by Mark Ferraro
Consulting Director, Purchased Services

In the age of near-constant mergers and acquisitions, health systems are taking on tremendous costs in the form of third-party—or purchased—services.

When a hospital or health system acquires additional facilities or a private practice, it inherits all of that entity’s contracted purchased services, including IT and telecom, clinical services, security, maintenance and more.

As hospitals, and especially health systems merge, the purchased services problem gets compounded as the newly merged system takes on all existing service contracts from all practices affiliated with the previous organizations.

While purchased services are crucial to operations, they’re not always top-of-mind when evaluating costs and budgets. After all, if a system is working well, it’s typically overlooked. But when you consider that third-party services can represent between 15 and 20 percent of an organization’s annual spend, it becomes obvious that these are opportunities in disguise.

Purchased services are often an untapped source of savings across the supply chain, and they present unparalleled opportunities for standardization of processes and technology.

Here’s a four-step process to successfully lower an organization’s purchased services costs while improving care delivery.

Data collection

For many health care organizations, simply gaining visibility on third-party contracts and costs can be challenging. More often than not, these contracts are managed by various people throughout the organization.

Start gathering the data by making a list of all third-party vendors used throughout the organization and their associated stakeholders. It’s important to speak with every stakeholder on your list and review each vendor’s contract.

There are a few key things to look for in your service contracts:

  • What’s my rate?
  • What are the scaling terms?
  • Is there an auto-renewal in place? If so, when?
  • What are the termination clauses?

The next hurdle is collecting all financial data for the vendors. Check with your accounts payable department and take a look at your purchase orders. But unfortunately, purchase orders won’t tell the whole story. Many third-party vendors have variable costs that make it difficult to get an accurate account for how much they’re really costing you. The general ledger will help you uncover variable costs.

You may find that the individual cost of many of your third-party vendors is relatively small, but when you aggregate the spend, the numbers start telling a larger story. Place vendors into categories to get a more accurate picture of how much your organization is truly spending.

Gain executive support

Armed with your data, it’s time to earn your executives’ buy-in.

Engaging them early in the conversation is a great way to build the case for moving forward with this project and understanding the shifts in your organization’s culture that might result from a new strategy.

Speaking with your executives can help you understand the “sacred cows” in your organization; those vendors that are above reproach for some members of the health system.

With this in mind, you can navigate the surmountable road blocks and build the business case to make changes.

Do the analytics

Analyzing the performance of your organization’s purchased services has three main parts:

  • Comparing spend
  • Assessing utilization
  • Evaluating the quality and efficacy

Some vendors charge hidden or variable fees, so looking at one month’s service charges could be misleading. Look at each vendor’s historical spend, trends and variability. Then, consider your regional benchmarks: What prices are other vendors in your area offering for a similar service?

Another important aspect to consider is utilization. Here are some basic questions that can help you begin to assess your organization’s utilization:

  • Who is actually using each vendor?
  • How are they using it?
  • Could the service be used more efficiently?

Finally, do some digging to find out your staff’s level of satisfaction with your third-party vendors.

  • What kinds of outcomes are you paying for?
  • Are stakeholders happy with the performance?
  • What kinds of performance metrics can the vendor provide?
  • Does the vendor make your staff’s job easier?

Complete the picture and review standardization opportunities

Completing the first three steps will give you a firm grasp of what types of services you’re paying for, how they’re being used throughout your organization and your staff’s openness to try new solutions.

When considering replacing a multitude of similar vendors with a single standardized solution, make sure that your new vendor does the following:

  • Addresses all stakeholder needs and goals
  • Has a positive impact on your organization’s overall spend
  • Plays a role in your organization’s strategic objectives

At the end of your evaluation, you should be prepared to make specific vendor recommendations based on your analysis and your organization’s strategic imperatives.

Third-party vendors are essential to hospital or health system operations and shouldn’t be overlooked when evaluating spend. When your organization undergoes a merger or acquisition, it’s even more important to gain the visibility you need to help the new organization operate more efficiently.

About the author. In his role as consulting director in purchased services, Mark Ferraro uses his more than 14 years of health care industry experience working with member organizations to develop and execute initiatives that improve operations and reduce costs in the areas of clinical engineering, MRO, after-hours call center and facilities, to name a few. Ferraro is a member of the Association for Healthcare Resource & Materials Management (AHRMM), the Virginia Association for Healthcare Resource & Materials Management (VAHRMM) and the Healthcare Financial Management Association (HFMA.)

Published: August 29, 2018