From a supply chain perspective, the premise behind “purchased services” can be plopped into any of three buckets: The good, the bad and the ugly.
But this trendy term represents no spaghetti western.
The good: Varying purchased services are centralized under Supply Chain’s control, management or oversight in that the contractual dollar volume representing all purchased services is accounted to Supply Chain, thereby increasing its share of the expense pool. By shifting some staff-oriented functions to outsourced expertise (even if the staff themselves convert to 1099 status or a vendor contractually “acquires” them), the healthcare organization can decrease labor costs (e.g., eliminating benefits, etc.) and shift them to contracted services in another accounting bucket, which also may be centralized in Supply Chain. This likely would increase Supply Chain’s stature and status within the C-suite.
The bad: With Supply Chain in charge of a much larger percentage of the expense stream, the Amazing Spider-Man tenet takes effect. Adapting Spidey’s famous, “With great power comes great responsibility,” in a business realm, the tenet becomes, “With great expense pool comes great accountability and scrutiny.” Who yearns for that kind of daily pressure but a relatively small number of enterprising entrepreneurial types? Of course, the flip side can be a challenge, too. If varying purchased services are decentralized and distributed throughout the contracting departments instead of centralized under Supply Chain’s control, management or oversight, then this may weaken Supply Chain’s influence, reputation and visibility. For a considerable segment of healthcare supply chain managers, this may offer a welcome sigh of relief, by and large, to fly under the radar.
The ugly: All told, either the good or the bad perspectives surrounding purchased services under Supply Chain’s purview leads to one ultimate destination: Deeper and more dedicated scrutiny of Supply Chain activities, outcomes and performance. Forward thinkers and top practitioners may see that as a positive development; the rest view it as a negative one, a hassle and a pallet-load of daily pressure.
So how should purchased services be viewed?
For more information on purchased services, visit HPN’s online archive. See “Making sense of a moonshot mindset,” February 2016, HPN, https://cdn.hpnonline.com/inside/2016-02/1602-PS-PurchasedServices.html and see “New name for familiar contracting category?” January 2011 HPN, https://cdn.hpnonline.com/inside/2011-01/1101-PS-PurchSvc.html.
Should it just be classified as a contemporary and fancier name for “outsourcing,” which was an oh-so-late 20th century controversy? Or is it a “bookable” and more clever classification for “miscellaneous?” You know, the bucket, file or list of stuff that can’t be placed elsewhere?
For a number of years now, experts, observers and pundits have forecast that “supply chain” will overtake labor as the No. 1 expense category in an organization after languishing for decades as No. 2 behind labor. But that only works if purchased services, which arguably can be another name for outsourced expertise and labor, falls under Supply Chain’s oversight. Purchased services may encompass managed contracts for billing coders, locum tenens, maintenance and repair, sterile processing and other third-party clinical, financial and operational services.
But is it much ado about nothing more than an accounting shell game?
Clarifying blurred lines
Purchased services as a total spending category is significant and accounts for one of the “greatest possibilities for hospitals to deliver cost savings and margin improvement,” according to Lisa Miller, Healthcare Advisor and CEO, VIE Healthcare Consulting, but the category can suffer from myriad challenges.
In short, follow the report, Miller insists.
“The greatest misunderstanding comes from the root cause of purchased services spend, and that is supply chain can’t run a line-item report of every purchased services spend for their hospital,” Miller told HPN. “The entire purchased services spend is embedded in the invoices. If you were to run a 12-month report for your supply item spend, you would see data — from physician preference items to exam gloves to syringes — by line-item detail, by month, over a 12-month period. However, if you ran that same 12-month report for your purchased services spend, you would only see the total invoice amount with a monthly total of spend for each purchased services category and no other data points that would include the line-item details that is rolled into the total invoice amount. In order for a hospital to have a true detailed understanding of their line-item pricing and line-item utilization, they would need to go manually to the invoices to see the details, and then if they wanted to analyze the specific purchased services spend, they would need to input those line-item invoice details into a spreadsheet manually.”
The C-suite does not realize the enormity of the challenge that the invoice line-item details are not accessible in their organization’s materials management information system, Miller argues.
