Historically, conventional wisdom among most healthcare administrators was that operating an On-Premise Laundry (“OPL”) was more economical and ensured a ready supply of textile items when needed. However, in recent years, that belief has begun to be challenged. The emerging trend is to outsource linen services for financial, operational and environmental reasons.
Having the recent opportunity to lend assistance in this area, I’d like to shed some light on this subject and lend some thoughts as to decision points.
Healthcare facilities typically find themselves following into one the following four linen/laundry models:
- On-Premise Laundry (“OPL”): the healthcare facility manages and performs complete linen and laundry services.
- Customer Owned Goods (“COG”): the facility contracts with independent launderer to service the linens owned by the healthcare facility.
- Rental Service: the facility contracts for rental of linens as well as laundry services.
- Cooperative: several healthcare facilities jointly own and operate a commercial laundry service.
According to Modern Healthcare¹ magazine, laundry services are now the number one most outsourced service in healthcare facilities. There are several trends that are leading hospitals, nursing homes, surgical centers and other medical facilities to outsource:
- Rising costs of operating and upgrading a laundry facility.
- Risks associated with hazardous objects (syringes, hand instruments, etc.) encountered by launderers.
- Environmental and infectious concerns and increasing regulatory oversight.
Conversely, the benefits of outsourcing include:
- Upfront cash infusion from selling equipment and linens.
- Reduced on-going costs, both operational and capital expenditures.
- Converting the OPL space (square footage) from overhead to potential revenue generating – switching “expense” space into “revenue” space.
- Improved linen utilization, thus further reducing costs.
As with many financial decisions, converting fixed costs to variable costs combined with outsourcing non-core competencies to specialized service providers often is a win/win in today’s cost reduction regime. To further elaborate on this concept, I offer the following:
Item 1 – The upfront cash infusion, a healthcare facility can experience an immediate cash infusion from selling the laundry equipment on the open market as well as selling the linens to the service provider and then leasing these back.
Item 2 – The reduced cost, a specialized and focused outsourced launderer is typically structured to offer lower per pound pricing on laundry services as well as facilitating the ebbs and flows of any cyclical and/or seasonal demands, hence, the utilization of a variable cost structure. Furthermore, the demands of patient and employee safety, coupled by the ever-increasing regulatory and environmental mandates, will require facilities to continually modernize their equipment and laundry operations.
Item 3 – The conversion of expense space into revenue space, this may be the most-compelling reason to consider an outsourcing arrangement.
Item 4 – Linen utilization, certain of these specialized outsourced launderers also offer training and customized monitoring to further assist in controlling the costs of linen usage and laundry.
To facilitate a decision as to whether to outsource or not I suggest the following steps from a financial perspective:
- Competitive Analysis
Benchmark your OPL’s financial parameters, including cost per laundered pound to industry peers and available market data.
- Divestiture Feasibility Study
Investigate the outsourcing incentives offered by commercial launderers; identify potential equipment acquirers and estimate a strategic value range for the sale of the assets, linens and the cost savings from outsourcing.
- Alternative Space Utilization
Determine the alternative usage of the freed-up laundry space and convert this into either net cash flow or cost reduction arising from the conversion.
For more information on how KFMR can help your business, please visit www.kfmr.com/healthcare or call 412.471.0200 – David J. Pieton, CPA, ASA.