-Related Opportunities?» Shared Services, Outsourcing, Staffing strategies and workflows #2 Supply/Procurement Opportunities?» GPOs #3 Facility Expense Opportunities? Contact: Susan Petrie COO-Capital Link Tony Skapinsky Project Consultant 27 27