“To add to this challenge, the department leaders are receiving their purchased services invoices each month and are responsible for approving the invoice accuracy to the agreement terms, and in some cases this could mean hundreds of pages of invoices and thousands of line items they have to review manually,” she continued. “In most organizations, Supply Chain is not responsible for the management and invoice accuracy of the purchased services spend. Supply Chain may be involved in the contract negotiations and cost savings initiatives, but the ongoing monthly management to ensure contract compliance and spend management is performed by the departments.”
The manual process of trying to identify purchased services expense management and reduction opportunities complicates progress to the point of “hospitals thinking they are achieving maximum savings when there is more waiting to be achieved,” she added.
“Even when hospitals utilize categorization tools and technologies to gain insight into their purchased services spend and to competitively bid some purchased services, these strategies fall short of best practice because they don’t give Supply Chain and the C-Suite automation and access to every purchased services invoice line-item details into their solution,” Miller continued. “Any manual aspect of a technology will leave room for significant error and missed opportunities. Simply spot-checking purchased services invoices is an underperforming tactic.”
Jeff Little, Senior Director of Purchased Services, Premier Inc., recognizes and understands the confusion that can be rooted in decentralization.
“Historically, it’s been difficult for providers to wrap their arms around total purchased services spend because different groups within a healthcare organization have been responsible for acquiring outsourced services most relevant to them,” Little said. “While Supply Chain may manage several of the contracts, legal departments may contract for external counsel, IT departments may contract for technology vendors, and marketing teams may contract with PR firms and change management consultants.
Little points to decentralization problems within internal areas as well.
“There is also often a lack of centralization on both the value analysis and contracting processes in the purchased services areas,” he said. “In some cases, the value analysis process may be non-existent. This leads to low visibility into the spend across purchased service categories, loose management of the lifecycle of the contracts and no control over the process.
Little contends the C-suite needs to be more engaged in this emerging process.
“Some of these services have a large tie-in to the patient and affect outcomes, satisfaction and even acquisition, meaning the C-suite should not only be involved, they should be concerned,” he warned.
Andrew Motz, Assistant Vice President, Supply Chain Consulting and inSight Advisory Solutions for HealthTrust, points to process fragmentation as the culprit.
“Supply Chain professionals and the C-suite often have difficulty getting their heads wrapped around their entire services spend because the process is so fragmented,” he said. “Departments select vendors they are used to working with and may not consider that contracts should be required to hold vendors accountable for service levels and liabilities.
“Contracting should be centralized and overseen by Supply Chain professionals with expertise in negotiating price, terms and conditions,” he emphasized. “Also, when vendor selection is de-centralized, individual departments may use different vendors for the same service. If you ask a CFO which vendor is used for a particular service, they may name one vendor, but if you take a deeper dive into their accounts payable spend, multiple vendors tend to appear within the same category. This is the direct result of individual departments not communicating with each other on the services they procure.”
“This makes sustaining a consistent cost reduction process very difficult,” Heckler said. “There is rarely a ‘one throat to choke’ for all purchased services, which means there will be finger-pointing across the organization when it’s budget season. Also, many hospital directors from non-clinical departments are accustomed to making their own vendor and procurement decisions. That’s why executive support for moving services contracting to the Supply Chain is crucial to success.”
Data analysis can be a problem, too, according to Motz.
“Another factor contributing to missed opportunities in purchased services is that expenses are often managed by looking back at previous months or years and gauging whether costs are holding steady,” he noted. “No real analysis is done to determine if hospitals are paying the right price from the beginning.”
Heckler concurs: “Tracking cost savings for services is much more challenging than tracking savings of supplies since comparing products with manufacturer item codes is more tangible,” he noted. “Therefore, your team might not get as much credit for their hard work because it takes longer to see the savings realized unless you have strong metrics from the beginning.”
Chris Gormley, CEO, Medpricer Purchased Services Solutions, traces some of the key challenges surrounding this category to “vague directions” issued to Supply Chain by health system leaders looking for “better services that provide better business outcomes.
“In order to discover margin improvement opportunities through purchased services, Supply Chain must be able to clearly define the business requirements of the services that the health system needs, and how these needs should be prioritized in relation to available resources,” Gormley noted. “This requires an investment in the supply chain — everything from personnel to infrastructure — from the C-suite.”
Heckler blames the “lack of visibility into the entire scope of the purchased services category” for misunderstanding the category. He challenges healthcare executives to check their general ledgers to prove it.
