Hospital executive teams around the country, in both private and nonprofit organizations, are being challenged by their boards to remove cost from the annual budget. Some are told to trim a dollar amount while others are given a percentage target. Pressures in the U.S. health care industry to become more outcomes-focused, along with increasing regulations, have forced every hospital to increase productivity.

One common source of financial stress for hospital executives is equipment replacement. While new equipment is integral to excellent patient care, its cost often can be measured in the millions. With many organizations already feeling pushed to the limit, a request to find savings can seem impossible.

Too Big, Too Small, Just Right

Ideally, hospitals purchase just the right amount of technology to meet clinical needs and deliver excellent care. But in a dynamic care environment, it can be difficult to find the right fit.

Some organizations purchase equipment based on subjective perceptions that a given sort of equipment, such as a CT scanner, is not meeting clinical needs, when in reality that machine simply may not be used to its best or fullest capacity. On the opposite end of the spectrum, some hospitals may knowingly under-purchase for their needs, deferring equipment acquisition or replacement for brighter days. If those days don't come soon enough, the hospital may reach a point when replacement demand far exceeds its annual capital planning budget.

Often, a fact-based analysis will yield insights on the state of existing equipment, as well as where unnecessary purchases can be avoided. Technology planning may be able to effect a 10 to 15 percent improvement in capital capacity. By looking closely at workflow, equipment use and equipment status, an organization may reduce its five-year capital expenditure plan by as much as 35 percent.

Tackling the Situation

As in any industry, funds are allocated when times are good and reimbursements are high. But when wallets get tight, businesses have to ask, "Where can we be more efficient?" and "How do we make that happen?" These questions are both a challenge and an opportunity.

So how can hospitals determine if they could be saving millions in unnecessary equipment purchasing? The first step, as with any challenge, is to acknowledge that there is an issue. In this industry, it is important to overcome the belief that efficiency comes from acquiring more. Once everyone agrees that something must be done, taking a few additional basic steps can guide purchasing decisions in a more efficient direction.

Know what exists today. Historically, equipment replacement budgets are allocated to a department and then carry over from year to year. This means budget decisions typically are approached from an incumbent position, not from a perspective developed by exploring the current real needs. Therefore, data used to inform purchasing decisions often are outdated and based on anecdotal requests from departments.

For example, a hospital is facing requests for additional IV pumps. Nurses say there aren't enough units to go around. They spend time — time that could be spent with the patient — searching for them. Your first instinct may be to buy more pumps, but quantity may not be the problem. It may be that pumps are not being returned to a central location where nurses can find them quickly. If you buy more pumps, the same request for more could come in year after year. Considering the cost of new generations of pumps, avoiding an unnecessary purchase could equate to serious savings.

Consider these other examples: One health system was able to reallocate $84 million from its five-year capital budget after discovering that equipment did not actually need replacing. Another large academic hospital ordered 25 percent less in mobile assets than originally intended after optimizing its asset management process, and saw a significant improvement in staff satisfaction with increased infection control compliance.

In the absence of real-time location technology, a physical inventory should be conducted annually. A health system might learn it has 15 percent more assets than it realized.

Have a plan … and take it one step at a time. It seems simple, but a plan is the best way to remain focused in the midst of overwhelming equipment requests that outstrip budgetary realities. Surprisingly, many organizations don't have an equipment replacement plan, or if one exists, the plan is outdated.

After sitting down and taking an inventory of what's under the roof today, anticipate needs over the next year or years, focusing on priority areas. Rather than trying to target equipment cost as a whole, segment it. Focus on the highest-cost equipment, programs most important to the organization and so forth. Every hospital's mission and patient population is different, and the solution for one hospital may not work for another. For example, a hospital that considers its cardiac program to be its key differentiator may prioritize related equipment above other areas.

Understanding workflow and factors surrounding equipment status and usage can reveal quite a bit. Findings may indicate lower capability in areas where more was thought necessary, needs for newer systems with higher throughput, or even excess capacity.

How does an organization get to where it needs to be? The average utilization rate of mobile equipment is less than 42 percent, according to data GE Healthcare gathered from 45 hospitals and presented in a 2012 white paper, "Out of Control: How Clinical Asset Proliferation and Low Utilization are Draining Healthcare Budgets." A health system can dramatically lower capital and operating expenses if workflow is improved to achieve 65 percent utilization. It starts with managing to the new plan, using objective criteria to manage purchasing, and right-sizing equipment inventory. A plan is better than no plan.

Put programs in place. Establishing a framework to meet goals can make removing cost from the annual budget much less overwhelming. Consider programs that will help manage equipment in the hospital better and establish committees to oversee purchasing requests and investigate if other measures (such as updating existing technology or redeploying assets from one location to another) could solve the problem.

Also, consider engaging with external partners and suppliers. Although it's common to worry that working with an external partner could be expensive or result in loss of ownership, many vendors are willing to be flexible and understand the nuanced and difficult nature of addressing workflow inefficiencies. In any industry, not just in health care, external providers have a wealth of expertise and knowledge on trends, frames of reference and industry benchmarks.

Planning for the Future

Many challenges seem overwhelming at the outset. However, by breaking the problem down into pieces and addressing each piece thoughtfully, it is possible to turn a problem into an opportunity for improvement. An analysis finding that an organization has over-purchased and now has too many clinical assets could be an opportunity to redeploy a piece of equipment to a higher-volume location in a thoughtful way. Within a single initiative, it may be possible to drive cost down, raise nurse satisfaction and improve patient care.

Richard Neff is the vice president and general manager of U.S. and Canada service at GE Healthcare in Wauwatosa, Wis.