Cost Avoidance vs Cost Savings: What’s the Difference?
By Jennifer Dawson, MHA, DLM (ASCP) bio As I work to spread awareness within the clinical laboratory community about the Cost of Poor Quality (COPQ) concept and its benefits as a method to demonstrate… . . . read more
By Jennifer Dawson, MHA, DLM (ASCP) bio
As I work to spread awareness within the clinical laboratory community about the Cost of Poor Quality (COPQ) concept and its benefits as a method to demonstrate a financial return on investment (ROI) for quality-related efforts, I have often encountered pushback that a portion of the COPQ is cost avoidance and therefore cannot be seriously considered as part of the return on investment. While I agree with that argument in that cost avoidance does not directly impact profit and loss statements for the laboratory, I do think that cost avoidance is an important factor to consider when determining the benefit of a quality initiative or program.
Review of COPQ
In order to fully appreciate the example below related to cost avoidance and cost savings for cost of poor quality, it is worth reviewing the basics of the COPQ concept.
Cost Savings or Cost Avoidance?
Cost savings, also referred to as “hard savings,” is defined by medium.com as “any action that results in a tangible benefit that lowers current spending, investment, or debt levels”. Cost avoidance, also referred to as “soft savings,” is any action that avoids incurring of costs in the future.
It is common for cost savings and cost avoidance to be confused or used interchangeably. If you are going to be using these terms to express a return on investment for quality initiatives in your laboratory, ensure that you are using them correctly. It is important to speak the language of those who hold the keys to your laboratory receiving the resources it needs to effectively manage quality in your laboratory.
Cost savings measures are reflected in financial statements and your annual budget. Cost avoidance measures on the other hand are never reflected in financial statements or your annual budget. They are only reflected in instances where a proposed action is not implemented, thus resulting in a cost increase.
Consider Quality Control (QC) in your laboratory. If we can order cheaper control material or perhaps implement an Individualized Quality Control Plan (IQCP) running QC less without compromising patient safety, this will result in cost savings. Cost avoidance is provided to the laboratory by QC just by virtue of the reliability of the results being issued being verified by running controls. Without QC, the laboratory could inevitably issue unreliable results which would result in misdiagnoses and harm to patients. Cost avoidance is harder to convey because you are factoring in events that did not occur due to an intervention.2
Cost Avoidance vs Cost Savings Example
To aid others in differentiating between whether the organization will realize cost savings or cost avoidance for a given initiative or in successfully eliminating a root cause for a specific event, I have found that a simple example helps to best illustrate. Quality methodologies, particularly Lean, focus on elimination of waste. The example that follows focuses on waste, though waste of a different variety, in order to simply illustrate the differences.
As my family often lives in rural areas outside the bounds of the city, I have dealt with septic tank issues in the past. Recently, I encountered an issue that I think really illustrates the differences between cost savings and cost avoidance.
In my last home, we pumped the septic tank at the frequency which the septic company recommended. When this happened, though it was a maintenance activity that we could anticipate at fairly regular frequency, we still begrudgingly agreed to and paid for this service, which cost us a few hundred dollars. We did not have firsthand experience with any repercussions of not having the maintenance performed and, really, we viewed this service as a financial inconvenience.
After a few cycles of pumping at the required interval that was recommended to us, we switched companies. The first time a serviceman from the new company came to our property to “do the deed”, he asked how frequently we had been having the tank pumped. He chuckled and said that it was not necessary to pump as frequently as we previously had. We had been having it pumped every two years at the recommendation of our former provider. We were relieved to hear that barring any special circumstances such as extreme precipitation that we could now go to pumping every 4 to 5 years or so. This at least 50% reduction in our expenditures for this service is an example of cost savings that would directly impact our family’s budget.
Typically, the benefits associated with maintenance, such as pumping the septic tank, are not fully appreciated unless one experiences the consequences of the maintenance not being performed. This leads me to the second part of my example.
When my family moved to California, we were just starting to settle in to our newest rural dwelling when we experienced an unforeseen crisis. While doing laundry and running the dishwasher, we started to smell a smell that is unmistakable. I ran to the guest bathroom which is closest to the kitchen to see that one of my worst household fears was in progress. Sewage was filling the bathtub. A quick check of the rest of the bathrooms revealed the same. Upon inquiring with the former resident, we learned that the septic had not been pumped in about 6 years and the recent rains combined with the increased water usage of our family’s daily activities has resulted in a backup from the tank.
As a laboratory professional that is more aware of microbes and health than your average person, of course this was a significant (and scarring) event. Instantly, we called a septic company who of course charged us an emergency fee of $200 and an afterhours fee of $200.
The pumping of the tank was taken care of with haste, but we were still left with the aftermath of the incident. Sewage had backed up into our bathtubs, showers, and sinks, and overflowed out of some of the toilets. I couldn’t let my family stay in such an unhygienic environment, so we stayed in a hotel for three nights while the cleanup (and disinfection) occurred at $200/night. We had to hire a remediation company to help us with some of the cleanup and water damage to the tune of about $1000. So, in addition to the routine pumping fee of $500, we had spent an additional $2000.00. There were also the negative consequences of embarrassment to our family for having this occur, possible health risks with potential exposure to harmful bacteria, the inconvenience of having to relocate our family to the hotel for three days, lack of sleep due to having to handle this issue late at night, etc.
Suddenly, we appreciated the benefit that we reaped when this important maintenance was done on schedule as we had suddenly learned to appreciate cost avoidance! If the maintenance had been done on schedule, then we would have never had had to go through this traumatic ordeal, which in addition to all of the inconvenience, embarrassment and health risks had also cost us an additional $2000.
Cost Avoidance & Cost Savings in the Lab
It is easy to draw parallels from this example to healthcare. In the lab, we spend a big chunk of our budgets on prevention costs such as preventive maintenance and quality program development as well as appraisal costs such as QC materials, internal audit programs, proficiency testing, competency assessment, and external inspection/accreditation fees. Administrators and the finance department often complain about the seemingly high cost for these basic quality activities that laboratories engage in. Sometimes we can form a justification for the realization of cost savings through actions such as reducing the frequency of QC through Individualized Quality Control Plans (IQCP), negotiating a less costly maintenance contract or redesigning/streamlining a competency program and it is prudent to explore this type of cost savings. However, it is often the case that laboratories will try to eliminate or cut back on resource allocation to quality efforts only to begin to realize and appreciate the cost avoidance that was being provided by these activities.
Next time your lab pays for a service such as a preventive maintenance on an instrument or pipette calibration, try to imagine the cost avoidance realized and the potential consequences of not investing in these routine, often underappreciated quality activities.
From – G2 Compliance Advisor
From – National Intelligence Report
From – Diagnostic Testing & Emerging Technologies
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