“Basically, Supply Chain professionals rarely know how big of a category it really is,” Heckler said. “This goes for the C-suite, too. Purchased services has been a catch-all, generic GL category for decades, so it’s completely mismanaged internally. If you are a hospital executive reading this, an easy test to identify if purchased services are being mismanaged in your organization is to see if you have a GL account called ‘Other Purchased Services,’ ‘Service Contracts’ or ‘Professional Fees.’ If so, this means there’s no way to know what is going in there. It’s tough to expect your team to run an RFP to reduce costs in something generic like Professional Fees. If they’re not using Valify or something similar, they will need to hire a consultant and spend more professional fees just to understand what is in their profession fees GL account.”
Rooted in data
Because of slimming reimbursements and market pressures providers view purchased services savings with new potential, according to Gormley. But they need to rely on the right data and strategy to succeed, he added.
“The first step in managing a smart sourcing strategy requires that sourcing teams have insight into how competitive their purchased services contracts are,” Gormley advised. “By understanding what’s standard across various purchased services categories, they can begin to manage expectations on what a reasonable contract looks like in terms of rates and service level terms. From there, they can illuminate opportunities and report to their C-suite colleagues to determine the best plan of action and management.
“In addition to obtainable data metrics, it is essential to create a strategic and standardized approach to purchased service improvement via governance and stakeholder committees that can balance clinical needs with favorable financial outcomes. Data transparency is the necessary foundation for committees to become successful and to empower supply chains to implement transformative sourcing strategies.”
Premier’s Little links purchased services progression to that of several other areas: Value analysis and workforce reduction.
“Over the course of the last few decades, hospitals have targeted expense reduction in products and supplies, and this has led to the prioritization of value analysis teams that weigh both cost and clinical efficacy and outcomes,” Little noted. “Likewise, providers have tackled workforce costs through efficiency and utilization modeling to better understand and properly allocate their resources. Now hospitals are moving that focus and mindset toward purchased services because data shows us that tackling purchased services can easily yield between 5 percent and 15 percent in savings, with some categories yielding 30 percent or more — and this is indispensable in today’s reimbursement climate.”
Little calls for a holistic strategy that focuses on purchased services across an entire enterprise.
“This is best achieved with a spend management platform that offers robust data and insight into which vendors are on contract across the organization, their rates, and the services they provide,” he said. “It’s most advantageous to consolidate all insights into one platform as we’ve seen that disparate systems make it challenging to identify how much is being spent on services across an integrated delivery network. Often, this exercise reveals greater opportunity to track and measure spend, set competitive rates, and manage savings targets and contract compliance. The C-suite should be hand-in-hand with Supply Chain in sponsoring purchased services optimization as the C-suite can provide direction about which opportunity areas are open to negotiation.”
Unfortunately, however, the purchased services category tends to include “a large area of traditionally unmanaged ‘rogue’ spend,” Little continued.
“Part of what makes standardizing purchased services spend tricky is that these services are often customized to each department’s or facility’s needs, so Supply Chain can’t easily assign an arbitrary number of what a specific service should cost entity-wide,” he indicated. “To that end, many of the decisions in these areas should be elevated to the C-suite where a data-driven, best-practice decision can be made as the potential impact to the organization is huge. This helps to remove some of the emotion from the decisions and keeps the higher focus on the patients and financial health of the hospital.”
VIE’s Miller targets two major challenges that need to be overcome for healthcare organizations to realize considerable savings and high performance from purchased services programs.
“One is that all purchased spend needs to be under financial control, and the second is that there needs be a fully automated process to access and analyze every purchased services line item spend on a monthly basis,” Miller noted. “The good news is that hospitals are dedicating more resources to strategically sourcing some categories of their purchased services spend. However, this is only a fraction of the entire purchased services spend and only the front end of the management process — the contracting.”
The lack of a disciplined approach to purchased services only leads to missed opportunities, Miller emphasizes.
“Cost management should be a strategic pillar for Supply Chain and the C suite,” she noted. “Otherwise, if protecting the valued cost savings which have achieved isn’t a priority, then the costs creep back, and worse yet, they increase.”
Valify’s Heckler believes that Supply Chain and the C-suite need to make purchased services expense management as much of a priority as they do with physician preference item products and services.
“That means they need to invest in technology to understand where the opportunities are and most likely need to hire or assign someone to be responsible for the entire purchased services spend category,” he noted. “There are huge savings opportunities in standardizing your contracting process to one department. The Supply Chain department will then use the subject matter experts (SMEs) from the departments as needed in the same way they would use clinical experts for input in most medical and PPI product categories.”
