NEWMARK KNIGHT FRANK

COST REDUCTION ISN’T EASY

Article written by John Cobb, Newmark Knight Frank Global Healthcare Services

A recent study summarized 100 healthcare finance professionals’ perspectives on cost reduction initiatives. Not surprisingly, the study found that many CFOs are having a difficult time meaningfully impacting margins. Healthcare Finance News’ article about the study makes some great points. The author observes there is widespread agreement that top-line (revenue) growth, though ideal, cannot be counted on as the sole means of shoring up margins, especially in light of current year-over-year trends. “Reducing operating expenses is the only way to preserve margin,” states one analyst. But reducing operating expenses is easier said than done: The study found that 83% of providers fall short of their cost reduction targets, with 70% reporting minimal savings and an estimated $765.0 billion wasted annually. Moreover, over half of the respondents find tracking and quantifying savings difficult, making the challenge of creating savings even more onerous. Yet the difficult work of cost cutting MUST be undertaken. It’s not a matter of desire, but survival.

What we at Global Healthcare Services find interesting is that articles of this type rarely if ever mention something that is absolutely impactable, namely real estate occupancy costs. Staffing and supplies receive significant attention via operational reviews, outside consultants, GPOs and more, and their results are dramatic and impressive. But for many systems, these results aren’t enough; greater cost savings are needed. After staffing and supplies, real estate is invariably a provider’s third-largest expense category. When approached strategically, strong improvements are possible in this area. In our engagements, savings between 10% and 20% of real estate occupancy costs are common.

Feel free to reach out to us to determine what may be possible in your situation.

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2017 Healthcare Real Estate Outlook