Are Food Service Operations Giving Your Bottom Line Heartburn?
If you’re a hospital administrator looking for cost savings, just follow your nose to the cafeteria. Among those cheeseburgers and tossed salads, your hospital cafeteria probably offers more savings opportunities than you imagined: Consider that the cost of food and food-related services in a hospital or health care system can represent between 8 and 12 percent of your annual purchased services spend.
But how do you know if your food department is creating financial heartburn? In my 20-plus years overseeing food and nutrition departments, as well as consulting with member hospitals, I’ve seen many organizations that were taking unnecessary hits to the bottom line due to over-indulgence in the food area.
There are three common symptoms that may indicate your bottom line is suffering the aftereffects of over-indulgence. Keep in mind that each symptom can be a sensitive topic from an organizational perspective, worthy of thorough evaluation beyond the scope of this blog.
Below-market pricing and employee discounts. When first broadly implemented, hospital cafeterias were reserved primarily for employees. As a benefit, employees were able to purchase meals and snacks, sometimes as much as 50 percent lower than normal retail pricing. Though today’s cafeteria concepts have modernized to offer more choices to visitors, hospital employees and physicians, the subsidy still remains in many hospital settings.
Removing or reducing the subsidy can offer significant savings. For example, an urban hospital in Louisiana had been providing a 60 percent employee discount, which was costing $1.02 million annually. The hospital reduced the discount to 10 percent and netted approximately $798,000 in retail sales after adjusting inflated pricing. Another hospital in the Southeast added $115,000 to the bottom line by appropriately pricing the top 20 percent of its retail menu items.
When deciding what is best for your hospital system, keep in mind that current IRS regulations view employee discounts as a taxable benefit. Each hospital should evaluate its program to determine the best method to offer a value to employees that isn’t cost prohibitive to the hospital.
Catering and free meals. I’ll be honest, I don’t know anyone who doesn’t enjoy free food. Food’s power to bring people together for a meeting or event works most every time. But be cautious if you find that you’re using food as an inducement. In this case, you may want to question the purpose of the event or meeting. It’s important for organizations to manage this expense by planning ahead for a limited number of employee celebrations or rewards during the year. On average, a health system can save 15 to 25 percent in spend by reducing its catering services. In Texas, a small hospital system saved $155,000 by eliminating free meals.
Floor stock. Medically necessary nourishment on patient units, such as what’s needed to control blood sugar or deliver medications, can inadvertently become staff snacks. Hospitals should stock only medically needed items like apple sauce, gelatin, juice and crackers, and then implement policies restricting their consumption to patients only. By applying the concept of medically necessary floor stock, an academic medical center in Maryland cut $178,000 off of its food spend in six months.
Hospitals and health systems can save 5 to 10 percent annually by reducing or eliminating these symptoms. Some of them will be easier to implement than others. Depending on your hospital’s financial situation, your executive team may opt to modify or remove one or all of those I’ve listed.
Next steps to savings
I recommend taking a methodical, well-planned approach to your cost-cutting efforts. Clear communications are important to effectively answer questions and quickly address concerns. Convene a multidisciplinary team representing human resources, clinical staff and your food services team, so that a variety of opinions are included and considered. Once the committee is established, the focus should be on:
- Determining your baseline measurement in each category, i.e. how much is your current spend?
- Identifying how you will measure success
- Communicating, communicating, communicating
- Successfully implementing the change
- Did I mention communicating?
I do this every day with member hospitals across the country. Have confidence that it can be done. Just ask yourself, ‘Do we really need this or is it better spent on the patient experience?’
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