Heckler finds that many Supply Chain leaders handle contracting for many of the larger purchased service categories that are “easy to understand,” such as medical gas and EVS distribution. But most categories require a completely different skill set or a unique process that is far removed from traditional materials management projects, he added.
He also sees that some departments that fall under the definition of purchased services (e.g., IT, HR, etc.) will self-contract for their needs or simply tell the Supply Chain department which vendor to put on contract. “This self-contracting process has led to massive amounts of waste, emotional attachments to vendors and long-term/no-bid contracts,” he warned. “This is not an efficient way to manage a high-performing organization.”
Dedicated leadership needed
Miller recommends centralizing the entire purchased services category under a single leader who reports directly to the C-suite.
“This leader would be responsible for all purchased services spend and to work collaboratively with Supply Chain, Finance, AP and the departments in the hospital for cost savings initiatives and the on-going cost management,” Miller continued. “They would have a purchased services cost savings and cost management roadmap. Their role would be to identify cost savings, remove silos and sensitive areas of spend and ensure all spend is competitively benchmarked and analyzed for opportunities and no stone is left unturned for review and oversight. They would also be responsible for monthly invoice reconciliation to the agreements and supporting department leaders so these leaders can focus on strategically operating their departments and meeting their budget expectations.”
HealthTrust’s Motz agrees that centralizing purchased services management remains the lynchpin to cost savings and management.
“This doesn’t take the decision-making and vendor selection out of the hands of the key stakeholders, but ensures all departments across the facility are aware of which vendors are being considered and chosen,” Motz said. “A successful purchased services strategy begins with reviewing all of a facility’s accounts payable spend. You must go beyond reviewing PO spend only since many services are not requested via purchase orders. A technology tool such as Valify is a valuable asset in gaining a comprehensive view of a health system’s purchased services spend. Valify categorizes purchased services into 1,200 individual categories.”
Motz recommends honing the product and service categories and vendors as starting points.
“After categorizing vendors and reviewing top areas of spend, develop a pipeline of initiatives and focus on five to seven categories at a time,” he said. “It is critical to engage stakeholders in each department for input on vendor selection and understand the specific service levels they require. Ask questions such as, ‘Why are you outsourcing to this particular vendor?’ ‘What are the critical performance indicators you are measuring with the current vendor?’ And ‘How would you rate the quality of the service they provide?’”
Once Supply Chain interviews stakeholders and reviews existing contracts, then it should identify at least three vendors to include in a Request for Proposal (RFP) process or direct contract negotiations, according to Motz.
“This will help you better understand the market,” he continued. “Speaking from the perspective of HealthTrust, be sure to identify what vendors are available through the contract portfolio. You can leverage pre-determined service-level requirements and other associated terms. When reviewing RFP responses, you should consider more than just the best proposed cost supplier. A successful long-term relationship often comes from the supplier that demonstrates a willingness and ability to be a partner and will support you through continuous improvement efforts.”
Providers pursue purchased services aplomb
For a growing number of healthcare provider organizations purchased services represents a relatively new — if not redefined — category of potential expense reduction opportunities. Some have accelerated right out of the gate; others have embarked more slowly on an incremental basis. Five experts in purchased services share some success stories they’ve recorded as examples to emulate.
“This is a successful process if the following are utilized:
1. Validate utilization and users. Many times right-sizing the agreement to actual utilization can achieve significant cost saving.
2. Perform a historical analysis to identify pricing errors or off-contract spend.
3. Benchmarking pricing for licenses, maintenance and especially IT professional services.”
Lisa Miller, Healthcare Advisor and CEO, VIE Healthcare Consulting
“We’ve worked with Banner Health, a Phoenix-based healthcare system with 28 hospitals in six states, and its 10-person sourcing team for almost one year now. Using mSource Analytics to illuminate savings opportunities, Banner Health has gained control over its 36-month contract renewal calendar.
“Our team of experts identified medical coding and document storage purchased services as the top categories for savings for Banner Health, even naming the eight most competitive vendors for these services. In an initiative spanning no more than two weeks, Banner Health saved $1.5 million on medical coding alone. This achievement enabled the organization to reallocate that savings back into the bottom line.”
Chris Gormley, CEO, Medpricer Purchased Services Solutions
“In the short term, providers can target eliminating multiple vendors who provide the same service. This consolidation is often low-hanging fruit and can yield quick savings wins.
