Third-party services, such as waste management, dialysis, elevator maintenance and security, can represent up to a third of a health system’s total annual expenditures. Called purchased services, these resources are crucial to hospital operations but aren’t always top-of-mind when it comes to delivering care and managing costs. When it comes to managing purchased services, there is significant potential to reduce supply chain spending in an era of constrained resources.
Hospitals and health systems can be at a disadvantage without understanding the full scale of agreements in place with purchased services vendors. Missteps also occur when a structured sourcing process for these services is lacking. For example, onerous legal agreements, limited transparency on pricing, fragmented data reducing visibility to expenses and inadequate internal resources to source and negotiate for these service areas can hamper a healthcare supply chain team’s mission to maximize savings.
Four key strategies can provide health systems with basics tenets of a viable purchased services sourcing program, if supply chain leaders incorporate them during the contracting process.
1. Understand internal data
Cost reduction and risk mitigation go hand in hand. Providers, however, often struggle with gaining visibility to their own internal data, which can help them do both. This can create an undesirable scenario when looking to properly manage purchased services categories. Truly understanding internal data is a crucial element that is necessary to create proper benchmarks and identify opportunities for savings. When working with AboutHealth, a collaboration of six separate integrated delivery networks (IDNs) consisting of 38 hospitals and nearly 4,300 beds, Premier conducted a full analysis of their purchased services spend and several key areas of opportunity emerged. After comparing initial spend data on waste and freight management across the six health systems to internal benchmarks and peer groupings, the group was able to leverage the data with vendors of these services which yielded up to 13 percent savings for the participating health systems. The power of collaboration and aggregation, coupled with a deep understanding of the data, ultimately moved the needle with the suppliers to providing competitive pricing options based on the transparency.
2. Benchmark, compare with peers
Once the data is gathered, an essential piece of the puzzle is to mine the data and examine how performance stacks up against peers. But because there is limited transparency around this data in terms of what regional variation exists across categories for individual providers, it is difficult to assess performance and irregularities in pricing. Enlisting a partner who can drive comparative analyses against historical spend benchmarks, industry standard benchmarks, or across a national peer group or regional cluster, is a crucial piece of the puzzle to understanding the lay of the land on purchased services and pinpoint where the outliers are to show relative opportunity for cost savings.
3. Standardize vendors
Reducing the number of vendors in a specific space generally results in cost savings. Often, facilities within a single IDN or informal aggregation use different suppliers for the same thing across their health systems. By selecting one supplier, providers can leverage their contracts by awarding market share to the chosen vendor. In exchange, suppliers will often give a volume discount for moving all or most of the business in a particular category to them. This shift also stimulates a more competitive landscape as some excluded suppliers will make aggressive offers to retain existing business. For example, AboutHealth is working with Premier on various cost savings initiatives, including standardizing vendors on waste management, and freight. By leveraging size and data, these two projects alone are projected to yield between $600-800K in savings.
4. Level pricing across facilities
After gaining a keen understanding of internal data and contracts for purchased services with the assistance from a partner in aggregating benchmarks, supply chain leaders can compare rates across sister facilities, challenge vendors to match the lowest price offered, and scale this reduced price across all system entities. With increased transparency in pricing for purchased services, this is similar to peer benchmarking but comparing only the facilities within a multi-hospital IDN and checking that their “price at the pump” is universally applied. In general, the best price offered to one facility can be pushed across to all.
Health systems must not lose sight of the low hanging fruit within purchased services. While it’s important to gather extensive data, understand spending trends and tackle quick wins, a “one-size-fits-all” approach doesn’t work for purchased services. Providers should tap the right partners who can provide access to benchmarking data and bring transparency to pricing, thus helping to control costs in these areas of spend. In addition, hospitals and health systems can benefit from working with GPOs that are able to tailor solutions based on their unique needs.