Purchased Services Represents Ideal Opportunity to Control Costs, Improve Efficiencies

By Blaine Douglas
Vizient Managing Principal

This is the first in a series to help providers and suppliers examine spend categories and drive cost savings to withstand an economic downturn.

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"Purchased services represents the last frontier of unmanaged spend." — Keith Gregory, Vizient Senior Principal

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Financial resilience in the current economic landscape requires health systems to look for savings in places they typically do not. Purchased services — non-labor spend such as food, environmental services and biomedical engineering that is contracted to a third party — falls squarely into this category. In general, transactional costs that do not go through the supply chain represent fertile ground for cost savings. Without organizational transparency and awareness, massive inefficiencies result.

Vizient has identified two primary factors that contribute to higher costs in this spend category:

• Systemness shortfalls: a lack of consistency and integration across sites and services that hampers effective decision making
• Unquestioned loyalty: relying on years-old relationships that are noncompetitive

Better Integrate Decision Making Across the Entire Health System

Despite best efforts to centralize operations, it is common for healthcare facilities operating under one umbrella to source products and services independently. Often, this is due to:

• failed or incomplete integration following a merger
• an unwillingness to centralize purchasing power
• a lack of process

It is common for a health system with five facilities, for example, to have five different contracts for a similar product.

In some cases, poor communication is the culprit for not comingling contracts. Sometimes inefficiencies are driven by a strong reluctance to work together, even due to issues far afield from healthcare. One Vizient client in football-loving Texas had two facilities located in rival towns. Staff charged with purchased services contracts shared the same animus as the local football teams and refused to collaborate. Although that might represent a rare example of a lack of cooperation, similar reasons exist that prevent centralized purchasing including a "we've always done it this way" mentality.

Purchased services is the fastest-growing segment of all hospital spend categories. Yet, in many cases, it is the least monitored. Technology is starting to change that, enabling robust data analyses to identify inefficient spend patterns. Vizient's Purchased Services Analytics tool helped one health system to better understand its food service spend – specifically that it relied on 47 vendors for over $14 million worth of product. Through standardization and utilization opportunities, the vendor list was pared significantly. When repeated over hundreds of categories, this is a powerful savings exercise.

Recommendations:

• Examine segments like food service and environmental services, and leverage scale to make sure all contracts align with like terms.
• Identify the oldest contracts that are set to expire in the next 6-12 months, as these represent immediate opportunity for cost savings.
• Ensure that the value analysis process engages stakeholders across the enterprise and fosters a systemness response.
• Eliminate repetitive contracts by initiating formal review processes for all product categories.
• Collaborate with experts who understand factors impacting pricing and terms. This is crucial, given that many categories are only negotiated every 3-5 years. During that time, technology or market disrupters can create upwards of 20% in savings. 
• Invest in technology and data solutions that provide visibility into historical spend and cost savings opportunities. This includes analytics tools, automated bid software, contract management software and purchase order management tools.

Create More Competitiveness by Looking Beyond Loyalty

A job well done can go a long way. That's particularly true for many purchased services categories, where facilities or department managers often renew contracts or grant new ones based on loyalty and past performance instead of product quality, cost, or terms and conditions.

Perhaps a supplier went above and beyond to get the operating room up and running for financially favorable elective surgeries and received a "thank you" with a vendor-friendly contract. One major hospital maintained a service contract for nearly 20 years because the vendor created an unbreakable bond with the facilities director. However, trust in the vendor can sometimes be misplaced. One Baldrige Award-winning health system relied on a vendor's word that it was receiving premium pricing. When the contract was finally reviewed, the pricing was not commensurate with the system's size and mission. The savings were staggering when challenging the existing contract.

Although relationships will always play a role in purchasing, contracts that are outside the realm of supply chain should be examined closely and open to competitive bids. Some health systems excel at this, but it's like shooting fish in a barrel for others. These relationships in purchased services still represent the wild west, with major opportunities to trim costs.

Recommendations:

• Ensure collaborative relationships between department managers and supply chain leaders that focus on value analysis.
• Educate department managers and purchasing teams about product categories under contract, or hand them off to supply chain. Many times, department managers are unaware of category nuances when contracts come up for review.
• Compile a list of product experts to provide knowledge when needed for unfamiliar product categories. This carries the potential for millions in savings.
• Obtain needed insights and the best pricing for specific categories by investing in digital tools such as analytics and RFP systems built specifically for purchased services.

Focusing on Purchased Services Can Improve Health System Profitability and Drive Better Outcomes

Financial pressures will continue to squeeze health system margins, especially during an economic downturn. However, close examination of purchased services categories can surface valuable cost savings and system standardization opportunities, which in turn can trigger growth across the enterprise. Health systems should not overlook these valuable savings opportunities.

Many thanks to Keith Gregory for contributing to this blog.