“Premier has had the privilege to work with several of our 4,000 hospital and health system members on purchased services projects, as well as a few hospitals from other member GPOs as part of an aggregation group. One that comes to mind is a group of integrated delivery networks in the Midwest where Premier used its data analytics processes to identify multiple opportunities for cost savings. In the first phase, we chose three areas that aren’t necessarily huge spend areas — waste, freight and shredding — but our work resulted in nearly $1 million in savings in the first three-to-six months, mostly by simple aggregation of spend and consolidation of suppliers.”
Jeff Little, Senior Director of Purchased Services, Premier Inc.
“One of our clients, a large hospital system in the Mid-Atlantic area, recently shared how they developed a dedicated purchased services team from the ground up. An advocate in the supply chain saw a greater need for purchased services expense management. She went to her chief financial officer and chief operations officer and made the case that the organization could significantly save on purchased services expenses if they were able to invest in technology and FTE resources. Leadership obliged, and the team was able to fulfill the return on investment they had outlined. They worked on some big categories, including courier services and language services – all while also going through an EHR conversion. So far, the team has implemented $12.5 million in realized savings, and they are actively working through their opportunities roadmapped and expect to save even more.”
Chris Heckler, CEO & President, Valify
“In early 2018, HealthTrust and an IDN with over 30 acute-care facilities partnered to develop a centralized focus on purchased services contracting. The process began with hiring a full-time contract administrator dedicated to purchased services who reported directly to Supply Chain. The IDN took the basic tenets of contracting for supplies and applied them to their services. By reporting to Supply Chain, the administrator was held to their standards of contracting strategies, such as using formalized bidding processes and ensuring standard terms, conditions and quality control measures were part of each new contract. By centralizing the process, while gaining input and support from department stakeholders, the IDN was able to build volume-based purchased services contracts that led to millions of dollars in annual savings.
“Prior to developing a centralized approach, the IDN suffered from a disjointed process. It lacked the necessary tools to quickly analyze spend data and facilities were signing individual contracts based on their own immediate needs. By using Valify to ‘group spend’ under one roof and review all vendors used within one category, the IDN was able to identify contracting opportunities as one team. This led to the ability to group spend and develop more powerful RFPs. It became a win-win for the IDN and the vendors who won bids because they were guaranteed a larger amount of business.
“In the end, a winning purchased services strategy will include three critical components: Creating a centralized process, including a dedicated resource responsible for reviewing and proposing contracting opportunities, implementing an analytics platform to inform the decision-making process and communicating early and often with stakeholders to track results.”
Andrew Motz, Assistant Vice President, Supply Chain Consulting and inSight Advisory Solutions for HealthTrust
Don’t sell purchased services short on long-term gains
Start small and work toward big wins
When embarking on a purchased services program — either establishing one internally or contracting externally with a third-party company — healthcare supply chain executives and professionals must identify and delineate their short-term and long-term strategic goals for lasting improvements, emphasize five experts in purchased services. Below, they recommend key strategies and tactics to succeed.
“Short-term tactics include understanding your hospitals total purchased services spend by category and vendor, where consolidation opportunities exist, and most importantly, collecting all of your purchased services agreements and outlining key contractual terms especially renewal terms. This is important because this overview will become the structure for your purchased services cost savings roadmap.
“Short-term improvement strategies are aimed at immediate cost savings and those purchased services opportunities focused on pricing improvements that can be achieved within three to nine months. Deciding on which of your purchased services agreements that can be competitively benchmarked and renegotiated to obtain better pricing is an important part of this short-term strategy. Many purchased services agreements require dedicated time for an overall assessment of the services, evaluating the performance of the service provider, performing reimbursement analysis for clinical spend and gaining organizational buy-in for potential contractual changes.
“It is important to note that a short-term strategy doesn’t mean a short-cut solution. Purchased services spend is complex. Agreements need a thorough review and examination of all financial terms to be understood, and most importantly, reconciled to actual invoice line item costs. A historical analysis of the prior 12 months of invoice line item details must be put into a spreadsheet to be analyzed and benchmarked based on this utilization. If you only benchmark from your agreement terms or only ‘spot-checking’ invoices, you will miss a significant amount of spend that is on your invoices and as a result miss out on significant cost savings for your organization.
