Although core expenses are often obvious in healthcare facilities and organizations, overhead expenses are not necessarily apparent. As a cost-reduction expert, I am often asked how to identify which overhead expenses should be reviewed more closely. Here are several strategies I recommend to help healthcare facilities and organizations identify spends that may benefit from closer scrutiny:
1. Identify your top expenses
The 80/20 principle is a great rule of thumb to follow, as overhead expenses by nature are numerous and not relatively large. The best place to start ranking expenses is the General Ledger. Use a full year to ensure you capture any seasonality and make the larger expenses more visible.
But dont stop there. It isnt uncommon to find misclassifications in the G/L for overhead expenses, with office consumables the most common culprit in hospitals and other healthcare facilities.
The Accounts Payable ledger is another good tool. Export it into a spreadsheet and add a column indicating the primary expense category for each vendor. Then sort by category and amount. This exercise will help expose any A/P discrepancies with your General Ledger and identify expenses that are split among vendors, which is particularly likely if an organization has multiple locations.
You are likely to find cost-savings opportunities simply by consolidating purchases with a single supplier.
2. Sampling is your friend
Looking at any significant expense in detail can be a time-consuming, mind-numbing chore. Few organizations have the time or resources to review a year of invoices in depth. I suggest you start by comparing invoices from a supplier, separated by six months or a year, to help highlight price creep with a vendor and within an overall expense. It is common to see prices rise due to reasons beyond the control of your vendors (increases in the cost of fuel, for example).
By identifying these increases, you can ensure they are aligned with existing pricing agreements. This exercise also helps highlights new surcharges or costs.
It is common for across-the-board increases to create pricing errors because custom agreements are not well identified and reviewed.
3. Let your eyes spot increases
Expenses rise and fall for a myriad of reasons. A good tool, especially for smaller healthcare organizations, is to chart monthly expenses for a year for various expense categories. Use whatever source is easiest the actual invoices, accounting software or even credit card statements.
I highly recommend using a spreadsheet for this analysis because the data can be presented as graphs and charts. These visuals are the key to quickly identifying changes that can be further analyzed as needed.
A step increase may identify an otherwise unnoticed price increase or it may be related to production of a new product or the unexpected use of resources. The spike in the office supply cost may be due to higher paper prices, expanding or opening a new facility or back-to-school shopping in the stockroom by some employees. This tool goes a long way to help businesses identify positive and negative influences on their costs.
4. GPO Pricing
Never assume that GPO pricing is the best pricing for the goods and services your organization is purchasing. If your spends are large enough, you can often negotiate better pricing with your GPO vendors. This is possible because GPO pricing does not take into account your organizations specific spending volume and activity, so it is a good idea to negotiate larger spends with the vendors directly. You wont necessarily have to change vendors; just negotiate lower pricing with the existing vendors your organization is happy with.
Any or all of these strategies can be implemented to help businesses quickly survey expenses and highlight potential problem areas. As a healthcare organization better understands how it spends its money, it can leverage that knowledge to keep costs best in class.
Although core expenses are often obvious in healthcare facilities and organizations, overhead expenses are not necessarily apparent. As a cost-reduction expert, I am often asked how to identify which overhead expenses should be reviewed more closely. Here are several strategies I recommend to help healthcare facilities and organizations identify spends that may benefit from closer scrutiny: 