“There are two main tactics for a long-term strategy. One is deciding on an external resource partner who can support the hospital with contract pricing and terms benchmarking, with assembling and executing a best-in-class RFP and with data analytics. This is very important because there are areas of spend that a hospital will need subject matter expertise and pricing insights in order to achieve the best financial outcome for the organization. There are also times when a hospital will want to add to their internal resources to achieve or accelerate a cost savings goal.
“The second tactic is how a hospital gets invoice line-item visibility into all of their purchased services spend. A hospital can decide to dedicate department resources so they can manually enter the invoice line item data into a spreadsheet each month for visibility into the line item costs or they can utilize a technology to extract the invoice line item details and reconcile the line item data to their agreement for complete automation and management.
“The biggest long-term improvements will come from a strategy of a disciplined cost management approach to purchased services spend — a strategy that has three key elements. One is that every single purchased services spend is analyzed for cost savings in a collaborative environment where the Supply Chain and Finance departments are working together. For example, legal expenses and marketing services are some of those sensitive areas of purchased services spend that rarely gets a deep investigation. A best-in-class approach is to say, ‘since we want six law firms, just like the physicians want choice, we will maintain the access to choice but will require each law firm to charge the same hourly rate and reimbursement structure and have a process in place to validate the legal invoices each month for accuracy without worrying about offending the firm.’ The cost savings achieved from requiring a specific hour rate and limiting additional expenses is between 15 percent to 25 percent.
“The second is keeping the cost savings that have been achieved. The only way to do this is by having a monthly line-item detail discipline on analyzing the invoices for accuracy, contract compliance, off-contract spend, utilization improvements and new pricing opportunities. The reason why purchased services spend is so hard to control is because hospitals don’t have a monthly cost management strategy in place. This is especially problematic with health systems where there are multi-hospitals and several vendors to manage on an invoice line item basis with monthly consistency. Seeing trends and errors as they are happening and not when the contract is due for renewal and looking back and identifying the pricing errors or the off-contract spend that has unnecessarily increased costs and ultimately causes margin erosion.
“The third is a result of performing purchased services line item analytics and seeing those opportunities to insource or to make adjustments to your agreement which are more suited to your current utilization. You may have an agreement in place that is based on a monthly flat fee, but understanding your utilization identifies that an actual price per utilization is better. It is important to look at purchased services spend from the perspective of ‘how can I innovate’ and ‘how can I do this differently?’”
Lisa Miller, Healthcare Advisor and CEO, VIE Healthcare Consulting
“While the task may seem daunting, especially without the right technologies to support such research, it’s important for supply chains to be able to visualize where spend is, as well as opportunities for consolidation and lifecycles of each purchased services contract. With this deeper level of transparency, they can better see short- and long-term savings opportunities.
“In the short term, automation workflows that can direct sourcing professionals to low-hanging fruit in their purchased services spend get quick wins with data-generated ROI predictions that point to low-complexity, high-volume savings. For those teams with not enough headcount to manage forward-looking initiatives with inbound stakeholder requests, a platform capable of speedy RFP collection, analysis and negotiation can reduce sourcing timelines as much as 40 percent.
“Looking ahead to long-term improvements, it’s crucial to understand your position in the marketplace in order to obtain competitive contracts. For example, comparing supplier utilization with actual performance metrics could uncover vulnerabilities in contract price structure. Spending trend analyses are equally important: Addressing off-contract spend, illuminating unwanted recurring charges and highlighting supplier consolidation opportunities are continuous needs for the supply chain.
“Investing in the personnel and infrastructure to benchmark and analyze contract terms, run RFPs and host negotiations will help supply chain teams better organize their resources to prioritize ROI-generating opportunities, while delivering the most up-to-date industry data to help them meet financial goals.”
Chris Gormley, CEO, Medpricer Purchased Services Solutions
“In the short term, providers can target eliminating multiple vendors who provide the same service. This consolidation is often low-hanging fruit and can yield quick savings wins.
“While accounts payables data does help to tell the story, acquiring additional details on scopes of work and something as simple as mapping out contract expirations for review are easy things a provider can do to help start down the road of improvement in purchased services. Starting small has the added benefit of creating early wins, which builds the strategies and internal buy-in that will prove beneficial when tackling larger categories.
“Understanding where the data lives is another item that often falls short in most organizations, and this requires a longer-term plan to properly capture, organize and manage the data.
“Providers also shouldn’t be afraid to be creative in sourcing for vendors — many companies outside of the traditional healthcare space may fit their needs at a lower cost, and they can present innovative and creative ways to provide services.”
Jeff Little, Senior Director of Purchased Services, Premier Inc.
“Regardless if you’re making short-term or long-term improvements, the first step is always the same: To gain complete visibility into every purchased services vendor and transaction. The fastest and most reliable way to do this is to utilize a third-party software that is 100 percent dedicated to this space. Once you have data that’s been auto-categorized, you can then build short and long-term plans.
“Hopefully, the software you select can quickly show you where your GPO already has contracts with vendors and/or specific purchased services categories. I recommend starting with this information and then leaning on your GPO’s resources by having them run the analysis to see if you would save by utilizing their contracted vendors. At the same time, with a dedicated technology platform to manage purchased services expenses, you can now easily see where there are rogue vendors – off-contract or non-preferred vendors – being utilized across your facilities. Send out some emails to the department heads and let them know that they are out of compliance and that they need good justification to continue using these vendors.
“To make improvements that produce sustainable, long-term results, make sure your purchased services expense management technology provides the following: Category-specific benchmarks, RFP technology, contract management, work-plan integration and savings tracking/monitoring services. These are all crucial tools for an efficiently running Supply Chain department.
“If you truly want to make a big difference in your purchased services spend, you need dedicated sourcing and leadership positions focused on this new mission. This structure varies based on the size of your organization, but I recommend taking a look at how your Supply Chain team is allocated today across different spend categories like med/surg, PPI, Pharmacy, Capital Equipment, Laboratory and Construction. The ratio of FTEs to the number of vendors and spend volume within each budget area (e.g., PPI, Pharmacy, Capital Equipment, Laboratory, Construction, etc.) should be comparable to the ratio of FTEs managing the vendors and spend volume within your purchased services category.
“Although purchased services consumes a significant percentage of a health system’s budget, at Valify we often find a disproportionate allocation of resources (technology and employee) dedicated to this demanding category. I recommend taking control by re-assigning or hiring new employees to fill-in the gaps where needed.
Now to the fun part. After doing some of the clean-up work [just] mentioned, I recommend building a multi-year savings plan. One area to focus on is filling in the gaps of your GPO’s contracts. Many of your service vendors are local to your geographic area, so they won’t be on contract with your GPO. Build out your own quarterly RFP schedule for those categories and use the Valify Marketplace – instead of Google – to find other local/regional vendors who serve other healthcare providers in your area. Also, consider partnering with or joining a shared service model where organizations share resources in order to benefit from economies of scale.”
Chris Heckler, CEO & President, Valify
“Short-term improvements can be achieved by reviewing what services your facility is receiving from the highest-spend vendors. After identifying the category for each vendor, search through the remainder of your [accounts payable] spend to identify other vendors in the same category and determine if it is possible to consolidate services. Any action requires review of current contracts and invoices to ensure you are considering all the services this group of vendors provides. Engaging with a consulting team can help kick-start a purchased services program while you build the necessary structure internally to support long-term success. Purchased services contracting often results in complex conversations, so it is important to choose a partner with proven operator experience, has advanced analytics and benchmarking, and is an expert in contract negotiation.
“Long-term, a purchased services strategy must include analytics capabilities that can group all accounts payable spend into similar categories, provide benchmarks, and assist in tracking implemented savings. HealthTrust offers Valify as a purchased services technology tool for spend visibility, and sourcing and consulting solutions for cost-reduction planning. By combining a tool such as Valify with the custom contracting expertise of a full-service GPO, hospitals can gain immediate insight into off-contract spend (e.g., rogue spending) and identify areas where multiple vendors are being used for the same services. Rogue spending can be addressed through monthly reviews by your supply chain and finance teams to keep service costs down.
“A long-term solution should also include the ability to track savings, otherwise negotiated saving may erode over time. There is often a difference in identified vs. implemented or realized savings. Once a contract is in place, an analytics tool like Valify will help show whether the contracted vendor is being utilized and if the new value is being realized.”
Andrew Motz, Assistant Vice President, Supply Chain Consulting and inSight Advisory Solutions for HealthTrust
Rick Dana Barlow | Senior Editor
Rick Dana Barlow is Senior Editor for Healthcare Purchasing News, an Endeavor Business Media publication. He can be reached at [email protected].
